Deep Dive Episode 257 – A Discussion on the FAR Council’s Federal Supplier Climate Risks and Resilience Proposed Rule
What happens when the Administration’s “whole-of-government approach” to climate change meets federal contracting? The Department of Defense, the Government Services Administration, and NASA have jointly proposed a revision to the Federal Acquisition Regulations that would require government contractors to publicly disclose greenhouse gas emissions and climate-related financial risk and to set science-based reduction targets. The agencies cast the proposal as a way to reduce climate-related risks, increase U.S. competitiveness, and promote economic growth. But critics say that the proposed rule would exceed the agencies’ authority, increase federal procurement costs, and unconstitutionally delegate policy-making authority to the private entities that would be charged with policing contractors’ compliance.
The panel will discuss the origins as well as the potential benefits and risks of this innovation in government contracting policy.
Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.
Colton Graub: Good afternoon and welcome to this Regulatory Transparency Project webinar. My name is Colton Graub. I’m the Deputy Director of RTP. As always, please note that all expressions of opinion are those of the guest speakers on today’s webinar. If you’d like to learn more about each of our speakers and their work, you can visit regproject.org where we have their full bios. After discussion between our panelists, then we go to audience Q&A, so please enter any questions you have in the Q&A function at the bottom of your Zoom window.
This afternoon, we’re pleased to host a discussion on the Federal Acquisition Regulatory Council’s federal supplier climate risks and reliance — resilience proposed rule. To discuss this topic, we’re pleased to welcome an expert panel of distinguished speakers. Adam Gustafson will be moderating the discussion. He is a Senior Counsel for Environmental and Regulatory Affairs at Boeing. Prior to joining Boeing, he served as Deputy General Counsel at the Environmental Protection Agency.
The panel he moderates will feature Brian Richman, Senior Associate at Gibson, Dunn, and Crutcher. His practice includes litigating cutting-edge constitutional and administrative law issues, challenging agency rulemakings, and defending against government enforcement actions. John Kostyack, Ceres Accelerator for Sustainable Capital Markets. His current work focuses on helping clients persuade regulators to promote sustainable investing and procurement. Lastly, but certainly not least, Marcus Speidel, government contracting expert and Procurement Law Alumnus of the George Washington University. Adam, I’ll pass it off to moderate the discussion.
Adam Gustafson: Thanks, Colton. As part of the Biden administration’s whole of government approach to climate change, in May 2021, the president ordered the Federal Acquisition Regulatory Council to consider amending the Federal Acquisition Regulation, or FAR, to require federal procurements to minimize the risk of climate change and to require federal suppliers to publicly disclose their greenhouse gas emissions. Last November, the FAR Council—consisting of the Department of Defense, the Government Services Administration, and NASA—responded with a proposed amendment to FAR.
The FAR Council’s proposed rule followed on the heels of a proposal by the Securities and Exchange Commission to require publicly traded companies to disclose climate related risk. But the FAR Council’s proposal is specific to government contractors. It would require all contractors receiving more than $7.5 million procurement annually to disclose a greenhouse inventory of scope 1 emissions, which are direct emissions from the contractor’s operations, and scope 2 emissions, which are indirect emissions associated with the contractor’s energy consumption. Major contractors, defined as those that get more than $50 million procurement in a year, would also have to disclose relevant scope 3 emissions. Scope 3 emissions include upstream emissions from a contractor supply chain and downstream emissions from the use of its sole products.
But the proposal doesn’t define relevant scope 3 emissions. Major contractors would also have to complete a climate change questionnaire created by the CDP, formally the Carbon Disclosure Project, a nonprofit dedicated to preventing dangerous climate change. And, finally, the proposed rule would require major contractors to develop science-based targets for greenhouse gas reduction and have those targets validated by the Science Based Targets Initiative, another nonprofit organization. Major contractors who fail to disclose their greenhouse gas inventories published a CDP climate disclosure or have their science-based targets validated would be deemed non-responsible and thus ineligible for government contract awards.
So we’re very grateful to have our panelists with us today to discuss this proposed rule. Brian, I’ll start with you. As with any novel regulatory proposal, this one has attracted some criticism. What do you see as the most important arguments the government’s going to have to confront?
Brian Richman: Thanks, Adam. That’s a great question. I see two main challenges that I’d like to discuss that I think raise interesting questions of administrative law. So the first issue concerns the FAR Council’s statutory authority. And people are familiar with kind of the usual general inquiry on that—has Congress authorized the agency to promulgate the particular regulation? And there are challenges I think the Council will face in that regard. The FAR — the acquisition statutes specifically refer to creating systems of economic and efficient contracting. They don’t get into climate change or other specific disclosures relevant here. To the extent Congress has wanted to give agencies the power to condition their contracting authority on other issues—such as the payment of wages, such as convictions for air pollution violations or for, say, cyber security standards—Congress has done that explicitly. But Congress has done none of that in this case.
