Biden Order Poses Climate Disclosure Challenges for Contractors

President Joe Biden’s order to reduce the federal government’s carbon footprint poses a new reporting onus for contractors over climate information.

The Dec. 8 executive order directs the General Services Administration to track major contractors’ disclosure of greenhouse gas emissions, carbon reduction goals, and financial risk from climate change.

The order comes as they’re already bracing for the Securities and Exchange Commission to release its own climate disclosures rules. Neither the SEC nor the GSA has released detailed plans on potential disclosures—such as whether the required reporting would include both direct and indirect emissions.

Contractors that are publicly traded could face competing reporting standards that require them to make environmental, social, and governance disclosures at various times and in different ways, creating challenges and potential risks for their businesses, lawyers told Bloomberg Law.

These companies could be accused of greenwashing and violations of the government-fraud combating False Claims Act, if they were to make inconsistent disclosures, said Paul Freeman, a senior counsel in Crowell & Moring LLP’s environment and natural resources and government contracts groups.

“There’s risk that you could be doing multiple disclosures for multiple purposes with different standards,” Freeman said.

The executive order “really drives that risk home,” he said.

More ESG Scrutiny

The SEC is considering rules for public companies to report in 10K reports their greenhouse gas emissions.

Biden’s executive order directs the federal government to have a net-zero carbon footprint by 2050 and directs the GSA to track emissions. It follows a May directive for federal agencies to consider requiring contractors to publicly report greenhouse gas emissions and climate risk and set reduction targets.

But contractors may have to report the information at other times, as well.

The Environmental Protection Agency already requires big greenhouse gas emitters and fossil fuel suppliers to report their emissions. Boeing Co., Lockheed Martin Corp., Northrop Grumman Corp., and other major Defense Department and NASA contractors disclose the EPA data, according to agency records.

Contractors that don’t have robust plans to quantify and track emissions have some work ahead as the GSA joins the mix, said Marcia Hook, an energy regulatory partner at Kirkland & Ellis LLP.

“It’s been clear that this executive order will result in supplier and contractor emissions being subjected to a higher level of scrutiny than they were previously,” Hook said.

Consistent Disclosures

The SEC and GSA also could require different levels of information about companies’ carbon footprints, further complicating compliance for contractors.

The SEC is looking at whether to mandate reporting on Scope 1 and 2 emissions, which come from companies’ direct operations and power usage. The agency also could require disclosures on indirect Scope 3 emissions that result from company activities like business travel and employee commuting.

Biden’s executive order doesn’t specifically direct contractors to supply data on their Scope 1, 2, and 3 emissions, though it requires agencies to reduce all of them.

Companies will need to figure out how to harmonize any climate reporting requirements that may apply to them, said Margaret Peloso, a Vinson & Elkins LLP partner, who advises clients on climate change risk. Investors and other stakeholders will look at these disclosures to see if they tell the same story, she said.

“As we emphasize with our clients, the name of the game in ESG is consistency,” Peloso said.

Conflicting reporting standards could elevate litigation risks, if the disclosures a company makes to compete for a government contract exceed or are deemed inconsistent with what they say in SEC filings, Freeman said.

“By placing those emission reduction calculations or other climate-driven disclosures at the center of individual federal procurement decisions, they take on legal significance,” he said.

Companies could face litigation under the False Claims Act, which prohibits contractors from deceiving the government, Freeman said. Contractors also could face state attorneys general challenging companies’ sustainability claims, he said.

Act Now

But coordination between the SEC and GSA is possible, Hook said.

“The GSA might allow parties to simply provide the data that they provide to the SEC to comply with the GSA requirement,” Hook said. “It’s a little bit too soon to tell whether or not there will be conflicts created here.”

The GSA, Defense Department, and NASA are still gathering public input on how the government could obtain information on contractors’ emissions. The SEC is putting the finishing touches on its climate disclosure proposal, but final rules would be several months away at the earliest after public comment.

Companies will have some time to ensure they’re compliant with the executive order and may even see it revoked by a Republican president, said Taite McDonald, a Holland & Knight LLP partner, who advises government contractors.

But companies should start acting on the executive order, despite any challenges they may face, she said.

“Industry is already moving in a direction similar to what’s set forth in the EO for numerous reasons – not simply in light of this EO,” McDonald said.