The Federal Acquisition Regulatory Council has proposed new legislation to require the United States government's top suppliers to report whether or not they publicly disclose their greenhouse gas emissions. These contractors will be required to also address how they plan to reduce these emissions and how climate change may affect their operations in the future.
The government's largest suppliers come from a variety of sectors; the list includes industrial giants such as Boeing, Lockheed Martin, Humana, and Computer Sciences Corporation. The proposal's comment period closed on July 25th. The National Aeronautics and Space Administration (NASA), General Services Administration (GSA), and the Department of Defense (DoD) are the main federal agencies driving this initiative forward.
This proposal is the latest addition to a collection of climate control initiatives that have come from the Obama administration. In 2015, the GSA became the first U.S. government agency to launch a pilot program for greenhouse gas reporting in partnership with the CDP, formerly known as the Carbon Disclosure Project. Last year, the GSA invited 115 of its top suppliers by total contract dollars to voluntarily participate in the CDP's supply chain emissions reporting program and to openly discuss their plans for reducing emissions.
This effort is designed to help some of the world's largest corporations get started on reducing their environmental footprints and help prepare them for compliance with future regulations, as the federal government continues to develop policies related to greenhouse gas reporting and climate change mitigation. So far, 63 companies accepted the invitation, including 14 companies that participated in the CDP's program for the first time. Eighty-five percent of the 63 respondents reported that they have implemented some kind of emissions-reducing project, and it is estimated that these projects together have already decreased CO2 output by the equivalent of 16 million metric tons annually.
Between its five branches, the U.S. military consumes more fossil fuels than any other single entity in the world. The Navy and Marine Corps account for nearly a third of this consumption, and as such, they will need to help lead the way in terms of reducing greenhouse emissions associated with government agencies. As of just a few months ago, the Navy has asked its 100 largest material suppliers to begin reporting both their total greenhouse emissions and their plans for reduction to CDP.
In 2010, the top 25 Naval suppliers by total contract dollars were paid more than $95 billion by the Navy, and these companies currently have a market capitalization of nearly $800 billion. This is a little more than four percent of the market capitalization of the entire New York Stock Exchange (NYSE), which lists over 2,000 companies based in the U.S. and abroad.
The Navy's goal in starting this program is to have at least half of its energy consumption fueled by sustainable sources within the next three to four years. According to Navy secretary Ray Mabus, the reason the Navy has decided to push for disclosure of greenhouse gases is to protect our nation. In his words, "energy can be used as a weapon, and I simply didn’t want it to be used against us." Our armed forces must be prepared to deal with highly unpredictable situations. By switching to cleaner energy sources, Mabus highlights that the Navy will improve its ability to carrying out its daily operations, even if we are forced to go off the power grid in the event of a threat or national emergency.
The Navy's move to require its suppliers to track and report greenhouse gas emissions is not the first sustainability commitment to come from a government agency. In 2009, the Environmental Protection Agency (EPA) implemented a policy requiring any source that produces at least 25,000 metric tons of CO2 equivalent each year to publicly disclose its total greenhouse emissions. This threshold makes it so that a majority of small businesses, as well as a few specific sectors like agriculture, are excluded from mandatory greenhouse reporting. Overall, the policy requires reporting by 41 different industrial sectors, and it covers between eighty-five and ninety percent of our country's total greenhouse gas output.
The primary focus of this initiative is to identify the major sources of greenhouse gas emissions in the U.S., which will allow the EPA to tackle the largest generators of pollution first. This program has revealed that greenhouse gas emissions from the oil and natural gas industries are increasing each year, while methane production has decreased gradually since 2013. This suggests that the oil and gas sectors may have the most room for improvement in terms of reducing greenhouse gas output, and the EPA will likely focus on these two industries going forward.
In 2014, the EPA also published its Clean Power Plan, which is a first of its kind set of standards created to manage carbon output related to the energy industry. The plan's primary objective is to reduce our nation's energy-related carbon pollution by roughly one-third before 2030.
Reporting Can Catalyze Behavior Change
Critics argue that asking suppliers to simply report on their emissions and plans for reduction will not lead to a decrease in greenhouse gas pollution. But there is actually strong evidence to the contrary.
According to the CDP, companies that have participated in its supply chain initiative for three or more consecutive years are more than twenty-five percent more likely to have climate management policies in place than companies that are participating for the first time. In addition, firms that regularly report their environmental data save an average of $1.5 million per emissions-reducing project, while first time reporters save just $900,000, or sixty-seven percent less than their regularly-reporting peers. These findings clearly support the theory that by requiring suppliers to report their emissions to the CDP, the Navy, EPA, and other government agencies will significantly reduce the greenhouse gas production associated with its supply chain.
As more companies actively participate in the various greenhouse emissions reporting programs, other firms are encouraged to follow suit. When investors see more and more corporations disclosing this kind of environmental information, they begin to wonder why other firms are staying quiet about climate management. The optics around certain businesses appearing to want to hide the true damage caused by their operations can harm a company's reputation.
If businesses choose to neglect environmental issues, they risk missing out on lucrative government contracts. As corporations compete with each other to acquire government contracts, it will become increasingly important for those companies to demonstrate that they are environmentally conscious—which should incentivize the prioritization of sustainability across an even wider range of companies.
In effect, the climate change proposals being put forward by the White House, as well as initiatives being started by independent nonprofit organizations such as CDP, will develop a system in which it is in everyone's best interest for corporations to make an active effort to publicly report and reduce their greenhouse emissions. After all, good business should be good for all.
First Affirmative understands that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. We believe that in addition to the benefits of ownership, investors bear responsibility for the impact our money has in the world. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?
NOTE: Mention of specific companies or securities should not be considered an endorsement or a recommendation to buy or sell that security. Past performance is no guarantee of future results.
Posted: August 26, 2016