And there’s a particular issue in the statutory area that I think will come up here, and that has to do with something you mentioned, Adam, which is the broader pull of government approach we’re seeing the government apply. Now, regulations in this space on climate change are popping up across the various agencies, some where’d you expect—so EPA—and some where you wouldn’t. So the Securities and Exchange Commission, for example, is one. The Department of Labor has addressed it. And now, the FAR Council has addressed it. And I think this raises an interesting question of federal power and the responsibility of Congress that the Chief Justice flagged in oral argument about a year ago.
In a case called NFIB v. Department of Labor, the Chief asked the following question at oral argument, which I think is in play here. He said, “As more and more mandates for more and more agencies come into place, it’s a little hard to accept the idea that this is a — this particularized to this thing, that it’s an OSHA regulation, that it’s a CMS regulation, that it’s a federal contractor regulation. I wonder if it’s not fair for us to look at the general exercise of power by the federal government and then ask, ‘Why doesn’t Congress have a say in this?’” I think that particular question is really going to come into play here. The administration announced at the outset that it is taking a whole-of-government approach to this, and then you’re seeing multiple agencies look for specific — look for statutory hooks to further that. And I think a fair question, the question the courts are going to have to confront is whether addressing this issue is something that Congress has delegated to the agencies and whether it’s something that Congress has to specifically address itself.
The other kind of main issue I think the FAR Council is going to face here has to do with nondelegation. So I know nondelegation has come up a lot recently. And usually, when we talk about nondelegation, we’re talking about Congress impermissibly delegating authority to an agency. But that’s not exactly what I mean here. I’m talking here about private nondelegation. So the government delegating regulatory authority to a private entity. And I think you’re going to see a significant challenge for the FAR Council dealing with the private nondelegation doctrine and the restriction on delegating government authority to private entities.
So let’s take this proposed rule. Here, the Council has essentially outsourced all of the standard setting to private entities. Contractors are required to disclose on a form created by CDP, a private entity, various climate related information. They’re required to disclose on the portions of those forms as recommended by TCFD, another private entity. When it comes to disclosing their greenhouse gas emissions, they are to do so in accordance with standards set by the GHG Protocol, standards set by two other private entities. And, finally, when it comes to developing science-based emissions reductions targets, contractors are supposed to create those standards based on the standards created by a private entity, SBTI, and then pay SBTI to validate the standards that the contractors develop pursuant to SBTI’s own guidance.
So here you have essentially a triple delegation of authority out to other private entities to really set the regulatory standard. And what’s interesting about the proposal is there’s no real place for the government’s opinion on this. FAR has not committed itself or indicated that it intends to supervise those standards, if there are changes to those standards if it will review them, or even what those changes might be. So if the rule is adopted as proposed, it appears that entities would be subject to standards created by private entities and how those standards evolve over time without really any government oversight over those standards. And I think that is a very unique aspect of this rule, this rule proposal, and one that could create potentially significant difficulties for the FAR Council.
Adam Gustafson: Thanks, Brian. I’ll turn to John next. John, rather than directly mandating reductions to achieve climate goals, this proposed rule seems to focus on transparency and reducing climate-related financial risk. What’s your understanding of the rationale behind that approach?
John Kostyack: Thanks, Adam. I have a few slides, and if we could put them up, I think that with the help of those slides, I can answer that question. And this is really going to be an interesting conversation because I think there are some interesting legal issues that we can work through. So, first of all, I want to thank Federalist Society for inviting me today. This is really an important rulemaking for addressing climate risk. And Ceres is a strong supporter of this proposal. We came in with a comment letter that had some suggested amendments to deal with some of the technical challenges that I want to get to at some point. But let’s start with a higher-level overview. Let’s go to the next slide.
But first, one quick word about Ceres. So the organization really, one of the keys to its success is the partnerships it has built with companies and investors. As you can see on this slide, 70 percent of the Fortune 500 are on the Ceres company network and 60 trillion AUM investors participating in the investor network. And these are organizations, entities, private sector entities that understand the fundamental challenges of sustainability and how that essentially a threat to business and see climate risk as a financial risk. And so, that’s one of the reasons why we are so supportive and we’ve seen such strong private sector support for this initiative is because of that challenge. Let’s go to the next slide.
So I want to touch upon one aspect of this proposal before I do a higher-level overview and the close attention that this proposal gets to greenhouse gas emissions in the federal supply chain. The federal government is the largest purchaser of products and services in the world. And because of that, it has an enormous carbon footprint that essentially adds risk to our entire economic system but, in particular, as risk to federal procurement. So what the FAR Council’s come forward with here with its attention to the greenhouse gas emissions in the federal supply chain is essentially recognizing best practices that have been already adopted in the private sector and by national governments around the world to begin to tackle this risk from a financial perspective.
