Importantly, the Executive Order also proposes to integrate climate disclosure and impact reduction efforts into the Federal procurement process. Specifically, the Executive Order proposes that the Federal Acquisition Regulatory (“FAR”) Council, in consultation with the Council on Environmental Quality and other agencies, consider amending the FAR to:
- Require major Federal suppliers to (i) publicly disclose greenhouse gas emissions and climate-related financial risk and (ii) set science-based reduction targets; and
- Require that the social cost of greenhouse gas emissions be considered in procurement decisions and, where appropriate and feasible, give preference to bids and proposals from suppliers with a lower social cost of greenhouse gas emissions.
Motivated in part by changing consumer preferences, investors have been demanding enhanced climate disclosure and impact-reduction efforts from companies for years1 and European regulators already have advanced guidelines on reporting climate-related information.2 A new rule requiring emissions reporting and the establishment and disclosure of science-based climate targets for suppliers would be a sea change for the Federal Government, and could bring the United States in line with the leading edge of climate-related supply chain requirements.
It is not clear whether and how the Federal Government will establish standards for disclosing climate information, establishing targets and measuring progress against those targets, or calculating the social cost of greenhouse gas emissions and factoring that cost into best value determinations. Even well-resourced and nimble private organizations have struggled to create voluntary frameworks that provide clear guidance on emissions inventory procedures, target setting, and disclosure processes that companies can use to create verifiable and comparable climate data. Many companies have also struggled to balance the competing forces of robust and aggressive emissions-reduction target setting to appease investors, and reasonable and accurate information with heavily caveated disclosures to reduce legal liability. Although the Executive Order only requires that the FAR Council “consider” amending the FAR to address these issues, it also states that “the Federal Government should lead by example” in addressing the risks of climate change.
As the FAR Council considers how and when to amend the FAR, it will have to consider how best to model the scope and substance of climate disclosure requirements, data availability and climate modeling limitations, the likelihood of emissions-reducing technology advancements, and resource constraints at impacted Government contractors. In this article, we identify some of the key challenges the FAR Council will face, possible options it could pursue in tackling such a far-reaching and important issue, and the implications for companies with Federal Government contracts.
What is the FAR Council?
The FAR Council is the Federal organization charged with assisting in the direction and coordination of Government-wide procurement policy and procurement regulatory activities. The FAR Council is made up of the Administrator of the Office of Federal Procurement Policy and procurement officials from the Department of Defense, the General Services Administration, and the National Aeronautics and Space Administration. The FAR Council ensures that procurement regulations promulgated by an executive agency are consistent with the FAR and in accordance with applicable laws and agency policies. The FAR Council also manages, coordinates, controls, and monitors the maintenance and issuance of changes to the FAR.
Possible FAR Council Action
The FAR Council has a variety of existing models to draw upon as it considers how to require Government contractors to disclose their emissions and climate-related financial risks, set science-based reduction targets, and how to objectively give preferential treatment to bids and proposals based on these climate metrics.3
Amending Existing FAR Sustainability Requirements
Currently, FAR Part 23 contains several provisions that address environmental issues in Federal contracting. Under this section, Federal agencies must ensure that 95% of new contract actions require products that are: (1) energy-efficient; (2) biobased; (3) non-ozone depleting; (4) water-efficient; (5) non-toxic or less toxic alternatives; or (6) made with recovered materials. FAR Part 23 also prescribes acquisition policies and procedures for protecting and improving the quality of the environment and fostering markets for sustainable technologies, materials, products, and services.
Under FAR subpart 23.2, Federal agencies are directed to utilize energy-savings performance contracts to obtain energy-efficient technologies, acquire energy- and water-efficient products and services, and acquire products that use renewable energy technology. Contracts under this subpart must include FAR 52.223-15, which requires contractors to “ensure” that energy-consuming products are energy efficient products. Similarly, FAR subpart 23.7 directs agencies to meet additional environmental objectives through the acquisition process, including cost-effective waste reduction and obtaining hazardous waste minimizing products and services. This subpart provides that contracts must include FAR clause 52.223-10, which requires contractors to establish a program to promote cost-effective waste reduction under the contract and comply with Federal, state, and local environmental requirements during contract performance.
