On May 20, 2021, President Biden issued an Executive Order on climate-related financial risk, in which the new president directs the federal government to develop a strategy to curb the risk of climate change on public and private financial assets in the United States. The order notes that it is the policy of the administration to “advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk” and directs certain federal agencies to incorporate climate risk and environmental, social, and governance (ESG) considerations into government spending and oversight. Federal agencies are tasked with focusing on both the physical risk posed by climate change such as increased extreme weather risk leading to disruptions in supply chains, and the transition risk from the global shift away from carbon-intensive energy sources and industrial processes.
Highlights
- Develop a “whole-of-government” approach to mitigating climate-related financial risk: The order directs the National Climate Advisor and Director of the National Economic Council to develop a comprehensive government-wide climate-risk strategy to identify and disclose climate-related financial risk to government programs, assets, and liability in order to identify financing needs in order to reach economy wide net-zero emissions by 2050.
- Encourage financial regulators to assess climate-related financial risk: The Treasury Secretary is instructed to work with the Financial Stability Oversight Council (FSOC) to assess climate-related financial risk to the stability of the federal government and the stability of the U.S. financial system, and to issue a report recommending actions to reduce risk to financial stability and incorporate climate-related financial risk into regulatory and supervisory practices.
- Bolster the resilience of life savings and pensions: The order directs the Labor Secretary to consider suspending, revising, or rescinding rules that would have barred investment firms from considering ESG factors in investment decisions relating to worker pensions, and it asks the department to report on measures that can be implemented to protect savings from climate-related financial risk.
- Modernize federal lending, underwriting, and procurement: The order requires consideration of new requirements for major federal suppliers to disclose greenhouse gas emissions and climate-related financial risks to ensure that federal agency procurements minimize those risks, and seeks recommendations for improving how federal financial management and reporting can incorporate climate-related financial risk into lending programs.
- Reduce the risk of climate change to the federal budget: The federal government has to develop and publish annually an assessment of its climate-related financial risk exposure, and the Office of Management and Budget is directed to reduce the federal government’s exposure to the risks of unmitigated climate change as part of the formulation of the President’s budget.
Takeaways
The order is a further demonstration of the administration’s effort to combat climate change with a “whole of government” approach. For example, the order’s directive for a report from the Treasury Secretary relating to its assessment of climate-related financial risks, may impact the United States Securities and Exchange Commission’s (SEC) recent announcement that it will be evaluating its guidance regarding whether public company corporate disclosures should be expanded to include ESG risks. Another example is the order’s formal establishment of a timeline for Labor Department to advance the administration’s effort to roll back Trump Administration regulations that discouraged ESG investing in pension and retirement plans, which the Labor Secretary indicated would be a priority during the committee hearings leading up to his confirmation. Further, the order’s emissions disclosure requirements for major federal suppliers could result in preferential treatment by federal agencies in regards to purchasing decisions from suppliers that account for lower social costs of greenhouse gas emissions.
The order is yet another example of President Biden’s emphasis on addressing the impacts of climate change as a pillar of his presidency.