So one example I have here is from a partnership that CDP has dealt with, 200 companies working on their supply chain emissions, $5.5 trillion’ worth of procurement spend right now are being put through a lot of the same kind of questions that the FAR Council as putting now — as proposals to putting now before its contractors. Similarly, we have other national governments—in Canada and Europe and U.K.—that are working on this as well. So the FAR Council is not the first one to do this. It has lessons it can learn from others who’ve been innovating in this space. But it’s joining a really important conversation. Let’s go to the next slide.
So this is the heart of the proposal. There are three fundamental areas of climate risk that the FAR Council wants to know more about on behalf of the Federal Procurement Agencies—emissions, climate risk assessments, and emissions reduction targets. The climate risk assessments are ones that you will — actually, before I get into this, let me go to the next slide because I’m going to elaborate on some of these points not here. And the next slide will talk about some of the ways the rule has been designed to get after really the largest sources of risk and to minimize burdens on smaller contractors.
And so, the fundamental disclosures I was talking about in the previous slide—emissions, climate risk assessments, and science-based targets—these are ones that large companies, most of the large contractors in the federal base are already familiar with, already have built into their systems. And what this proposal does is essentially tries to just pull out all of the other contractors, let them essentially off the hook. Only 1.3 percent of the entire registered federal contractor base would be covered by this rule. Only 0.3 percent would be covered by the primary requirements of this rule—the climate risk assessments, the scope 3, the targets. The 1 percent is only covered by those scope 1 and 2 disclosures. Then the 0.3 percent would be covered by those more rigorous requirements.
So that’s a really fundamental component of this rule to understand. It’s really scaled to getting at those big contractors. The other thing is there’s a lot of cost savings that go along with using these private standard setters, private methodologies, because so many of the companies that would be covered by this proposal are already working with those entities. Last point I would make—and there’s a number of exceptions and waivers—I’m not sure if you want to spend time on today’s webinar going through them all, but they’re all designed to try to minimize burden, avoid unfair outcomes, avoid duplicative reporting, and to avoid interfering with the delivery on agencies’ missions. Let’s go to the next slide.
Actually, I want to skip this one. I think it’s just too much detail for the time we have, but you’re welcome — I’m happy to share that following the webinar. Let’s go to this one. So this is two key issues that we put in the Ceres comment letter that really gets to the nub of why this rule is fundamentally consistent with the procurement act. So I would have to disagree with Brian in terms of the questions about statutory authority. So the procurement act essentially has two standards. You have broad authority—FAR Council does—to set procurement rules if it’s advancing efficiency and if it’s advancing economy, economic purposes. So our simplified way of saying that is we’re advancing the economic goals by saving money for the taxpayers. We’re advancing efficiency by making program delivery more effective and efficient. So how are we achieving that through this rule? Three main ways—physical risk, transition risk, and systemic risk. Let’s go for the next slide.
Starting with physical risk. So I’m sure you guys are reading the headlines like everybody else and learning how much climate impacts have arrived. It’s no longer something in the future. NOAA puts an annual report on billion-dollar weather disasters just in this country alone. We were averaging three per year back in the 1980s. We’re now averaging 20 per year in the past three years. And so, these two images right here, one is from the Mississippi River drought, and the entire western half of the United States is going through a megadrought that has a significant climate change footprint. That has dramatic impacts on federal suppliers because a significant number of those suppliers are using the Mississippi River for transshipments.
Similarly, we saw Hurricane Ian rage through Florida last year. Just think about the number of coastal storms and intensified storms that are going to affect performance by major federal contractors of their responsibilities. This was the second largest insured loss in U.S. history. The largest was also a climate fueled superstorm—Hurricane Katrina. So as these megaevents become more frequent, the federal government has a great interest for both saving money for taxpayers and insuring government delivery to have a window into how prepared its contractors are. Let’s go to the next slide.
Somehow — oh, I understand that chart that I put up was not the one I intended to lead. The other one that I had before I get to systemic risk was — I’ll just talk about without an image is what is known as transition risk. Transition risk is essentially the failure of companies to prepare for the rapid shift to a decarbonizing economy that is underway. So one example that we can easily put out is the rapid extinction of the internal combustion engine that is coming our way. You can see every major automaker around the world shifting rapidly over to EVs, thanks to technological progress as well as policy incentives. And, of course, there’s a massive supply chain up and down the entire automobile sector all the way down to the service stations that are going to have to adjust.
Every other sector around the world is going through these same dramatic changes. And the question the FAR Council is posing is, how ready is the federal contractor base? Are they going to be like Blockbuster which failed to prepare for the arrival of DVDs by mail and streaming video? Are they going to be like Kodak where it failed to prepare for the arrival of the digital camera? We could have many contractors on their way out due to their failure to adjust to these changes. That is transition risk, and that is a key need that our federal government has to understand in moving forward with the current policy.
