Contractors facing some onerous new reporting requirements

Unless Congress says otherwise, federal contractors will have a raft of new disclosure requirements imposed by the Biden administration. Specifically climate, ESG and cybersecurity. With how companies might deal with it all, the Federal Drive with Tom Temin has an in-studio conversation with the Head of Public Policy at Grant Thornton, Greg Wallig.

Interview Transcript: 

Greg Wallig So that’s actually what a lot of people are asking right now, is give us some clear guidance on what the requirements are. The Securities Exchange Commission, SEC, has been sort of teasing that these requirements are coming for publicly traded companies. The government has a different span of control, and where they can affect change is through their contracting requirements. And so the government has been hinting that they will start to put these greenhouse gas emission standards into federal contract requirements. We actually have our first example of that and it’s called Alliant 3. It’s a government wide contracting vehicle or GWAC, and that is expected to include greenhouse gas disclosure requirements. It’s in draft right now and we’re expecting it to be released in April or May. But all of the materials show that that will be an evaluation criteria.

Tom Temin Yeah, that’s really interesting. Suppose you’re, I’m just making this up, a reseller of some commodity on Alliant 3. And you are selling your hardware to the government under that contract. They’ve had a tough time getting that one out because of protests and so forth. Then what is the meaning of climate and greenhouse gas emissions for a service type of organization? Do I have electric forklifts in a warehouse or that kind of thing?

Greg Wallig Well, that’s a great question. And it’s a question that a lot of the competitors are likely asking. We don’t have any evidence. We don’t know where this is going. What we do know is typically these emissions are described as scope one, scope two and scope three emissions. And we think about the typical components of Alliant 3. It’s actually very buzzworthy. They’re things like robotic process automation internet of things. But I like to think about data center operations. When you’re operating your data center, you can make certain choices about how that data center runs, how efficient it is. That’s scope one. Scope two is where you get your power from to power that data center. Scope three is a lot more nebulous. It includes upstream and downstream value chain. So when you think about the government, they are ultimately the consumer of your product or service that you’re producing. Do you have access to how the government is using your service and what the greenhouse gas emissions are associated with that usage? No one knows right now, and certainly there are certain programs within the government that are classified. So your downstream user may not be able to provide you any information about how they’re actually using your service.

Tom Temin And then the question is how will that figure into contract award decisions? Because if the government has something that needs to get done and the best technical proposal at a good price, well, we don’t like the fact that they have a gas stove in the company kitchen. Then would that disqualify a contractor? That’s unknown too, probably fair to say.

Greg Wallig What we do know is what the GSA has provided us, and they’ve told us that these scoring criteria are going to amount to about 4% of the overall scoring for the contract. So it’s not an overwhelming number, but it’s still significant. And as we all know, these contracts tend to hang on pretty tight criteria. So 4% would be enough of a motivation, I think, for companies to want to understand where they are as far as the greenhouse gas emissions, certainly those things that they can control, which are those scope one and scope two emissions.

Tom Temin Well, maybe we can get them down to 3.75. And it won’t be so bad.

Greg Wallig We can only wish.

Tom Temin But in any case it’s a huge compliance exercise too isn’t it?

Greg Wallig That’s right. And I think that’s the other piece that’s really important here, is that business does not like uncertainty. Generally, we’re ok to comply with requirements as long as they are defined for us. This is one that isn’t currently defined. And so it’s untested. We don’t have an opportunity to say, is my criteria going to meet that 4% threshold so that I’ll get the maximum possible points on this award? We don’t know how that scoring is going to take place. And I think that level of uncertainty is causing a lot of confusion and frankly, agitation within business that are just trying to do the right thing and score as highly as they can on these important contracts.

Tom Temin And probably fair to say that not too many contracting officers really understand it either.

Greg Wallig I don’t know how they could, because we don’t have any cases that would show how this is going to be evaluated. And again, the Alliant 3 is one of the first that we’re seeing. I’m expecting more. Bear in mind though, that we’re in a presidential election year. So this is one of those issues where the candidates differ. Republicans and Democrats differ. Democrats tend to be more focused on environmental regulations, Republicans less so. We saw that in Congress over the summer, but both president Biden and whoever the Republican candidate would be have expressed very different views in this area. So what does that mean for future government contracts? We don’t know. We do know that most government contracts have multiyear. The Alliant 3 as an example is a ten year contract vehicle. So how does that then extrapolate into the future? That remains to be seen.