Additionally, FAR subpart 23.4 directs agencies to develop and implement affirmative procurement programs to purchase products composed of the highest percentage of recovered (recycled) material or biobased content practicable. This subpart incorporates by reference the standards for the minimum amount of recovered material or biobased content in items designated by the U.S. Environmental Protection Agency (“EPA”) or the U.S. Department of Agriculture (“USDA”), and agencies must implement a program to require contractors to provide reasonable estimates, certification, and verification of recovered material used in the performance of contracts. For example, certain contracts must contain FAR 52.223-1, which requires contractors to certify that biobased products, as defined by the USDA, will be used or delivered in performance of the contract, and FAR 52.223-4, which requires contractors to certify that the percentage of recovered materials for EPA-designated content will be at least the amount required under the contract.
Moreover, FAR subpart 23.8 directs agencies to minimize the procurement of materials and substances that contribute to the depletion of stratospheric ozone and give preference to the procurement of alternative chemicals. As prescribed under this subpart, Federal Government contracts must include FAR clauses 52.223-11 and 52.223-12, which address the labeling of ozone-depleting substances and contractor compliance with the Clean Air Act. FAR 52.223-11, for example, requires contractors to track the amount of ozone-depleting substances contained in equipment delivered to the Government under the contract and annually report that amount to the Government during the contract’s performance. Contracts under this subpart must also include FAR 52.223-22, the provision that requires contractors to publicly disclose greenhouse gas emissions and reduction goals, if the clause was included in the initial contract solicitation.
Given that FAR Part 23 already outlines specific environmental guidelines for Federal procurements, the FAR Council may propose to amend several subparts of this section or establish an entirely new section to implement the Executive Order and expand upon the existing use of contractor reporting and mechanisms of preferencing certain products to achieve the goals of the Executive Order.
Environmental Sustainability Self-Certification
As noted above, the FAR requires contractors to certify the amount of biobased or recovered materials used during contract performance, and the FAR Council could expand the environmental self-certifications required in FAR Part 23 to address the Executive Order. More broadly, as any contractor that has registered in the System for Award Management or completed Section K of a Federal solicitation knows, the FAR relies heavily on self-certification to implement a variety of statutory and regulatory programs that are applicable to Government procurement. FAR 52.204-8 lists nearly three dozen representations and certifications that contractors may have to make, depending on the particular contractor and the particular procurement. For example, under the Small Business Act, Federal contracts may be set aside exclusively for competition from small businesses. In order to qualify for these set aside contracts, small businesses must certify their small business status and eligibility.
The FAR Council could try to replicate this model for the implementation of the Executive Order. Under such a model, companies could certify to the accuracy of their publicly disclosed greenhouse gas emissions inventories, climate-related financial risk assessments, and to their established science-based reduction targets, whether those have been established through compliance with an existing voluntary framework or through some other method. Contracting officers could review these certifications the same way they review other existing certifications, as part of a binary assessment of present responsibility or under a pass/fail evaluation factor.
But this assumes that simply making some disclosure or setting some target is all that the Executive Order requires. The much harder question for the FAR Council is whether to require meaningful disclosures and targets, and the even harder question is how contracting officials will verify such disclosures and targets. Looking at the various representations and certifications currently prescribed by FAR Part 23 or listed in FAR 52.204-8 suggests that self-certification, without more, may not be a workable implementation of the Executive Order’s provisions on disclosure and target-setting.
Moreover, it is not clear how self-certification would address the Executive Order’s mandate that the FAR Council consider requiring that procurement decision-making criteria include a bidder’s social cost of greenhouse gas emissions. As the Executive Order focuses on “suppliers,” the FAR Council may establish climate risk and emissions disclosures, and adoption of science-based reduction targets from suppliers, but not require such metrics or consider the social cost of carbon in the evaluation of procurement awards for services contractors or in procurements for services (or at least not in the initial rulemaking contemplated by the Executive Order). But “suppliers” or procurements for “supplies” hardly narrows the inquiry, as those terms span many industries with very different greenhouse-emissions characteristics.
