Federal procurement may soon be getting the attention it deserves from those concerned about climate change. In the next several months, the Biden administration is expected to finalize two rules aimed at tackling climate-related risks and opportunities in federal supply chains. The first, which is the focus of this article, will elicit the first-ever disclosures of climate risks, emissions, and emissions reduction targets from federal contractors. The other will accelerate selection of products with ecolabels and similar sustainability recommendations. Considering the far-reaching impact of federal procurement — the U.S. is the world’s largest buyer of products and services, with roughly $700 billion in annual spending — this is good news for taxpayers, effective program delivery, the U.S. economy, and global efforts to build climate resilience and drive down greenhouse gas emissions.

In recent years, investors have helped to reframe climate change as a threat to individual businesses, the economy and the financial system. CA100+, a leading investor group, highlights research showing that without greater action in line with the goals of the Paris Agreement, planetary warming could result in roughly $23 trillion of economic losses this century. In a March 2024 survey of investors representing $18 trillion in assets, 90% said they are focused on the energy transition.

To drive progress, investors spearheaded the Task Force on Climate-Related Financial Disclosures and related frameworks to facilitate measuring and managing climate-related financial risks and opportunities. These investor-led frameworks have been helpful to a degree, but they have significant limitations. Because they are voluntary, disclosures vary greatly in terms of completeness and reliability. Many focus only on climate risks facing individual businesses, not potential financial crashes and other systemic impacts of climate change.

Thankfully, governments around the world have begun addressing these gaps with a suite of new climate-related financial regulations based on the private sector frameworks. However, beyond the financial regulatory agencies, governments have largely failed to use the private sector frameworks or otherwise address climate change from a financial risk perspective.

This will soon change if the Federal Acquisition Regulatory Council, the multi-agency body charged with writing U.S. procurement rules, moves forward this year with its disclosure rule as anticipated. Among the rule’s key features is a requirement that the largest federal contractors – the roughly 1,000 companies with more than $50 million in annual contract obligations – disclose the climate-related financial risks they are facing and how they are managing them. These contractors will be required to use the Task Force on Climate-Related Financial Disclosures (TCFD) framework.

Adapting To Climate Change Impacts

National security programs are among the many that will benefit from the rule. The Defense Department will receive, for the first time, standardized disclosures showing its most important suppliers’ strategies for ensuring timely deliveries in the face of growing climate change impacts.

The urgency of these disclosures was made evident in 2023. Severe drought, driven by a combination of El Niño and climate change, limited shipping through the Panama Canal to 62% of its usual volume, and the U.S. alone experienced a record 28 weather-related disasters with $1 billion or more in damages.

Droughts, floods, wildfires, heatwaves, and other supply chain disruptions will only worsen as GHG emissions continue to accumulate in the atmosphere. To protect taxpayers and effective program delivery, agencies must partner with their top suppliers to develop strategies for climate adaptation. Reliable and comparable information about the suppliers’ approaches and capabilities will provide a critical foundation for these adaptation strategies.

Addressing Financial Risks From Emissions

In addition to eliciting disclosures about preparedness for climate change impacts (physical risks), the rule will provide the government with supplier disclosures regarding their preparedness for the transition to a decarbonized economy (transition risks). Suppliers with more than $50 million of contract obligations in the previous fiscal year will be required to disclose direct emissions (Scope 1 and 2), value chain emissions (Scope 3), and validated science-based emissions reduction targets. Suppliers with contract obligations between $7.5 million and $50 million will be required to disclose only Scope 1 and 2 emissions. As with the physical risk disclosures, transition risk disclosures will be built on established private-sector frameworks, specifically the TCFD, Greenhouse Gas Protocol and Science-Based Targets Initiative.

