Client Alert

Biden Executive Order Instructs Federal Government to “Lead by Example” in Addressing Climate-Related Financial Risk

Encourages Development of Climate-Related Emissions, Financial Data, and Risks Disclosure Requirements for Regulated Businesses and Government Contracts

25 May 2021

Since taking office in January, President Biden has made his commitment to tackling climate change clear. He has taken important steps to reestablish the United States as a climate leader, from hosting the Leaders Summit on Climate, to rejoining the Paris Agreement, to taking steps to curb fossil fuel production and environmental degradation.

Executive Order 14030 (the “Order”), issued May 20, 2021, is the most recent of Biden’s strategic climate efforts. It emphasizes the risks climate change poses to financial markets and stakeholders and calls upon the federal government to factor these risks into investment and fiscal management decisions. By doing so, President Biden hopes to set an example for financial institutions and companies. Furthermore, the Order encourages government agencies to consider actions that would encourage improved disclosure around climate-related emissions, financial data, and risks, including incorporating such concepts into regulatory and supervisory practices as well as in federal lending, underwriting, and procurement.

Specifically, the Order directs certain federal agencies, offices, boards, and departments to assess and address the risks of climate change as follows:

1. The Director of the National Economic Council, together with the National Climate Advisor and other agency leads, (i) has 120 days from the date of the Order to develop a strategy to increase the stability of federal programs and assets through analysis, mitigation, and disclosure of climate-related financial risks and (ii) must assess public and private financing needs for achieving established climate mitigation goals.[1]

2. Members of the Financial Stability Oversight Council (FSOC) must consider (i) facilitating climate-related financial risk data sharing among FSOC members, (ii) issuing a report within 180 days from the date of the Order on FSOC member efforts to integrate climate-related financial risk into their policies, and (iii) including an assessment of such risks in the FSOC’s annual report to Congress.

3. The Federal Insurance Office, in consultation with state governments, must assess gaps in the supervision and regulation of insurers in connection with climate-related risks and the potential for major disruptions of private insurance coverage in regions particularly vulnerable to climate events.

4. The Office of Financial Research must assist the Secretary of the Treasury and the FSOC in assessing and researching climate-related financial risk to financial stability and the U.S. financial system generally.

5. The Secretary of Labor must (i) identify actions to take under applicable law[2] to protect U.S. worker savings and pensions from climate-related financial risks, (ii) revise or rescind rules perceived to limit shareholder actions related to environmental, social, and governance (ESG) factors, (iii) assess how ESG factors have been taken into account by the Federal Retirement Thrift Investment Board, and (iv) submit to the President, within 180 days of the Order, a report on the foregoing.

6. The Director of the Office of Management of Budget (OMB) must work to integrate climate-related financial risk into federal financial management and financial reporting, including the President’s Budget.

7. The Federal Acquisition Regulatory Council must factor the social costs of greenhouse gas emissions in procurement decisions and consider requiring federal suppliers to publicly disclose emissions and climate-related financial risk and to set reduction targets.

8. The Secretary of Agriculture, the Secretary of Housing and Urban Development, and the Secretary of Veterans Affairs must consider better integrating climate-related financial risk into underwriting standards, loan terms, and asset management and servicing procedures.

9. Heads of agencies must submit to the Director of OMB, the National Climate Task Force, and the Federal Chief Sustainability Officer actions to integrate climate-related financial risk into their procurement processes.

Broader Implications

Though it is focused on the internal workings of the federal government, the Order makes clear Biden’s view that protecting the integrity of U.S. companies and markets, and the wealth of U.S. workers and communities, will require financial institutions to follow suit. Given that many of the regulatory authorities directed or encouraged to take action may exercise authority or influence over non-government players, the Order’s implications have the potential to be far-reaching. For example, actions of the Financial Stability Oversight Council could reach banks, asset managers, insurers, and other financial services industry participants. And insurance companies should expect to see changes in regulations and requirements related to how they address climate risk their policies. Further, companies that now or may in the future borrow from or provide goods and services to the federal government should be prepared to publicly disclose their greenhouse gas emissions and climate-related financial risks, in addition to setting science-based targets for reducing them.

Connection to Other Governmental Efforts

Independent regulators, such as the U.S. Securities and Exchange Commission (SEC) and Federal Reserve, are not subject to direct instruction from the White House and therefore are not directly impacted by the Order. But these regulators have been independently moving in the same direction since President Biden took office. The SEC is currently seeking public input on regulations that would require companies to disclose their contributions to climate change, as well as its impacts on their operations. And the Federal Reserve has begun to initiate efforts to police banks for climate risks.

More broadly, the SEC has indicated that the climate (and other ESG) promises of investment advisers and private funds will be a key focus of 2021 exams and enforcement actions. See, e.g., https://www.mofo.com/resources/insights/210419-asset-management-takeaways.html.

Conclusion

Climate is a key issue of focus for the Biden administration. Companies, financial institutions, and other market players should start factoring climate considerations into their operations now in order to avoid more significant shocks to “business as usual” as additional climate regulations are implemented. This will require measurement, analysis, and disclosure of climate-related risks, and development of mitigation and adaptation goals and strategies, which in turn may prompt innovation and job creation.


[1] These goals include achieving “net-zero greenhouse gas emissions for the U.S. economy by no later than 2050, limiting global average temperature rise to 1.5 degrees Celsius, and adapting to the acute and chronic impacts of climate change.”

[2] E.g., the Employee Retirement Income Security Act of 1974 (Public Law 93-406) and the Federal Employees’ Retirement System Act of 1986 (Public Law 99-335).

Close
Feedback

Disclaimer

Unsolicited e-mails and information sent to Morrison & Foerster will not be considered confidential, may be disclosed to others pursuant to our Privacy Policy, may not receive a response, and do not create an attorney-client relationship with Morrison & Foerster. If you are not already a client of Morrison & Foerster, do not include any confidential information in this message. Also, please note that our attorneys do not seek to practice law in any jurisdiction in which they are not properly authorized to do so.