Regardless of how the FAR Council defines the universe of procurements to which the Executive Order applies, the basic challenge with self-certification is that it potentially places procurement officials and Government customers in the position of evaluating disclosures, targets, and social cost estimates that they are not qualified to assess. Without detailed guidance in the FAR on how to evaluate this information, contracting officers and their advisors would be left with mountains of climate data but no framework within which to evaluate it. And without detailed guidance to contractors on what will be required to meet any requirements that the FAR Council imposes, the Government’s ability to obtain full and open competition from all responsible offerors competing on a level playing field will be in jeopardy.
Leveraging Existing Voluntary Frameworks
The FAR Council could also look to certain existing, voluntary frameworks as a model for best practices methodologies in climate impact inventorying and impact reduction efforts that could be adjusted and adopted in the FAR to achieve the goals of the Executive Order. Certain Government contractors may be familiar with the more prominent voluntary frameworks for climate risk disclosure, such as the Task Force on Climate-related Financial Disclosures (“TCFD”) and for setting emissions reduction targets, such as the Science-Based Targets initiative (“SBTi”). These frameworks could serve as a template for the FAR Council’s establishment of emissions data and climate risk disclosure terms, as well as processes for companies to establish an achievable and verifiable emissions reduction goal.
The TCFD was established in 2015 by the G-20 Financial Stability Board to encourage the disclosure of consistent climate-related financial information. In 2017, the TCFD released a set of climate-related disclosure recommendations along with the accompanying technical supplement and annex, which includes supplemental guidance for certain sectors. The framework is structured around four main categories of climate disclosures (governance, strategy, risk management, and metrics and targets) and recommends determining materiality in a manner consistent with the governing law in the jurisdiction where a company makes required securities filings. The risk management pillar of the TCFD framework may be particularly helpful for the FAR Council’s reference in building out climate-related financial risk disclosure guidelines. The TCFD has become the gold-standard for voluntary climate disclosures, even being endorsed by the G7 as a basis for mandatory climate reporting.4
The SBTi is a partnership between the Carbon Disclosure Project, the United Nations Global Compact, the World Resources Institute, and the World Wide Fund for Nature. The SBTi assists companies with setting emissions-reduction targets in line with global decarbonization pathways established in the 2015 Paris Agreement. The Initiative defines and promotes best practices based in climate science, provides technical assistance and expert resources to companies who set emissions goals, and offers a team of technical experts to independently assess and validate targets. A company can establish a SBTi-validated target after following the Initiative’s five-step process: (1) submitting a letter establishing the intent to set a science-based target, (2) developing an emissions-reduction target in line with the SBTi’s criteria (including identifying the scope of emission to be included in such target), (3) presenting such target to SBTi for official validation (requiring comparison of the submitted target against the company and industry-specific target protocols, if available), (4) communicating such target to relevant stakeholders, and (5) thereafter annually reporting on emissions and tracking progress toward set targets. Currently, the SBTi has finalized sector-specific methods for only four industries: power, information and communication technology, apparel and footwear, and financial institutions. Methods for the aluminum, chemicals, forest and land, agriculture, oil and gas, and transport sectors are either in development or in an early scoping phase.
These established voluntary frameworks, among others, could provide a model for the FAR Council to draw upon as it considers how to amend the FAR. There is precedent for the FAR to reference third party standards,5 as well as for requiring compliance with other governmental models,6 for preferencing programs in the environmental context,7 and for disclosure of greenhouse gas emissions for certain offerors.8 However, it is unclear whether the FAR Council would wholesale adopt or refer to a non-governmental standard, or create a bespoke framework. Should the FAR Council attempt to use these frameworks as a model for their own industry-specific climate disclosures, emissions inventories and impact reduction targets, more work will need to be done to prescribe detailed standards for the numerous industries in which Government contractors operate. If instead the FAR Council mandates a uniform emissions reduction target — for example, net-zero emissions by 2050 in alignment with the NDC — this would appear to run contrary to the Executive Order’s goal of each supplier setting individual science-based targets, the application of which may result in a variety of customized targets.
What False Claims Act Risks do Companies Face?
There are many risks likely to arise in Government contracts as a result of the complexity of climate-related disclosures and emissions reduction targets, including under the False Claims Act (“FCA”), and reputational concerns from greenwashing.