Two significant benefits are achieved from eliciting GHG emissions information from large suppliers. First, as the transition accelerates, some suppliers will decline or fail due to their inability to compete with those in their sectors that deliver products and services with lower GHG emissions. Lack of preparedness for major changes in the economy led to the failures of once-dominant companies such as Kodak and Blockbuster. The federal government needs better visibility into its major suppliers’ transition preparedness to ensure they will not soon be joining this list of failures. Large companies such as Walmart
WMT
, with its sustainability hub Project Gigaton, already recognize these risks and work closely with suppliers to drive down emissions.

Second, gathering emissions information – especially information confirming suppliers’ commitment to emissions reductions on a science-based trajectory – will be essential to reducing systemic risks. When extreme weather linked to rising emissions disrupts federal supply chains, whether due to transport problems, lost worker productivity, or other factors, the overall costs of supplies and likelihood of delivery disruptions grows.

Of course, failure to reduce emissions has implications for federal programs beyond the cost and reliability of procurements. Rising temperatures exacerbate a wide array of public health problems, from heat-related illnesses to infectious diseases, that private insurance is unable to cover. Similarly, as climate-related damage to homes and businesses accelerates, property insurers increasingly withdraw from markets, reduce coverage and raise premiums. The federal government is expected to bear the spiraling costs of disaster relief and health, flood, crop, and mortgage insurance to address these systemic climate impacts.

The inflationary effect of delaying the transition of the economy away from fossil fuels, sometimes called “fossil-flation,” has become increasingly evident in recent years. As the Bank of International Settlements explained in a May 2023 report, when fossil fuel supply is constrained – as happened when Russia invaded Ukraine or whenever oil companies elect to hold back production – and where sufficient clean energy supplies are not yet available, energy prices increase. This price volatility is why, following the Russian invasion, German finance minister Christian Lindner referred to renewable energy supplies as “freedom energies.”

Another component of inflation strongly linked to rising GHG emissions is inflation from climate impacts, sometimes called “climate-flation.” This is particularly evident in food prices. According to the IPCC’s 2022 Sixth Assessment Report, extreme weather and water scarcity linked to rising emissions have already led to decreased food production, rising food insecurity, and malnutrition around the world. As the World Economic Forum and the United Nations Framework Convention on Climate Change have shown, these shortages have led to increased food prices and contributed to a growing crisis of climate refugees and political instability.

In a March 2024 study, researchers from the Potsdam Institute for Climate Impact Research show that this problem will likely intensify in the coming decades. The researchers analyzed monthly consumer price indices, recent weather conditions, and anticipated temperature increases and projected that average food prices would increase one to three percent annually through 2035.

When worsened by GHG emissions, societal problems such as food insecurity, infectious disease, and losses of livelihoods and property from extreme weather must be seen first and foremost through the lens of environmental injustice. Those who suffer the most from these climate disruptions are the people who contributed the least to the problem.

Procurement officials must also view these climate disruptions as systemic financial risks, as rising costs and logistical breakdowns threaten the functioning of numerous essential federal programs. Under the federal procurement law (Federal Property and Administrative Services Act of 1949, 40 U.S.C. § 101), the Federal Acquisition Regulatory (FAR) Council has the authority to write procurement rules as needed to strengthen federal programs – specifically, to promote program economy and efficiency. Tackling the problem of rising GHG emissions is essential to fulfilling this responsibility.

A Critical Opportunity to Build Climate-Resilient, Low-Carbon Supply Chains

This article has largely focused on the risk management benefits to the federal government of the proposed Supplier Climate Risk and Resilience Rule. However, a risk management approach to procurement inevitably reveals opportunities. With the information and emissions reductions commitments elicited by the proposed rule, the federal government will have the foundation for crafting a new generation of programs and policies that provide a boost to companies showing a readiness to partner on scaling up climate-resilient, low-carbon products and services.

The proposed rule does not specify how the information and emissions reductions commitments will be used, but it sends a strong signal to the market that high performers on resiliency and emissions reduction will soon be well-positioned to take a leadership role in strengthening federal supply chains. Exercising its enormous customer power, the federal government can strengthen U.S. leadership on climate resilience and decarbonization.

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