President Biden’s “Climate-Related Financial Risk” Executive Order Pushes Forward on the Administration’s ESG Commitments

Foley Hoag LLP - Global Business and Human Rights

[co-author: Nicholas Hanel]

On May 20, 2021, President Biden signed an Executive Order to address predicted financial instability in the federal government as a result of climate change. This Executive Order showcases a dramatic change in how the Biden Administration’s stance towards climate-finance and environmental, social, and governance (ESG)-based investments will differ from the previous administration.

The Executive Order, titled “Climate-Related Financial Risk” seeks to “bolster the resilience of our rural and urban communities, States, Tribes, territories, and financial institutions in the face of the climate crisis . . .” To do so, the Executive Order directs several federal agencies to assess climate-finance risks and to recommend or issue policies to mitigate those risks.

What does the Executive Order do?

First, the Executive Order directs the National Economic Council and the National Climate Advisor, in coordination with the Secretary of the Treasury and the Director of Office of Management and Budget to develop a government-wide strategy to increase long-term stability. This strategy will mitigate and adapt to the impacts of climate change as well as identify areas where the public and private sectors can coordinate to advance “economic opportunity, worker empowerment, and environmental mitigation, especially in disadvantaged communities and communities of color.”

Second, the Secretary of the Treasury is directed to work with members of the Financial Stability Oversight Council to assess the long-term stability of the United States’ financial system in light of climate change. The Secretary of the Treasury is also directed to issue a report detailing recommendations to mitigate climate-related financial risk through regulatory policies.

Third, the Secretary of Labor is directed to identify any actions the Department of Labor can undertake, compliant with ERISA, to “protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk.” The Secretary of Labor is also directed to consider rescinding or revising two previous Trump Administration rules that generally prohibited ERISA fiduciaries from considering ESG factors in making plan investment and proxy voting decisions.[i]

Next, the Federal Acquisition Regulatory Council, along with the Council on Environmental Quality and other appropriate agencies, are to consider amending the Federal Acquisition Regulations to require major federal suppliers to publicly disclose greenhouse gas emission. Major federal procurements will also be required to minimize the risk of climate change and factor in the social cost of greenhouse gas emissions and to give preference to contracts with less emissions.

Finally, the Secretaries of Agriculture, Housing and Urban Development, and Veterans Affairs are to consider how to better incorporate climate-related financial risk into underwriting standards for federal lending programs.

What might this mean for the private sector?

While the Executive Order’s scope is mainly limited to the federal government and its contracts, it has potentially significant implications for the private sector.

This Executive Order is part of what appears to be a growing trend in the Biden Administration of promoting corporate ESG investments. Last month, the Securities and Exchange Commission announced their intention to require ESG disclosures. In March 2021, the Department of Labor (DOL) issued a policy statement explaining that, until further guidance, it will not enforce the Trump Administration’s final rules on ESG investment and proxy voting by ERISA plans.  Under the Executive Order, the DOL has until September 2021 to publish a proposed rule to revise or rescind those final rules.  The Administration is sending a clear signal that ESG investments may be playing a much larger role in the near future.

In 2019, Business Roundtable released a new statement on the purpose of a corporation, redefining that purpose as being a moral obligation to serve all stakeholders in a fair and ethical way. This, along with President Biden’s recent Executive Order and push to allow for ESG considerations, represents a dramatic push from both the public and private sectors towards recognizing environmental and social responsibilities. While this Executive Order is perhaps just a small start, it is a sign of increased public and private interests and collaboration in ethical leadership.

With a massive increase in ESG investments in just the past year, companies should be highly aware of this shift in investment trends and stakeholder preferences. More and more, investors will be looking to see if companies are meaningfully implementing sustainable policies, and the Biden Administration seems keen to encourage them.

[i] For more information on the Trump Administration’s rule on proxy voting by ERISA plans, please see our prior client alert here. For more information on the rule regarding ESG investments by ERISA plan fiduciaries, please see our prior client alert here.

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