On May 20, 2021, President Biden took action to address the economic impact of climate change by signing an executive order on climate-related financial risk. The order directs federal agencies to begin analyzing and mitigating the risks that climate change presents to homeowners, consumers, businesses and workers, as well as to the U.S. financial system and federal government as a whole. The White House noted that “agency actions will better protect workers’ hard-earned savings, create good jobs, and position America to lead the global economy.”
According to the official White House briefing room fact sheet, the executive order will:
- Develop a whole-of-government approach to mitigating climate-related financial risk. The order directs the White House national climate advisor and the director of the National Economic Council to develop and identify, within 120 days, public and private financing needed to realize economywide net-zero emissions by 2050, while also advancing economic opportunity, worker empowerment and environmental mitigation, particularly in disadvantaged communities and communities of color.
- Encourage financial regulators to assess climate-related financial risk. The order urges the secretary of the Department of the Treasury to work with Financial Stability Oversight Council (FSOC) members to assess climate-related financial risk as it pertains to the stability of the federal government and of the U.S. financial system within a 180-day period. The order also requests a report on plans of member agencies to improve climate-related disclosures and other sources of data and to incorporate climate-related financial risk into regulatory and supervisory practices.
- Bolster the resilience of life savings and pensions. The order directs the secretary of the Department of Labor to consider suspending, revising or rescinding any rules from the prior administration that would have barred investment firms from considering environmental, social or governance (ESG) factors, including climate-related risks, in investment decisions involving workers’ pensions. The order also requests a report on other potential measures to protect the life savings and pensions of U.S. workers and families from climate risk and an assessment of how the Federal Retirement Thrift Investment Board will incorporate ESG risk factors.
- Modernize federal lending, underwriting and procurement. The order requests recommendations for how federal financial management and reporting can incorporate climate-related financial risk, in particular in federal lending programs. The order also directs consideration of new required disclosures of greenhouse gas emissions and climate-related financial risks for federal suppliers and seeks to minimize such risks in federal procurements.
- Reduce the impact of climate change to the federal budget. The order mandates fiscally responsible action to respond to the risk of increased costs and lost revenue resulting from climate change. It also directs the federal government to develop and publish annual assessments of climate-related fiscal risk exposure.
Final Thoughts
President Biden’s latest executive order reflects current private-market demands for domestic companies to provide clearer information surrounding climate risk, and directs the FSOC, which includes the U.S. Securities and Exchange Commission (SEC), to create a plan to realize that vision. Although the SEC was not mentioned in the order, the SEC has already observed an increase in voluntary disclosures by public companies concerning the operational impacts of climate risks and ESG issues in general. In addition, the SEC is in the process of collecting feedback on the concept of mandatory climate risk and ESG reporting from market participants.
Where the White House lacks direct authority over some of the more independent federal agencies, President Biden is instead applying pressure in support of his agenda to mandate climate disclosures, particularly because his administration considers the current realm of voluntary reporting to be inadequate for safeguarding investors, jobs and individual American savings.