Last point I would make about these risks is systemic risk. And so, you’ve probably been hearing about bank failures a lot lately. And Secretary Yellen has made — and many other top financial officials in the U.S. and around the world have made the point that climate change is also one of the key contributors to financial instability. So the real question—they call that the green swan event. When will that day arrive where there is a massive widespread asset deflation linked to the failure to prepare for climate change? And so, certainly federal procurement officials have a great interest in knowing about that, one, for the potential of loss of ability to deliver and on programs, but also the enormous financial impact. Let me have that one last slide I believe. If we could go to the last —
So a whole bunch of additional benefits here I won’t have time to go through. I’ve been talking a lot about risk, but just enormous opportunities to improve the U.S. economy by emphasizing the companies that are not taking these gigantic climate risks but in fact are innovating with new sustainable business practices and, obviously, the huge national security benefits, environmental public health benefits. I got one last slide, if you could just give me the luxury of 15 more seconds.
Just this week, Ceres admitted analysis of the entire comment file to the FAR Council as a supplemental comment. And the key takeaway from that is very strong support for this proposal, especially if you set aside carbon intensive sectors, private sector in addition to the NGOs, in addition to other commenters. Private sector likes this proposal. They have some changes and tweaks, which we can talk about—and I listed some of the key issues that arose in the comment file—but we were really gratified to see the strong private sector support for this proposal and are excited about moving it forward. Thanks. [Inaudible 22:21] wrap it up.
Adam Gustafson: Thanks, John. Let’s turn to Marcus next. Marcus, thanks for joining us. Brian and John have debated the FAR Council’s authority to promulgate a climate rule like this. In your view, how does this proposal fit into the agency’s legal authority?
Marcus Spiedel: Adam, excellent question. And I want to start just by thanking you for letting us be here and to have this discussion. I am here in my personal capacity. As a bit of background, I do work at a large D.C. law firm in their government contracts group, but these are my own opinions. I just wanted to make that clear at the outset. I’m here as the sort of the neutral and to give some context in terms of the FAR and what has already happened and also what other pieces are coming. Because this is really, I see it as — I see this as something of a tide shift that we might be trying to work with here. My reasons for saying that is there is actually a fairly longstanding tradition in the FAR on environmental related regulations, right?
So the FAR is a massive, 2000-page regulation and there’s — divided into various parts. FAR Part 23 is devoted — the title is unwieldly. The title of FAR Part 23 is Environment, Energy, Water Efficiency, Renewable Energy Technologies, Occupational Safety, and Drug-Free Workplace. Some of those don’t fit so well together. And actually there is another proposed rule in the work which would reorganize that section. But that is the section where the administration is pulling from as it’s working on this agenda of it. So we are looking at a political agenda and an administration that is looking at the existing rules that are in place trying to see how we can leverage that.
And there’s a couple of key things that are noteworthy about how the administration’s going about this. So they are taking existing rules and extending them in new ways. So there is a novel aspect there. It’s not coming out of the blue, but they are pushing in new directions. Then they’re also adding teeth that have not been there before. As I said, this FAR Part 23, that’s been on the books for a while now, and sub-part 23.1 entitled Sustainable Acquisition Policy—there’s a whole subsection there on sustainable acquisition policy, how agencies should go about buying things in a sustainable manner—that, the authority for that comes from two executive orders—Executive Order 13423 from 2007 and another executive order from 2009. So two different administrations, both are being pulled on to give authority for sustainable acquisition.
As such, I don’t think acquisition that is sustainable is a bad thing. I don’t think anybody would be in favor of unsustainable acquisition. The question is, how do we do it, and how do we do it legally? And I think that’s where really sort of the debate comes in. Is this the right approach? What are some of the pros? What are some of the cons? And how could this rule, proposed rule, be improved before—if—it becomes finalized? To that note, there’s also various other subparts under Part 23 that also deal with environmental or sustainable issues. So I think there’s a basis there.
But in terms of the policy, the stated policy on the book right now says, “Federal acquisitions — federal agencies shall advance sustainable acquisition by ensuring that 95 percent of new contract actions for the supply of products and for the acquisition of services require that the products are” — and then it gives you a laundry list of ways to make those acquisitions sustainable. That’s surprising. It currently says, “95 percent of new contract actions should advance sustainable acquisition.” Debatable what exactly you mean by “sustainable acquisition.” Certainly, the FAR lays out a laundry list there. But this is indicative of where things have been. That is on the books, and it does say “agencies shall,” right? If those of us who remember law school, shall versus should, this is a shall, but who’s been paying attention to that? And that is one thing that you really notice in this proposed rule by addressing — by making this sort of a gateway issue into being able to contract with the government.
All government contractors in order to do business with the government have to complete a registration in sam.gov. Sam.gov is the system for award management. And that is where companies disclose all sorts of things so that the government knows who it’s doing business with. As a standard practice, the government only wants to do with business with responsible contractors. I think almost all taxpayers are in favor of that. Nobody wants crooked, corrupt, shady businesses taking public money and failing to deliver on that. A big part of responsibility is past performance—how have contractors done in the past?
