The Status of Two Pending Rules That Would Require Disclosure of Climate Risks – Part 2

Sullivan & Worcester, LLP

by | Jan 18, 2023

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In this two-part series, Jeffrey Karp, Senior Counsel, Sullivan & Worcester LLP, and Edward Mahaffey, Staff Attorney, Sullivan & Worcester LLP  will discuss the status of two pending federal regulations that would require the disclosure of information concerning greenhouse gas (GHG) emissions and climate-related risks: one proposed by several agencies that would apply to federal contractors, and the other by the Securities and Exchange Commission (SEC) that would apply to public companies.

Part 1 will focus on the proposed regulations for public companies, while Part 2 will dive into the federal contractor side.

The Proposed SEC Rule For Federal Contractors

On November 14, 2022, Defense Department, General Services Administration, and National Aeronautics and Space Administration (Agencies) published a proposed rule, “Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk.” According to the agencies’  summary of the proposal in the Federal Register, it would “amend the Federal Acquisition Regulation (FAR) to implement a requirement to ensure certain Federal contractors disclose their greenhouse gas emissions and climate-related financial risk and set science-based targets to reduce their greenhouse gas emissions.”

The Agencies acknowledge that some similarities exist between the content of the disclosures required in the proposed FAR and SEC rules but note that the FAR rule requires contractors with significant Federal contracts “to provide their disclosures using the CDP Climate Change Questionnaire to maximize the consistency, comparability, and accessibility of disclosure data for use in managing Federal procurements and supply chains.” (CDP, formerly the Carbon Disclosure Project, is a nonprofit organization that runs a global environmental disclosure system.) The proposed rule would separate ‘major Federal suppliers’ into two categories: major contractors and significant contractors. Suppliers in both categories would be required to disclose annual Scope 1 and Scope 2 GHG emissions. But only major contractors must provide an annual climate disclosure that includes Scope 3 GHG emissions and science-based target requirements.

The rule would define Scope 1 emissions as direct GHG emissions from sources that are owned or controlled by the reporting entity; Scope 2 emissions as indirect GHG emissions derived from the generation of electricity, heating, and cooling, or steam by third-party sources and purchased or acquired for the reporting entity’s own consumption; and Scope 3 emissions as GHG emissions, other than Scope 2 emissions, that are generated by third party sources as a consequence of the reporting entity’s operations.

Under the proposed rule, a science-based target is “a target for reducing greenhouse gas emissions that is in line with reductions that the latest climate science deems necessary to meet the goals of the Paris Agreement to limit global warming to well below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C.” Major contractors would be required to develop science-based targets, and have them validated every five years by the Science Based Targets initiative (SBTi), a partnership between CDP, the United Nations Global Compact, World Resources Institute, and the World Wide Fund for Nature. The comment period for the proposal ends February 13, 2023.

Enforcing the Federal Supplier Rule 

It is anticipated that difficulties may occur in accurately measuring Scope 2 and 3 GHG emissions, and in evaluating science-based targets. In an effort to address these concerns and strengthen compliance, the rule relies on third parties for GHG measurement and science-based methodologies. For example, evaluation of science-based targets is to be conducted by the SBTi.

Nevertheless, validation of the targets is not the same as tracking companies’ progress towards achieving these targets, something for which the SBTi acknowledges it presently is developing a process. The SBTi states that, during the coming year, it will issue more specific guidance on what companies must report annually on a public basis to facilitate this process. However, in the meantime, consistent with the Agencies’ proposed rule, the SBTi suggests disclosure through CDP’s annual questionnaire as one of several ways for companies to “publicly disclose their emissions inventory and progress against their targets.”

Nonetheless, questions remain whether the Agencies will promulgate a final rule as strict as the proposed rule, and whether the federal courts will uphold the final rule’s legality. Interestingly, a review of the comments submitted to date indicate that, while there have been some objections to aspects of the proposed rule from organizations representing federal contractors, those comments generally have been rather muted. The White House’s announcement of the proposed rule pointed out that more than half of major Federal contractors are already disclosing climate-related information, which, perhaps, may account for the absence of rancor.

Please note: Additional citations can be found on Sullivan & Worcester LLP’s website

Author Profiles

Jeffrey Karp

(Credit: Jeffrey Karp)

Jeffrey M. Karp, Senior Counsel, Sullivan & Worcester LLP

Jeff heads Sullivan’s Environment & Natural Resources Practice Group. He assists clients in resolving complex regulatory matters and high-stakes business disputes, and engaging in transactions that involve the intersection of law, science, and technology.

Jeff represents clients on a range of environmental issues under federal and state laws, including advising on regulatory compliance, contaminated property and remediation matters, due diligence in property and corporate transactions, government investigations, and enforcement actions. He also has an impressive track record of resolving disputes short of litigation, both with respect to claims arising under a wide range of federal and state laws, and those involving private party transactions.

Edward Mahaffey

(Credit: Edward Mahaffey)

Edward R. Mahaffey, Staff Attorney, Sullivan & Worcester LLP
Edward focuses on regulatory matters including environmental, energy, and securities law. He has co-authored numerous articles on developments in environmental and securities law for such publications as Financier Worldwide, Thomson Reuters Practical Law, and Law360, and has contributed extensively to Sullivan’s Environment & Energy Insights blog.

About Sullivan
Sullivan & Worcester (Sullivan) is a leading AmLaw 200 law firm with over 200 attorneys in Boston, London, New York, Tel Aviv and Washington, DC. Sullivan’s clients, including Fortune 500 companies and emerging businesses, rely on Sullivan’s strategic vision, comfort with complexity and intense focus on results. As a global law firm, Sullivan’s reach extends beyond the United States. Sullivan has represented clients around the world and has a deep bench for working on a variety of matters and issues affecting clients globally.

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