Any certification or representation made by a company to the Government presents an FCA risk. The FCA is aimed at providing the Government with the ability to recover losses sustained as a result of misrepresentations to the Government. Since its inception, the FCA has always been used as a bulwark against making material misrepresentations to the government and was born out of the Lincoln Administration being sold unhealthy mules and the same lot of calvary horses during the Civil War.9 In relevant part, the FCA prohibits contractors from “knowingly” obtaining contracts through false statements or fraudulent conduct, or falsely certifying compliance with Federal laws and regulations.10 The term “knowingly” is defined as actual knowledge, deliberate ignorance of the truth or falsity of information, or reckless disregard for the truth or falsity of information.11 No specific intent to defraud is required. FCA claims must also be material — meaning that the false statement involved has a tendency to influence, or be capable of influencing, the payment or receipt of money or property.12 A fraudulent claim is material if the Government never would have signed a contract had it been informed of an undisclosed or false fact. The possibility and severity of an FCA claim will ultimately depend on the regulatory requirements created by the FAR Council. It is unclear whether contractors will be required to make objective, verifiable statements that they have to certify to, as opposed to uncertified, general estimates.
An example of materiality and the FCA can be found in the context of energy savings performance contracts (“ESPCs”). An ESPC allows a Federal agency to achieve energy savings through improvement projects that meet energy efficiency, renewable energy, water conservation, and emissions-reduction goals. Contractors design and construct energy saving projects suited to the Government’s needs and the agency then competitively selects the best contractor. In ESPCs, a contractor’s proposed energy savings and environmental impact is material to the Government’s selection of the proposal. The Government is unlikely to select a contractor where facts later reveal that the technical feasibility or reasonableness of the energy savings were misconstrued, or that the contractor’s energy analysis was not based on sound assumptions and engineering principles. Here, the “reckless disregard for the truth or falsity of the information” is a standard that contractors must heed when making already forward looking projections without the benefit of sound baseline data or when utilizing non-accepted methodology.
Similarly, climate data and climate-related disclosures may also be material to the Government’s selection of other contracts, such as construction or for the acquisition of “green” or energy-efficient products. However, climate data, by its very nature, is somewhat inherently limited. Many companies are still in the early stages of determining how to calculate their own carbon footprints.13 Relying on currently available climate data, flawed as it may be, to create forward-looking statements in good faith is unlikely to create a risk that a company “knowingly” made false statements to the Government. Yet, relying on climate data that a company knows to be false, inaccurate, misleading, or so outside of the norm of generally accepted standards that it could be considered reckless, could create risk during both the bid process and ultimately during any investigation after the fact.
Fraudulent Inducement
Where companies provide climate disclosures in Government contract proposals or certify to certain climate-related information, companies must make representations to the Government to which they have a good-faith belief that they can achieve. The express language in the Executive Order indicates that the Government will give preference to bids and proposals with a lower cost of greenhouse gas emissions. The limitations on climate data and modeling supporting these possible company certifications complicate this requirement and could be used by FCA claimants to show that any related falsity on the part of a contractor is “material.” Until more sophisticated modeling and emissions measurement tools are readily available, companies must muddle through with, at times, incomplete data and unproven projections in developing their emissions inventories, risk assessments and impact reduction targets. Companies could somewhat inadvertently provide a false or deeply flawed emissions reduction forecast to the Government to induce the agency to enter into contracts that the Government otherwise would not have executed. In such a scenario, the Government could bring an FCA claim under a fraud-in-the-inducement theory alleging that the contractor made false statements that induced the Government to enter into the contract. With the speed at which climate science and intervening technologies are advancing, even recent certifications may quickly become stale and inaccurate. As a result, companies may push for any FCA amendment to include a safe harbor for climate-related representations made in good faith, even if they later become inaccurate. If such safe harbor is unavailable, companies should be careful to properly balance setting ambitious emissions reduction targets, or at least caveating the methodology, to attract favorable outcomes, but achievable targets to avoid FCA scrutiny and liability.
False Certification
The Government could also bring an FCA claim under an express or implied false certification theory. An express false certification occurs when a contractor falsely certifies that it is in compliance with regulations which are prerequisites to Government payment in connection with the claim for payment of Federal funds. In contrast, an implied false certification occurs when a contractor seeks and makes a claim for payment from the Government without disclosing that it violated regulations that affect its eligibility for payment, thereby impliedly certifying that the contractor is in compliance with all preconditions for payment. If companies are required to certify their greenhouse gas emissions or targets under forthcoming FAR regulations, the Government may bring an FCA suit alleging that compliance with such a certification was a condition of payment.