Now, the proposed rule would make it mandatory what has so far been a voluntary disclosure. There is already an existing FAR provision that goes into the solicitations. When the government needs something, it advertises through a solicitation. And in that solicitation, it is currently asking contractors to voluntarily disclose. That provision 52.223-22—a lot of 2s, a lot of 3s—that one is what the administration is building off of, cranking up, and turning from voluntary to mandatory. So a key takeaway, this is not coming out of the blue. The agency is building off sort of an existing, shall we say, infrastructure of regulations. But the question is, is it doing it the right way? Is it doing it in a permissible way? What are the implications for small business contractors? What are the implications for national security? As Brian pointed out, is there a sufficient government review of outside parties?
To Brian’s other point about delegation, there has been a practice in government contracting, a longstanding practice, to require contractors to have certain credentials, and those are often done by third parties. But what we’re looking at there is, if you’re going to drive trucks on foreign military bases, you may need to have a driver’s license from that foreign government. So that would be a responsibility determination ultimately—are you able to meet the requirements of the contract?—but that has been on a sort of contract-by-contract basis. Whereas here, now, we’re scaling it up into — for all contracts, if you meet the threshold, you’re now going to be held to these third-party — these third-party assessments. So in the interest of time, I’m going to yield the rest of mine back so that we can move on to a bit of discussion here.
Adam Gustafson: Thank you, Marcus. And in the interest of discussion, I’d like to invite the audience to submit any questions they have through the Q&A feature. We look forward to having the panelists respond to any questions from the audience. In the meantime, I’d like to give each of the panelists an opportunity to respond to anything that’s been said by the other panelists. So, Brian, I’ll start with you. One of the questions that I think has come up is this question of legal authority. Feel free to respond to that or anything else you’d like to add.
Brian Richman: I mean, I think a question that comes up for me just on the administrative law side and an arbitrary and capriciousness issue of it and it cuts to the statutory authority as well is what is the federal government going to do with the very expensive disclosures they are proposing to require here. The FAR Council in the proposal does not say who is going to review this information or what they’re going to do with it. They don’t explain how, say, a line procurement officer in the Department of Education is going to say, “Read a contractor’s disclosure of the amount of carbon dioxide that they’re suppliers that are downstream customers, which includes the federal government itself, will use. How the government will factor that into its decision, that is a part of the analysis, an important part of the analysis, that it doesn’t seem the FAR Council has considered.
When it comes to some of the natural disasters or other events that John mentioned, again, it’s not clear what this particular proposal is going to have to do with those. The FAR Council has not identified any piece of information that could have been disclosed in one instance that would have informed anybody’s actions in another. They haven’t identified any particular, say, weather event and what information this rule would have required someone to disclose and what a federal agency would have done in response to that disclosure. There has been some talk also about efficiency for the contractors themselves.
And I would just say to the extent that making these various disclosures or considering certain risks is something that is beneficial to the contract or something that allows it to save costs to provide goods and services to the government more efficiently at a better price, one would expect in the competitive bidding market that the acquisition regulations create, one would expect that competitive pressure to actually incentivize companies to conduct the proper analysis. If accounting for a certain risk makes the company more efficient, when you’re competitively bidding to provide goods or services, you would expect that you would take the steps necessary to help you have a competitive bid. And that’s another part of the analysis really the FAR Council just doesn’t address here.
So I think — to sum it up, I think one of the big problems here or something they’re going to have to address is really the connection between what they’re doing and what their stated end goal is. So that’s both relevant from a regular arbitrary and capricious standpoint, and then it’s relevant, frankly, to the statutory standard. So John and I both talked about economic and efficient government contracting. I mean, that’s something that the FAR Council’s going to have to draw a direct connection between the regulation and that piece of statutory authority.
Adam Gustafson: John, do you have a response?
John Kostyack: Yeah. I think Brian’s first point is one that I would agree with, which is there’s not as much detail as we would like to see in this proposal on the use of this information. But one thing I think we can say for sure—there is nothing in this proposal that tells a contracting officer to do anything differently. This is not about asking contracting officers to evaluate a climate risk assessment and making that part of the review. In fact, I think that would be unwise. I don’t think these contracting officers have that kind of sophistication on climate change risk. So there are many other reasons for the government to collect disclosures.
And that gets to Brian’s second point, which is, is it really an efficient way to manage your contractors to ask at every single bid for them, these companies, to demonstrate they are prepared for the many shocks that are coming from climate change as well as from the dramatic changes in our economy? And the answer is no. Actually, it makes sense to see that at the company-wide level. If there’s a risk of business failures among the contracting base of the federal government, it’s better to look at that at a strategic level and to deal with it at that level than on a contract-by-contract level. So this is why this rule is so important at this stage.
There are many other policy processes under way, including a separate FAR rule that we are expecting to see sometime this year, case number 2021-016, that brings it down to the contracting level. This is not at that contracting level. This is at the strategy level. This is for federal and procurement officials to think about the FAR in a big picture way to understand how vulnerable is the federal contracting base to climate risk and what are the best approached to dealing with that. And this is the time to do it. I mean, every year, the number of climate-related disasters is on the upswing. Every year, the prices of renewables comes down and is shocks to our system from our overdependence upon fossil fuels is hitting us — or hitting our economy. So this is a moment to take that big picture review on the entire FAR and to think about what is the best way to integrate climate considerations into the bid process and the acquisition planning process and the post award management processes. You can’t really make that at a — those kinds of decisions at a contract level.
