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Biden Orders Assessment of Climate- Related Financial Risk

World in Transition

Our views on changing dynamics in energy, ESG, finance, globalization and US policy.

Last week, President Biden issued an executive order directing federal agencies to assess and mitigate the economic risks associated with climate change and the accelerating transition to less carbon-intensive energy sources in the US. The order, signed by President Biden on May 20, 2021, is in line with the administration's previous executive actions to date in that it advances a "whole of government" approach to fighting climate change.

The "Executive Order on Climate-Related Financial Risk" provides direction for a number of federal agencies, and focuses on both the physical risk posed by climate change (e.g., increased extreme weather risk leading to disruptions in supply chains, according to a White House fact sheet on the order) and the transition risk presented by the shift away from energy produced by fossil fuels. The White House fact sheet indicates that the order is intended to address increasing climate-related risks to infrastructure, investments and business that are "often hidden." Notably, measures included in the order address not only assessment of climate-related risk, but also disclosure and mitigation. As we have previously reported, the U.S. Securities and Exchange Commission announced earlier this year an enhanced focus on climate-related disclosures by public companies and the creation of an enforcement task force focused on climate and environmental, social and governance
("ESG") issues.

The order instructs the Director of the National Economic Council and the National Climate Advisor, in coordination with other executive agencies, to develop, within 120 days, a government-wide strategy regarding the assessment, mitigation, and disclosure of climate-related financial risk to the federal government, and the public and private financing needs associated with the federal government's climate-related targets (including achieving net-zero greenhouse gas ("GHG") emissions by no later than 2050).

The order also directs the Secretary of the Treasury and Chair of the Financial Stability Oversight Council ("FSOC"), Janet Yellen, to work with FSOC to consider the assessment of climate-related financial risk to the financial stability of the federal government and financial system, facilitate the sharing of climate-related financial risk information among executive departments and agencies, and issue a report within 180 days on any efforts to integrate consideration of such risk into FSOC's policies and programs. The order expressly states that the Biden administration's policies include advancing "consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk." Yellen is charged with directing the Federal Insurance Office to assess climate- related issues or gaps in the supervision and regulation of insurers, and to assess the potential for disruption of private insurance coverage in regions of the country particularly vulnerable to climate change impacts.

The Secretary of Labor, Marty Walsh, is instructed to identify agency actions that can be taken to protect the savings and pensions from the threats of climate-related financial risk, and to consider suspending, revising or rescinding Trump administration-era rules that barred investment firms from considering ESG factors in their investment decisions. The order also requires that Walsh submit, within 180 days, a report on any such actions undertaken.

The order directs the Director of the Office of Management of Budget ("OMB") and the Director of the National Economic Council to develop recommendations on integrating climate-related financial risk into federal agencies' financial management and reporting, and directs regulators to consider new requirements for federal suppliers to disclose GHG emissions and climate-related financial risks, so that federal agency procurements can minimize those risks. The order directs the federal government to consider amending procurement rules to ensure that federal agency procurements minimize climate change risks and give preference to suppliers with a lower social cost of greenhouse gas emissions. This is notable because federal government agencies, such as the U.S. Department of Defense are some of the most significant consumers of fossil fuels in the world. President Biden also incorporated into the order a reinstatement of an Obama-era executive order regarding federal flood risk management, effectively reestablishing a Federal Flood Risk Management Standard that will address current and future flood risk to federal projects.

Finally, the OMB is instructed to develop and publish annual assessments of the federal government's climate- related financial risk exposure, and improve the accounting of climate-related financial risk through the federal budget and oversight of its execution.

Some directives laid out by the order have already begun. Yellen's efforts to assess climate-related financial risk to the government and the financial system began in March, when the Federal Reserve established a Supervision Climate Committee. Walsh had previously signaled, in response to questions from a February 2021 Senate Health, Education, Labor and Pensions Committee hearing prior to his confirmation as the Secretary of Labor, an intention to roll back the Trump administration-era regulations relating to investment firms' consideration of ESG factors in pension and retirement funds. However, the order formalizes and establishes a timeline for the advancement of these efforts, which may be crucial in driving action. Some have also noted that the 180-day deadline set by the order coincides with meeting of the 26th Conference of the Parties to the United Nations Framework Convention on Climate Change, which will take place in Glasgow in November 2021.

For more information on previous climate-related executive actions by the Biden administration, see our previous reporting on the January announcement to pause new oil and natural gas leasing on federal lands and the GHG emissions reduction target announced at a climate summit held in April.

 

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