ESG contract stipulations are becoming common. Are you prepared?

By Skyler Handl, Corporate Counsel, Public Sector

How familiar are you with new Environmental, Social, and Governance (ESG) policies in the U.S. and abroad? For public sector companies, staying current with these new requirements will be an important part of remaining competitive.

ESG has become popular recently in the commercial investor market, but it actually has been a long-time staple in government contracting. For decades the U.S. government promoted public policy aligned to ESG objectives through the inclusion of contract and subcontract requirements to combat human trafficking (FAR 52.222-50), promote small and diverse business (FAR 52.219-9) and to utilize energy efficient products (FAR 52.223-15). Social and Governance objectives have historically impacted contractor responsibility and qualification under FAR Part 9, and have been weighted factors in evaluation criteria during best value competitions with specific attention for exceptional small and diverse business plans.

More recently, President Biden’s Executive Order on Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis issued on January 20, 2021, refocused the discussion on the environment.

As a result, the government is beginning to consider factors such as the “social cost of carbon” (SCC) in their decision-making, and government contractors are being pushed for carbon neutral facilities and solutions. For instance, the recent Ascend Cloud Blanket Purchase Agreement Statement of Work, released in advance for public comment, specifically requires cloud providers to commit to carbon neutral data centers by 2030, with an exception for backup equipment to be powered by traditional means.

Furthermore, the U.S. government is drafting several proposed FARs and DFARs targeted at driving “Sustainable Procurement” and “Minimizing the Risk of Climate Change.” Drafts of these rules are expected in summer of 2022 with final publication in 2023. While these requirements may advance public policy objectives, the government and industry must balance the benefits of developing renewable technologies with the potential for adverse impacts on small businesses with less capital.

Beyond taxpayer spending, the U.S. government’s focus on ESG has been felt in the private sector as well. The Securities and Exchange Commission (SEC) recently issued two proposed rule changes to incorporate ESG into required disclosures. These proposed changes would provide more visibility into the data behind key terms used in disclosures. For example, companies who have ESG terminology in their strategy, like “green” or “sustainability,” under the proposed rule would have to disclose specifically how they impact the environment with details like the company’s carbon footprint.

Emphasis on ESG policy is not unique to the United States. Many European and Middle Eastern countries have adopted positions considering ESG objectives. For example, as part of the United Kingdom’s recent exit from the European Union, the U.K. is considering incorporating a 10% weight into proposal evaluation criteria for the “social value” presented by a bidder. This broad language will include everything from job creation to environmental initiatives. Additionally, the Kingdom of Saudi Arabia’s Vision 2030 has aligned to ESG elements since its release in 2016 and requires commitments from foreign companies to enable economic development/diversification, secure a sustainable future and invest in local housing.

To meet new requirements and remain competitive in the federal market, public sector companies must pay close attention to these and other evolving ESG requirements and policy at home and abroad. ESG planning and investment will continue be an important consideration for the U.S. government, commercial investors, and foreign governments.

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