Adam Gustafson: Thanks, John. Marcus, you’re welcome to respond to anything that you’ve just heard. I’m also curious about a specific aspect of the proposal. There’s some ambiguity in the term “relevant scope 3 emissions,” which major contractors would be required to disclose. Do you have any insight into what is meant by that term, “relevant scope 3 emissions”?
Marcus Spiedel: Adam, again, I think that you’re asking the right question. That question you asked makes a world of difference in terms of what this rule would mean, especially to the smaller contractors. Scope 3, the rule is ambiguous about what scope 3 means. It really sort of looks like it’s leaning on the Greenhouse Gas Protocol. It cites to that. And that separate document lays out a whole — a broad picture of what scope 3 looks like. That would be everything that happens outside the direct plant of the contractor, right?
So I tend to think of that as a supply chain emissions. But if you define it the way the Greenhouse Gas Protocol defines it, it goes both ways. It goes upstream and downstream. And when I was working with the ABA comments for the proposed rule, some of the — we were pointing out the fact that you don’t have a whole lot of control necessarily about the people who are below you. If you are providing supplies to the government, how much control do you have over what they do with what you have delivered? Although, in the broad definition of scope 3, that would be included. So you would be carrying the burden of what others do with what you have produced.
A much narrower and arguably fairer definition would be to use what the government currently has been using since 2016 in its own scope 3 evaluations. So the government itself, the federal agencies, have been working to reduce their own scope 1 and 2 emissions but also been tracking their scope 3 emissions. And that is much more narrow definition of what counts, what you measure, when we’re talking about scope 3. That includes things like travel, commuting, and much more tangible and limited factors.
So the rule says relevant scope 3, and relevant there does a whole lot of lifting depending on how you want to define what is relevant. You’re either going to include a broad list going upstream and downstream or a much more narrow and tailored list. That will have huge implications for how much this costs to implement. And that is certainly one thing that I’d like to see come out more crystalized in the final rule—what do they mean by scope 3?
Adam Gustafson: Brian, turning back to you, you and John have discussed the legal authority, or lack thereof, for this proposal. The Supreme Court’s recently taken an interest in the major questions doctrine, especially in a recent challenge to a novel environmental regulation. Do you see any potential application for that doctrine to this FAR proposal?
Brian Richman: Yes. I think all of the proceeding discussion has really emphasized the unique steps it’s going to take. So I mean I think John’s PowerPoint presentation was titled A Historic Step in Climate Regulation, or something along those lines. But the historic step part I think is what — is part of what triggers the major question doctrine here. And I want to be clear about just the scope of the burden that the FAR Council proposes here. Even under the Council’s own estimates—assuming everything in there is correct, and there are reasons to think those estimates are low—in the next 10 years, this would cost $3 billion in disclosures. And that doesn’t include numerous costs.
So, for example, the FAR Council would mandate here that contractors create a science-based emissions reductions targets, and their estimate for the cost of that is the cost of filing the proposal with SBTI, not the cost of actually developing it and not the cost of implementing the science-based targets that they would be required to implement. Those are potentially massive costs that aren’t even factored into the 3 billion number that the FAR Council itself estimates.
So, here, you’re talking about a huge amount of money. You’re talking about a step that I think is novel. So to Marcus’s remarks earlier, you’re going from some things that are voluntary to here you’re going to essentially an outright prohibition on companies doing business with the federal government unless they take extremely specific, extremely expensive steps. And I think that is classic major questions doctrine.
Adam Gustafson: Thanks, Brian. John, do you want to respond to that?
John Kostyack: Yeah. Because I have to say when I put the word “historic” on the slide, it was certainly not in all implying that I think we’re getting even close to the world of major questions. The reason why it’s historic is this is the first time the federal government would be able to get its arms around one of the greatest risks facing our global economy, the U.S. economy, and the federal supply chains. And it is business insanity for any large corporation not to be evaluating its climate risk, which is why virtually all of them are embarking upon that right now.
So the federal government is actually playing catchup. It’s not historic in the sense that of a large purchaser, managing, measuring, reducing its climate risk. That’s happening around the world. What’s historic is the federal government is now finally getting to that. So that is a really important development, but I have to say it’s completely acquiring the environmental disclosures from contractors is something—Marcus points it out—it’s been going on for quite a long time. Nothing new here. And, obviously, we can’t rule out major questions coming up in litigation because, let’s face it, it’s now any federal regulation that comes out that word seems to pop up. But to me, this is not even a close call. This is consistent of a long line of procurement policies that essentially say we need better information from our contractors.