Therefore, due to the Executive Order’s potential impact, companies likely face increased FCA liability due to the complexities surrounding climate related disclosures, and the uneven and evolving methodologies for establishing both baselines and projections. These suits will come from all sides to include: individual whistleblowers within the company; from industry competitors and other companies; and as an outgrowth of parallel criminal investigations. Any established violation of the FCA is likely to result in substantial penalties as the FCA entitles the successful plaintiff to recover up to treble damages.
What Other Risks Could Companies and Government Agencies Face?
Contract Termination
In addition to the risk of an FCA action, the Government may terminate the contract and bring a claim for breach of contract and damages for false statements of fact made concerning climate disclosures, even if the company is complying with other requirements for contractual delivery or performance.
Should contract termination increase in frequency due to breaches of climate and emissions-related requirements, this will slow the entire Government procurement process, and necessitate costly and lengthy repeats of proposal requests and delays of the underlying projects.
Greenwashing
Greenwashing is the act of making potentially false or misleading statements that lead the public to believe that a company has further advanced its sustainability efforts than it actually has in practice. This could result from (1) making public statements about corporate climate goals with no plan or expectation of meeting them, or (2) publishing inaccurate climate data in reporting. Importantly for the FAR Council, any statements made by prospective Government contractors must be accurate and verifiable to avoid greenwashing concerns and the associated reputational damage that could be caused to both the offending contractor and the Federal Government’s procurement process as a whole.
Should the relevant procurement agency choose not to verify a company’s climate statements, or should a company’s announced climate target ultimately become significantly unfeasible, this detracts not only from the climate benefits intended to be created by the Executive Order, but it also causes reputational harm to the system and public trust. Laying the groundwork to support public statements concerning climate data, disclosures, and commitments could become key to avoiding allegations that contractors have “knowingly” made a false statement in violation of future FAR requirements and guidance.
Considerations And Recommendations for Government Contractors
In the near term, given the Federal Government’s recent aggressive trajectory pointing toward enhanced climate change disclosures and emissions reduction targets and the preferential status likely to be provided to advantageous climate metrics in bids, Government contractors seeking a competitive advantage during the procurement process would be wise to begin preparing for changes to FAR requirements. We suggest that Government contractors:
- Begin building an interdisciplinary team of internal and external counsel, advisors and managers with climate sophistication, outline processes for emissions and other impact inventories, strategize the achievability of impact reduction targets, and outline a possible climate disclosure strategy. Businesses that already have robust climate risk assessment and disclosure regimes in place should prepare to revise their internal procedures to comply with possible FAR Council requirements.
- Act in good faith, and given the language in the Executive Order, carefully consider the tradeoffs associated with satisfying stakeholder or government demands for enhanced climate disclosures along with the data and metrics necessary to support any associated climate metrics and targets.
- Build and maintain a reasonable record of efforts related to climate reporting. This documentation could pay dividends in the long run should concerns over the basis for climate statements ever arise.
Possible Timeline of FAR Council Action
Although the Executive Order was just recently issued, the FAR Council may face growing pressures to establish, or at a minimum, preview, their requirements. However, given the number of climate initiatives across the Federal Government under the Biden Administration, especially at the Securities and Exchange Commission (the “SEC”), the FAR Council may be wise to avoid rushing to publish requirements that may be duplicative of, or worse, contradictory to, climate‑disclosure requirements issued by another agency that are also applicable to Government contractors. For efficiency, the FAR Council may seek to work in parallel with Federal agencies to harmonize requirements, or to establish their criteria in reference to more detailed metrics established by other agencies. If they choose such a path, the FAR Council will be bound to the timelines set by those agencies, and implementation of the Executive Order’s requirements may take longer.14 For example, the SEC recently issued a request for public input on climate change disclosures.15 Should that request result in a formal rulemaking, the process could take 18 months or more for the solicitation of input, issuance of a notice of proposed rulemaking, review and incorporation of comments, and issuance of a final rulemaking, which would likely be challenged. This would put the SEC’s rulemaking on track for issuance in late 2023, at the earliest.
