Tracking US Government Contractor Compliance Measures Against ESG topics
As the SEC and other federal entities consider new environmental, social, and governance (ESG) disclosure regulations, it is worth reviewing the compliance measures that US government contractors have had to meet for decades.
Many of these compliance measures align with issue areas covered under today’s ESG frameworks. In some ways, government contractors have long been evaluated against ESG-standards at levels above and beyond those applied to other private sector companies.
The following brief history of USG federal government contracting compliance measures map these requirements against key ESG topic areas.
1. Environmental
Many of the early environmental requirements that the government imposed on contractors focused on strict measures dealing with water, air, and waste pollution. While all companies are subject to these regulations, government contractors operating on government land or running government facilities often must meet a higher standard.
For example, the Toxic Substances Control Act (1976), the Superfund Law (1980), Federal Facility Compliance Act (1992), and the Frank R. Lautenberg Chemical Safety for the 21st Century Act (2016) all imposed strict regulation on government contractors working with toxic waste or managing remedial cleanup efforts.
In its role as the world’s largest single consumer, the US federal government has also sought to leverage its procurement power to drive green outcomes, showing preference for government contractors that can supply energy efficient products and services.
In 1976, Congress passed the Resource Conservation and Recovery Act which, among other things, established a preference for acquisition of recyclable goods.
In 1998, President Bill Clinton signed executive order (EO) 13101 which further expanded efforts to incorporate waste prevention and recycling. He also ushered in energy savings performance contacts (ESPCs) which allowed federal agencies to procure energy savings and facility improvements from contractors with no up-front capital investments.
In May 2011, the FAR was amended to ensure that 95 percent of new contract actions go to contractors that can supply sustainable products that are:
- Energy-efficient (e.g., ENERGY STAR),
- Water-efficient,
- Biobased,
- Environmentally preferable,
- Non-ozone depleting, and/or made with recyclable materials.
Most recently, in 2021, President Biden signed EO 14030, which seeks to explore how federal procurement can be leveraged as a core means to help federal government reach net-zero carbon emissions by 2050, including a requirement that federal suppliers disclose GHG emissions.
2. Social
The USG has also been forward leaning in ensuring that government contractors maintain fair labor standards and safe and healthy workplaces.
In 1868, Congress overrode President Johnson’s veto to enact an “Eight Hour Work Law” that mandated laborers and mechanics employed by the federal government only had to work eight hours a day.
Legislation including the Davis-Bacon and Related Acts (1931), Copeland Anti-Kickback Acts (1934), Walsh-Healy Public Contracts (1936), and McNamara-O’Hara Service Contract Act (1965) all strengthened labor standards on public projects, establishing minimum wage, maximum hours, and safety and health standards for contractors of certain size.
More recently, President Obama signed EO 13706 which established paid sick leave of 7+ days for certain federal contractors. In 2021, President Biden under EO 14025 established the White House Task Force on Worker Organizing and Empowerment which may lead to further labor requirements for government contractors.
The US government has also pressed federal contractors to develop diverse, inclusive workforces. After African American leaders were blocked from taking jobs in segregated war production facilities, President Franklin D Roosevelt in 1941 signed EO 8802 which outlawed discrimination based on race, color, creed, and national origin in the federal government and defense industries (later extended under EO 9364 to all federal government contractors).
In 1953, the Small Business Act was passed, creating the Small Business Administration which seeks to support federal government aim to award prime federal contracts to small businesses, including woman-owned and service-disabled veteran-owned.
Congress passed the Equal Opportunity Act (1972), Rehabilitation Act (1973), and the Vietnam Era Veteran’s Readjustment Assistance Act (1974) to address discrimination and expand opportunities for African Americans and other minorities, individuals with disabilities, and veterans.
Most recently, President Obama in 2014 amended EO 11246 which prohibits federal contractors from discriminating on basis of sexual orientation or gender identity. In addition to these nondiscrimination requirements, every federal contractor of a certain size must file an Affirmative Action Plan (AAP) outlining how the company is taking proactive steps to recruit and advance underrepresented minorities in the workforce.
3. Governance
Given government contractors are paid via taxpayer dollars, there is special emphasis on ethics and prevention of bribery and corruption in the distribution of those dollars. As early as 1863, the False Claims Act (Lincoln Act) was passed which mandated that contractors with federal contract awards of at least $5M are subject to Federal Acquisition Regulation (FAR) ethics rules.
In 1961, Congress passed The Trust in Negotiation Act which require contractors with contracts over $500K to certify any cost data submitted. Further efforts to prevent bribery and corruption in federal contracting including the Foreign Corrupt Practices Act (1977), The Federal Anti-Bribery Statue (1984), and the Procurement Integrity Act (1989).
Federal contractors often rely on extensive network of subcontractors and suppliers to complete work and thus significant attention is paid to supply chain management. One of the priorities within federal supply chain management is to encourage domestic production.
Presidents from Ronald Reagan to Herbert Hoover to Donald Trump to Joe Biden have all overseen legislation or signed executive orders to push federal procurement to buy American products and services.
In addition, federal contracting regulations seek to mitigate human trafficking, and government contractors must comply with the Trafficking Victims Protection Act (2000), augmented under EO 13627.
One of the most dynamic governance topics for government contractors in last two decades has been data protection/cybersecurity. In 2003, NIST 800-171 was published which outlined new rules for contractors when managing controlled unclassified information.
In 2007, the FAR was updated to outline rules for contractors regarding patents, data, and copyright laws. Under President Obama’s tenure, several executive orders and new legislation (e.g., FISMA) were signed which pushed the government to develop new standards for government contractor ownership and use of government data.
Most recently, the cybersecurity maturity model certification (CMMC) process became mandatory for DoD contractors, requiring third-party assessments to ensure cyber requirements are being met.
Conclusion
Several rules now under consideration would mandate additional ESG-related disclosures for government contractors. For example, in July 2021, the US Department of Defense published an RFI asking for companies to comment on efforts in measuring GHG, ESG, and supply chain risks.
Such new disclosures on top of existing compliance regulations may encourage government contractors to further strengthen ESG practices.
In many ways, government contractors are far better prepared to meet the increased scrutiny generated by the ESG movement. While there are always areas for improvement, these companies recognize that their policies and operations are subject to strict public oversight.
Moreover, government contractors seeking to grow their business will likely have to go beyond simply meeting existing compliance requirements.
The US government will increasingly be looking to procure from government contractors that have incorporated responsible internal practices and processes and that have crafted a sustainable portfolio of offerings.
To take advantage of this opportunity, government contractors should ensure that they are viewing ESG topics as paths to build long-term financial growth and drive value creation, rather than simply as risk mitigation tools.