And I just disagree with the cost assessment fundamentally. Disclosure of climate risk and disclosure of emissions, you can just look at all of the graphs in terms of where it was 10 years ago and where it is now and where it’s going to be 10 years from now. And the short version of that story is disclosure — best practices disclosure industry has scaled dramatically and is expected to continue scaling, which means costs go down every year. Companies are really comfortable doing this, and therefore, they have figured out efficient ways to collect and analyze and produce this information. So I would be very skeptical about some of those numbers I see tossed around.
One little point I want to make and respond to Marcus on the scope 3 thing, I actually agree on his points there. I do think — in our comments, Ceres’s comments, we did ask for the federal government to provide more definition. In fact, our approach to all four of those standard setters is to say, “No, let’s have the federal government set the standards here.” And then, if you want to work with these entities on the methodologies for achieving those standards, please do. We encourage it. They’re great organizations. But the federal government should provide clear standards here and have everybody aim toward them and let people choose which entities they want to work with and to achieve those standards.
Adam Gustafson: Marcus, there’s been some talk of the cost of implementation. What do you see as the primary issues for government contractors as they try to comply with this rule if it’s finalized?
Marcus Spiedel: Before I get to that, I do want to tag onto something both John said and then also something that Brian said. Agreeing with John, one of the things that I think needs to happen with the final rule is this somehow needs to be brought more in-house. If the government is going to do this, whether or not — the rule should be finding a way to exert a final influence over it. I think if they want to look outside for how best to do this to find ways that are maybe, as John has pointed out, what the industry’s already doing, fine, so be it. But I agree with Brian that I think there’s a national security risk involved here that we haven’t really touched on by having global outside nonprofits weighing on who is a responsible contractor. So I think looking at them for a model that works? Maybe. But I think there needs to be some sort of federal review, some sort of final U.S. stamp on those, instead of just entirely leaving it a global third party.
And then, to the point on — actually, I think, Adam, you had brought up the Supreme Court case—I think you were eluding to EPA—in which they were slapping back the agency for trying to regulate an entire sector of the economy. And I think we can distinguish though what was happening in that case where the government was acting as a regulator from what is happening here where the government is in a different posture. Here, the government is in the posture of a market participant. It’s a buyer.
And if we recall from Con Law, there’s a different stance when you’re regulating, say, interstate commerce—states are not allowed to regulate interstate commerce—but when they’re acting as a market participant, the rules are different there. You are able — a state government can prefer local goods and services over those from another state, even though that does affect interstate commerce. So I think it’s important to keep that different stance in mind here. The government would not be trying to regulate a sector of the economy. It would be looking to be perhaps a more informed buyer. Throwing out some ideas there for others.
Adam Gustafson: Brian, why don’t you take that? How does the government’s role as procurement officer, as buyer, affect your analysis? And what’s the role of national security in your argument?
Brian Richman: In terms of the statutory analysis, I don’t think it affects it. The question is, did Congress authorize the FAR Council to essentially condition federal government contracting on this unique regulatory scheme? And I think the answer to that question is no. And the fact that the federal government is a buyer to me doesn’t change the analysis. So the government, for example, has tried to do this exact thing in the COVID vaccination context. And in the last year, the Fifth, Sixth, and Eleventh Circuits have all rejected that, saying that the federal government does not have that power, that conditioning the use of the federal procurement power on other regulatory objectives—so in those cases, COVID-19 vaccination—was not connected to the efficient and economic use of government procurement.
As for the second point, national security, I agree this raises significant national security concerns. A large portion of the federal contracting involves national defense. And here—this ties into my nondelegation point—here, you have an essential outsourcing of standards, not only to private organizations, but to private organizations that are potentially foreign and have foreign connections and foreign influences. So you have without government supervision as to the standards they’re setting. So that, to me, creates a potentially big problem that the FAR Council needs to address.
And then lastly, the one point that I want to make and just keep coming back to is just the connection between what the FAR Council is proposing, these massive costs—and even if we take their number, 3 billion over 10 years, and the potential risk that Marcus mentioned on national security—it’s hard to see how any of that — any of the benefit from this ties into what they actually want to do. Still, the FAR Council hasn’t been able to identify who exactly is going to read these disclosures and what are they going to do with them. There has been no discussion of that, and it’s not clear why the disclosures are necessary.
Take greenhouse gas emissions, for example. Generally speaking, you could estimate with publicly observable information the size of a company, its revenue, the number of employees. You can get over 90 percent accuracy in estimating a company’s scope 3 greenhouse gas emissions from just that. What the FAR Council doesn’t explain, doesn’t even attempt to explain, is how billions of dollars in cost, how this national security risk can be justified from going from an estimate they could easily calculate with publicly available data or data they already have in the contracting process to bring that number from say 90-something percent accuracy to a hundred percent accuracy, or it wouldn’t even be a hundred percent because if scope 3’s kind of — it’s still pretty new. So let’s say you go from 90 percent to 95 percent accuracy in terms of the scope 3 emission. I haven’t seen a justification for why the costs and the risks of this justify that.