However, given the difficulty in developing internal climate sophistication and the resources required to prepare and assess a comprehensive environmental impact inventory and associated impact reduction effort, companies should not waste time waiting for further signals from the Federal Government before beginning to prepare.
*Alex Sprenger, 2021 Summer Associate, contributed to this series post.
1 Caroline Flammer et al., Shareholders Are Pressing for Climate Risk Disclosures. That’s Good for Everyone, Harvard Business Review (Apr. 22, 2021), https://hbr.org/2021/04/shareholders-are-pressing-for-climate-risk-disclosures-thats-good-for-everyone.
2 See European Commission Guidelines on Reporting Climate-Related Information, https://ec.europa.eu/info/publications/non-financial-reporting-guidelines_en#climate.
3 See FAR 23.703 (requiring agencies to “Implement cost-effective contracting preference programs promoting energy-efficiency, water conservation, and the acquisition of environmentally preferable products and services”); FAR 23.802 (indicating Federal policy that “Give[s] preference to the procurement of acceptable alternative chemicals, products, and manufacturing processes that reduce overall risks to human health and the environment.”); FAR 23.804 (requiring a representation regarding greenhouse gas emission and reduction goals in certain situations).
4 See G7 Finance Ministers & Central Bank Governors Communiqué (June 5, 2021), https://home.treasury.gov/news/press-releases/jy0215.
5 See FAR 23.704 (requiring the Government’s purchase of specified percentages of EPEAT®-registered electronic products, which include those adhering to the IEEE 1680.1™-2009 Standard, established by the non-governmental Institute of Electrical and Electronics Engineers Standards Association).
6 See, e.g., EPA ENERGY STAR® program referenced under FAR Subpart 23.2.
7 See FAR 23.703 (requiring agencies to “Implement cost-effective contracting preference programs promoting energy-efficiency, water conservation, and the acquisition of environmentally preferable products and services”).
8 See FAR 23.802 (requiring certain offerors who are registered in the System for Award Management and who have received $7.5 million or more in Federal contract awards in the prior Federal fiscal year to represent whether they publicly disclose a quantitative greenhouse gas emission reduction goal and provide a website for such disclosure, if available).
9 Larry D. Lahman, Bad Mules: A Primer on the Federal False Claims Act, 76 Okla. B. J. 901 (2010).
10 See 31 U.S.C. § 3729(a)(1).
11 31 U.S.C. § 3729(b)(1).
12 31 U.S.C. § 3729(b)(4).
13 The EPA has promulgated rules regarding the calculation GHG emissions data from over 40 types of large emission sources. 40 CFR Part 98. One material complication in voluntary emissions disclosure frameworks is whether companies should include each of Scope 1 (direct emissions that occur from sources that are controlled or owned by a disclosing company), Scope 2 (indirect emissions associated with the disclosing company’s purchase of electricity, steam, heat, or cooling) and Scope 3 (emissions that result from a disclosing company’s customers’ use of the product, or that the company indirectly impacts in its value chain) emissions in their footprint inventories.
14 The previously implemented procurement-related executive order on ESG may provide an insight as to when the FAR Council could require any disclosures. President Obama signed Executive Order 13693, Planning for Federal Sustainability in the Next Decade, on March 19, 2015. This Executive Order required federal contractors to disclose if and where they disclose information on greenhouse gas emissions. The FAR Council did not publish a proposed rule until May 25, 2016 and comments were due on or before July 25, 2016. The Final Rule was published on November 18, 2016, and contractors were not required to disclose information on greenhouse gas emissions until the rule became effective on December 19, 2016.
15 See Securities and Exchange Commission, Public Input Welcomed on Climate Change Disclosures, SEC (Mar. 15, 2021), https://www.sec.gov/news/public-statement/lee-climate-change-disclosures; Colin P. Myers, A Renewed Focus on the SEC’s Guidance Regarding Disclosure Related to Climate Change, ABA (Apr. 12, 2021), https://www.americanbar.org/groups/environment_energy_resources/publications/ed/20210412-a-renewed-focus-on-the-secs-guidance-regarding-disclosure/.
