On May 20, President Biden issued his Executive Order on Climate-Related Financial Risk (“Order”)1 which requires federal agencies to assess the potential impacts of climate change on public and private financial institutions and assets. The Order calls on the Secretary of the Treasury, the Director of the Office of Management of Budget (OMB), and others to develop a strategy to mitigate those risks. The Order exemplifies President Biden’s focus on climate change and underscores his “whole-of-government” approach to addressing climate change by directing a wide range of federal agencies, including the Department of Labor and the Council on Environmental Quality, to take action. Importantly, the Order also states Administration policy to account for and address “disparate impacts on disadvantaged communities and communities of color.”
The Order begins by identifying the problem: “The failure of financial institutions to appropriately and adequately account for and measure [climate change] risks threatens the competitiveness of U.S. companies and markets . . .” Climate-related financial risks include physical risks to assets and companies, “such as increased extreme weather risk leading to supply chain disruptions.” For example, the February winter storms in Texas resulted in significant economic impact. Those severe storms resulted in approximately $130 billion in losses in Texas alone due to, among other things, crop losses, damage to homes, business disruption, and—not least of all—injuries and loss of life.2 The Order also highlights transition risks, such as “the global shift away from carbon-intensive energy sources and industrial processes.”
The Directives of the Order
The Order provides several specific directives to federal agency heads. First, the Order requires the Director of the National Economic Council, the National Climate Advisor, the Secretary of the Treasury, and the Director of OMB to develop a government-wide strategy, within 120 days, for assessing climate-related financial risk to federal programs, assets, and liabilities, as well as a financing strategy to achieve net-zero greenhouse gas emissions by 2050 and limit global average temperature rise to 1.5 degrees Celsius. Of note for the private sector, the Order directs those agencies to identify “areas in which private and public investments can play complementary roles in meeting . . . financing needs.”
The Order also requires the Financial Stability Oversight Council (FSOC) to prepare a report on the impact of climate-related financial risks on the Federal Government and U.S. financial systems by November 2021. The report must discuss actions necessary to enhance climate-related disclosures by regulated entities and make recommendations to mitigate climate-related financial risk. The recommendations could result in significant new disclosure requirements for financial institutions. The Order also requires Treasury Secretary Janet Yellen (who, as Treasury Secretary, also heads FSOC) to direct the Federal Insurance Office to assess climate-related risks in insurance regulations.
The final sections of the Order require government agencies to assess climate financial risks related to pensions and federal financial management and reporting to enhance federal lending and underwriting programs. With respect to federal procurements, the Order asks the Federal Acquisition Regulatory Council to consider requiring major federal suppliers to disclose greenhouse gas emissions and climate-related financial risk and to set science-based reduction targets, and to ensure that federal agency procurements minimize the risk of climate change. In addition, the Order directs the heads of agencies to submit proposals to integrate climate-related financial risk into their procurement processes to the Director of OMB, the National Climate Task Force, and the Federal Chief Sustainability Officer. The Order also reestablishes the Federal Flood Risk Management Standard, which was revoked by former President Trump. Finally, the Order directs the Director of OMB, in consultation with other federal agencies, to establish methods to quantify climate risk within the long-term budget projections of the President’s budget.
Statements from Key Players
Treasury Secretary Janet Yellen is already leading the Federal government’s efforts to assess and mitigate these risks. In an appearance in March during the first public FSOC meeting with her at the organization’s head, Secretary Yellen made clear that she views climate change as an “existential threat” to the U.S. financial system and pledged to use government regulatory power to protect against its potential impacts.
And more recently, in testimony before the House Financial Services Committee,3 Michael Hsu, Acting Comptroller at the Office of the Comptroller of the Currency (OCC), similarly acknowledged climate change as an “existential risk,” highlighting both physical and transition risks. He pledged that OCC will engage with banks and others to learn about best practices for climate-related risk management and support banks in implementing those practices. He concluded his testimony by promising a proactive and urgent effort by OCC.
The Order continues to advance President Biden’s climate agenda by laying out guidelines and calling on federal agencies to assess, disclose, and begin to mitigate the risks climate change poses to the economy. Although much of the Order is inward looking—focused on managing risks to government programs—public companies can expect the ultimate FSOC report to provide further momentum for expanding climate change disclosures. The articulation of a financing strategy could identify opportunities for private investment in renewable energy sources and infrastructure to achieve net-zero emissions in a “modern and equitable clean energy future.”4
President Biden’s actions on climate finance have already spurred some critiques. Environmental organizations want the federal government to be more aggressive in discouraging fossil fuel financing. And some financial experts have urged FSOC to take bold action in its forthcoming report to encourage stringent regulation of financial agencies on climate-related risks. On the other hand, skeptics of the President’s focus on climate have highlighted the potential adverse effect that focus will have on the economy and have asked how other countries, particularly China, will be held accountable for their climate impacts. This is certainly an area that requires proactive preparation and engagement as the FSOC and Federal agencies act to implement the Order.