Tom Temin We’re speaking with Greg Wallig. He is head of public policy at Grant Thornton. And let’s turn to the ESG kind of a country cousin of the climate question, because it covers more things. ESG refresh our memory stands for.

Greg Wallig Environmental, Social and Governance.

Tom Temin And so governance means do the unions have a say in your operations?

Greg Wallig Governance is more related to how you oversee your operations, and that could include the composition of your board. There are a number of elements that are, again, fairly undefined. So environmental at least there are some scientific standards that you might be able to point to. The social and governance elements of ESG are much more qualitative than quantitative. And so again, those standards become very fuzzy on the edges and frankly, haven’t really been very well defined to date.

Tom Temin And out in the greater commercial marketplace, there have been some leading financiers, leading company heads that have pushed back against ESG because there’s some evidence that ESG oriented companies do worse over the long haul for their stockholders than otherwise.

Greg Wallig I think that’s considered debatable. And you have arguments on one side or the other. This is where part of the issue is, is what are the criteria we’re using to measure these entities. And one could argue that if you were to use these ESG standards, perhaps those companies are faring better, because they’re scoring better on these larger measures. If you’re looking at pure financial measures, maybe the scoring criteria is different and you would reevaluate the company differently. We don’t have a common yardstick right now. And so the purpose of most of these disclosures is to educate the consumer. If the consumers, the government or the consumers and investor, someone like you and me buying stocks in a company, the premise is we need to know more about these companies. But if we don’t have a common standard, then we can’t do an apples to apples comparison when we’re making those decisions.

Tom Temin So that again, a remains to be seen type of thing, how this will fall out in detail. And then, of course, we know that the cyber security reporting provisions are coming both via GSA and CISA on one side, and then the Cybersecurity Maturity Model Certification program on the DoD side. And there’s some similarities between the two sides. They’re not identical, but cyber reporting is definitely coming. And there the government has a clear interest, I think, relative to the other two issues.

Greg Wallig I’m glad you brought that up, because those of us who operate in this space are using some of that history to guide what we imagine will happen in the future. So when we think about FedRAMP or we think about CMMI, we can see how those programs are rolled out. It’s reasonable to expect that when we’re looking at environmental standards, maybe a similar type of a framework would be used where there will be large company requirements and small company requirements, third party assessment entities. But we don’t know. And so right now it’s all speculation.

Tom Temin So really then companies have an existential thing to think about. So this sounds like all of this reporting requirements coming is not just simply your federal division, or if you’re purely federal, it’s not just your business development or your captured people. Sounds like this is an executive suite concern.

Greg Wallig That’s exactly right, Tom. And when you imagine many of these entities aren’t just contracting with the federal government, they might be publicly traded. So you’re talking about the SEC disclosure requirements, which may be different. Some of them do business in foreign countries. European standards are different than what are proposed in the United States. So it’s a real mesh of compliance requirements. And companies are able to do this. It’s technically feasible when you imagine it, but you don’t know how if you’re not given those criteria.

Tom Temin And it also has the effect of possibly saying to some companies that would like to be in federal and the federal government is from all quarters saying it wants new suppliers, new innovation. But some people might say this ain’t worth it.

Greg Wallig It creates barriers to entry, to be sure. And I think when you look at the stated desire to have more small businesses engaged in government contracting and then these enhanced requirements, those things can contradict each other. And so I think a lot of businesses are looking at what will this mean for subcontractors. So are these flow down requirements and will there be different thresholds. So large business versus small business requirements. Again we don’t know that right now.

Tom Temin And then there’s the possibility of a complete swing when the election happens. And there could be a different administration from a different party. Nobody knows, but that could result in a lot of this being switched.

Greg Wallig That’s very true. And everyone’s looking at the presidential election. But if you’re involved in this particular issue, this is one where there is a sharp contrast between the candidates and the parties as far as how they treat greenhouse gas emissions.

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