Adam Gustafson: John, do you want to respond to that point about the rule just being marginal improvement and information that’s already publicly available?
John Kostyack: Well, there’s a lot of information in the public sphere right now, and some of it reliable, some of it not. And so, creating a standardize method for federal contractors, the big ones, to put forward the information so that the federal government can truly analyze it—it can, if necessary, go back to the contractors for supplemental information to clarify things—this is fundamental risk management. I mean, it’s the same kind of risk management that major corporations and the U.S. government are doing on cyber security and a whole host of other risk that are existential for companies.
So I don’t see why the federal government, just because climate seems to be politically hot right now, should run away from this fundamental risk management practice. And, no, we should not rely upon just general reports floating around the internet. We should rely upon federal governments — I mean, federal contractors responding to their biggest customer and providing the information they need to minimize their risks.
Adam Gustafson: John, Brian opened his remarks by quoting the Chief Justice in a recent case where he expressed some skepticism about the whole-of-government approach and pointed out that if lots of different agencies are tackling a problem that Congress seems to have been silent on, maybe this should have been Congress’s move in the first place. What’s your response to that, and how does this FAR proposal relate to the SEC’s proposed climate disclosure rule?
John Kostyack: Well, I work on the SEC’s rule as well. And, obviously, there are two different statutory frameworks, and both agencies are working within their frameworks. We’re big supporters of that climate risk rule over there as well. But it’s really a different rationale because, in that context, it’s about investor protection. It’s about ensuring effective functioning of markets for publicly traded companies. In this case, it really comes back again to those two core concepts of economical and efficient procurement program. And so, just walk through the analysis. There is extensive data out there demonstrating the cost savings around identifying and reducing exposure to the physical impacts of climate change, to exposure to transition risk.
And these are the most sophisticated asset managers. Just this past week, the second largest asset manager in the U.K. just came out with enormous financial differentials between managing transition risk and getting aligned with NetZero and letting transition risk run unmanaged, enormous environmental impacts that are getting the top financial institutions around the world and the financial regulators extremely concerned about unaddressed climate risk. So why would federal procurement agencies take themselves out of that conversation? They’re the ones that are so badly exposed to this risk.
As the largest purchaser in the world, any massive business failures or failures of companies to deliver on the products they are promising our federal government because of climate impact, because of dramatic changes in the economy that force them out of business—those are basic questions of the functioning of government and taxpayer protection—that it would be malpractice for this federal government to not get their arms around.
Adam Gustafson: Thanks, John. Marcus, do you have any closing thoughts before we wrap up the panel? And I’ll Brian the same thing.
Marcus Spiedel: I do want to say this has been an excellent discussion. I think more of this needs to happen. I think there are definitely things in this proposed rule that should be worked out before it is finalized. And I think one of those—and Brian has hammered on this—is what is the — what is the authority? What is the statutory authority? Are we even looking in the right place? Tucked away under 42 USC 4321 there’s a mention of, not this executive order, but a related executive order for procurement with a proposed FAR rule coming out under that. And so, it is not clear to me that we’re looking in the right place because the rule right now is silent. It just says the laws of the United States. And I think that is a question that the FAR Council really should push an answer for. What is the authority under which this rule is promulgated?
Adam Gustafson: Thanks, Marcus. Brian, any closing thoughts?
Brian Richman: Yeah. Thank you, Adam, and thank you, Marcus and John. This has been a very fun discussion. I think for me the closing thought is just the fact that the FAR Council’s going to need to face matching up the specific disclosures that it is requiring with the benefits that it is claiming. So to take transition risk for example, it doesn’t take a couple billion dollars in disclosures to figure out whether transitioning from fossil fuels, what impact that’ll have on certain companies or industries.
I mean, take a simple example. Look at the factory that’s on the waterfront. It doesn’t require billions of dollars in disclosures or hundreds of thousands or millions for that particular company on its specific scope 3 emissions to figure out if a rising sea level will impact that factory. This is information that could be easily achieved or cheaply, efficiently achieved through other sources, and the FAR has not been able to, so far, link the specific proposals here to the benefits it’s claiming in the move.
Adam Gustafson: Thank you, Brian. I’d like to thank each of our panelists. I think this has been an excellent discussion and a very illuminating about the proposed rule. You’ve given us a lot to think about. Colton, I’ll turn it over to you.
Colton Graub: Thanks, everyone. Just want to echo what Adam said. Brian, John, and Marcus, we’re very grateful to you for your time today and for the insight and the discussion on this extremely important issue. For those in the audience who joined the conversation midway through, you can watch the recording via YouTube or listen to it via our podcast feed, which is available everywhere you listen to podcasts. We welcome listener feedback by email at [email protected]. Thank you all for joining us. This concludes today’s discussion.
Ceres Accelerator for Sustainable Capital Markets
Gibson, Dunn & Crutcher
Procurement Law Alumnus
The George Washington University
Senior Counsel for Environmental and Regulatory Affairs