On Thursday, May 20, 2021, US President Biden signed a Executive order, titled âClimate-Related Financial Riskâ (Climate Risk EO), which sets the stage for the US federal government, including its financial regulatory agencies, to begin integrating climate risk and other environmental, social and human rights issues. governance (ESG) in financial regulation. The Climate Risk OE further demonstrates the priority the Biden administration places on tackling climate change and will likely accelerate the ongoing efforts of federal financial regulators to pass new regulations related to climate risk. In particular, it should be noted that the executive order directs Treasury Secretary Janet Yellen to use the Financial Stability Supervisory Board (FSOC) to coordinate the adoption of regulatory measures to address climate change by federal financial regulatory agencies. The United States Securities and Exchange Commission (SEC) is already actively preparing a proposal to revise public company disclosure requirements to cover a range of ESG issues1, and the Federal Reserve Board has established two working committees to examine climate-related risks to financial stability and to the safety and soundness of financial institutions2.
From the OE’s perspective on climate risks, it is evident that the administration believes that improving company disclosures on ESG is an important initial response to the risks posed by climate change, but that reforms much broader regulations are likely over the next few years. The Climate Risk OE provides the policy framework for federal agencies to adopt new supervisory and regulatory measures with respect not only to insured deposit-taking institutions, but also to insurers and other non-bank financial institutions, ERISA plans, the Federal Thrift Savings Plan (TSP), federal loans (US Department of Agriculture (USDA), US Department of Veterans Affairs (VA), Federal Housing Administration (FHA) and Ginnie Mae) and federal contractors. In addition, Secretary Yellen said in her remarks on the signing of the OE on Climate Risks that â[a]Climate-related financial risk assessments may require new perspectives and new tools. “3 She did not specify what additional tools could be considered.
The EO on Climate Risks requires the submission of several reports to the President on additional regulatory measures that may be needed to address the risks associated with climate change. When these reports are released later this year, they could provide more information on additional financial system measures the administration believes are necessary to address the risks of climate change.
A detailed summary of the climate risk EO is provided below.
Summary of the decree on climate-related financial risks
The OE on climate risks establishes that the administration’s policy consists of:
- âPromote consistent, clear, intelligible, comparable and accurate disclosure of climate-related financial risksâ¦, including physical and transition risksâ;
- âTake action to mitigate this risk and its factors, while taking into account the disparate impacts on disadvantaged communities and communities of colorâ¦ and by stimulating the creation of well-paying jobsâ; and
- “Achieving our goal of a net zero emissions economy by 2050 at the latest.”
The OE on climate risks seeks to implement this policy by ordering several senior officials of the administration to take specific measures.
1) White House. The Director of the National Economic Council (Brian Deese) and the National Climate Advisor (Gina McCarthy) are responsible for developing a âcomprehensive government-wide strategyâ that includes:
- How to measure, assess, mitigate and disclose climate-related financial risks to âfederal government programs, assets and liabilitiesâ;
- The funding needed to achieve net zero greenhouse gas emissions for the US economy by 2050 and limit the average global temperature rise to 1.5 degrees Celsius; and
- Where private and public investment can help provide the necessary financing, while “advancing economic opportunities, worker empowerment and environmental mitigation, especially in disadvantaged communities and communities of color” .
The report must be submitted within 120 days of the date of issuance of the OE on climate risks (September 20, 2021).
2) FSOC. Treasury Secretary Janet Yellen is to use her post as FSOC President to “engage with FSOC members” to assess climate-related financial risks to the financial stability of the United States and the federal government (including and transition) and facilitate the sharing of data and information on climate-related financial risks between FSCO member agencies and other government departments and agencies.
The Climate Risk EO also requests that the FSOC publish a report to the President on measures taken by FSOC member agencies to integrate climate-related financial risk into their policies and programs, including climate-related disclosures by officials. regulated entities, regulatory and supervisory activities and processes. to identify climate-related financial risks to US financial stability. The report will contain recommendations on how climate-related financial risk can be mitigated, including through regulatory standards. The report is due 180 days from the date of publication of the Climate Risk OE (i.e. November 20, 2021). Secretary Yellen is also to include an assessment of climate-related financial risks in the FSOC’s annual report to Congress.
3) Federal Insurance Office. The OE in charge of climate risks asks Secretary Yellen to ask the Federal Insurance Office to assess climate-related gaps in the supervision and regulation of insurance companies and to assess the risks that climate change creates major disruptions in private insurance coverage in all regions of the country.
4) Office of Financial Research. The Climate Risk OE also requests Secretary Yellen to request the Director of the Office of Financial Research (OFR) to assist the FSOC in assessing and identifying climate-related financial risks to financial stability, including using his authority to collect data. The director of OFR will also develop research on climate-related financial risk for the US financial system.
5) Labor secretary.
a. ERISA. The Climate Risk EO is asking the Secretary of Labor (Marty Walsh) to determine what actions can be taken under the Employee Retirement Income Security Act (ERISA) to protect Americans’ savings and pensions from climate-related financial risks. It also directs Secretary Walsh to consider suspending, revising or rescinding the US Department of Labor regulations “Factors in Selecting Plan Investments” and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights” , which were released last year to establish that ESG factors should not be taken into account by ERISA Trustees in their investment and proxy voting decisions if they negatively impact the pecuniary interests of beneficiaries plan. It is likely that Secretary Walsh will issue new regulations that will explicitly allow ERISA trustees to take ESG factors into account in investment decisions and proxy voting.
b. TSP. The Climate Risk Office asks Secretary Walsh to assess how the Federal Office for Retirement Savings Investments has used ESG factors in its investment decisions for the FST.
vs. Report. Secretary Walsh is to report to the President on actions he has taken regarding the aforementioned guidelines on ERISA and TSP within 180 days (i.e., by November 20, 2021).
6) Office of Management and Budget (OMB). The OE on Climate Risk asks OMB Director (Acting Director Shalanda Young) and National Economic Council Director to develop recommendations for the National Climate Working Group on how to mainstream risk climate finance in federal financial management and reporting (especially for federal lending programs.), including through new accounting standards for federal financial reporting. OMB Acting Director Young is also responsible for identifying climate-related financial risks for the federal government, developing methodologies to quantify that risk as part of the President’s budget projections, and taking action. to reduce this risk when formulating the president’s budget and implementing the federal government. budget allocated by the government. The OMB Director and ACE President (Cecilia Rouse) are to include an annual assessment of the federal government’s climate risk exposure in the President’s budget.
7) FARC. The Federal Acquisitions Regulatory Council (FARC) is tasked with considering amending the Federal Acquisitions Regulations (FAR) to require key federal government contractors to disclose not only greenhouse gas emissions and financial risks related to the climate, but also to set emission reduction targets. FARCs are also encouraged to take climate change risks into account in their purchasing decisions, giving preference to low-emission contracts.
8) Federal loan programs. The executive order directs the secretaries of agriculture (Tom Vilsack), housing and urban development (Marcia Fudge) and veterans (Denis McDonough) to consider how to integrate climate-related financial risk into the operations of their respective loan programs, which include loans. and warranties offered by FHA, VA, USDA and Ginnie Mae. These actions could include revising underwriting standards, loan terms, asset management and service. The Climate Risk OE also restores federal flood management standards, which were repealed by a previous decree in August 2017.