President Biden Signs Executive Order On Addressing Climate Change Risk Through Financial Regulation – Environment

On Thursday, May 20, 2021, US President Biden signed an Executive Order,
entitled “Climate-Related Financial Risk” (Climate Risk
EO), that sets the stage for the US federal government, including
its financial regulatory agencies, to begin to incorporate
climate-risk and other environmental, social and governance (ESG)
issues into financial regulation. The Climate Risk EO further
demonstrates the priority the Biden administration is giving to
addressing climate change and will likely accelerate ongoing
efforts by federal financial regulators to adopt new, climate
risk-related regulations. Of particular note, the executive order
directs Treasury Secretary Janet Yellen to utilize the Financial
Stability Oversight Council (FSOC) to coordinate the adoption of
regulatory measures to address climate change on the part of the
federal financial regulatory agencies. The US Securities and
Exchange Commission (SEC) is already actively preparing a proposal
to revise public company disclosure requirements to cover a range
of ESG issues, and the Federal Reserve Board has established two
working committees to examine the climate-related risks to
financial stability and to the safety and soundness of financial
institutions.

From the scope of the Climate Risk EO, it is evident that the
administration believes that improved corporate disclosures on ESG
are an important initial response to the risks posed by climate
change, but that far broader regulatory reforms are likely over the
next several years. The Climate Risk EO provides the policy
framework for federal agencies to adopt new supervisory and
regulatory measures with respect to not only insured depository
institutions, but also insurers and other nonbank financial
institutions, ERISA plans, the Federal Thrift Savings Plan (TSP),
federal lending programs (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 stated in her remarks on the signing of the
Climate Risk EO that “[a]ssessments of climate-related
financial risks may require new perspectives and new tools.”
She did no go on to elaborate what additional
tools may be under consideration.

The Climate Risk EO requires the submission of several reports
to the president on additional regulatory measures that may be
needed to address climate change risk. When these reports are
released later this year, they could provide more insights into
what additional measures with respect to the financial system the
administration believes are needed to address climate change
risk.

A detailed summary of the Climate Risk EO is provided below.

Summary of Executive Order on Climate-Related Financial
Risk

The Climate Risk EO establishes that it is the
administration’s policy to:

• “advance consistent, clear, intelligible, comparable, and
  accurate disclosure of climate-related financial risk …,
  including both physical and transition risks”;




• “act to mitigate that risk and its drivers, while
  accounting for and addressing disparate impacts on disadvantaged
  communities and communities of color… and spurring the creation
  of well-paying jobs”; and




• “achieve our target of a net-zero emissions economy by no
  later than 2050.”

The Climate Risk EO seeks to implement this policy by directing
several senior administration officials to take specified
actions.

1) White House. The Director of the National
Economic Council (Brian Deese) and the National Climate Advisor
(Gina McCarthy) are directed to develop a “comprehensive,
Government-wide strategy” that includes:

• How to measure, assess, mitigate, and disclose the
  climate-related financial risks to the “federal government
  programs, assets and liabilities”;




• The financing needed to achieve net-zero greenhouse gas
  emissions for the US economy by 2050 and limiting global average
  temperature rise to 1.5 degrees Celsius; and




• Where private and public investments can help provide the
  needed financing, while “advancing economic opportunity,
  worker empowerment, and environmental mitigation, especially in
  disadvantaged communities and communities of color.”

The report is due within 120 days from the date of issuance of
the Climate Risk EO (September 20, 2021).

2) FSOC. Treasury Secretary Janet Yellen is
directed to use her position as chair of the FSOC to “engage
with FSOC members” to assess the climate-related financial
risks to the financial stability of the US and the federal
government (including physical and transition risks) and facilitate
the sharing of climate-related financial risks data and information
among FSOC member agencies and other government departments and
agencies.

The Climate Risk EO also requests that FSOC issue a report to
the president on the actions by FSOC member agencies to integrate
climate-related financial risk in their policies and programs,
including climate-related disclosures by regulated entities,
regulatory and supervisory activities, and processes for
identifying climate-related financial risk to the financial
stability of the United States. 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 the issuance of the Climate Risk EO
(namely, November 20, 2021). Secretary Yellen also is directed to
include an assessment of climate-related financial risks in the
FSOC’s annual report to Congress.

3) Federal Insurance Office. The Climate Risk
EO directs Secretary Yellen to have the Federal Insurance Office
assess the climate-related gaps in the supervision and regulation
of insurance companies and to assess the risks that climate change
will create major disruptions in private insurance coverage in any
regions of the country.

4) Office of Financial Research. The Climate
Risk EO also directs Secretary Yellen to have 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 by using its authority to collect data. The
director of OFR will also develop research on climate-related
financial risk to the US financial system.

5) Secretary of Labor.

1. ERISA. The Climate Risk EO directs the
   Secretary of Labor (Marty Walsh) to determine what actions can be
   taken under the Employee Retirement Income Security Act (ERISA) to
   protect the savings and pensions of Americans from climate-related
   financial risk. It also directs Secretary Walsh to consider
   suspending, revising, or rescinding the US Department of
   Labor’s regulations “Factors in Selecting Plan
   Investments” and “Fiduciary Duties Regarding Proxy Voting
   and Shareholder Rights,” which were issued last year to
   establish that ESG factors should not be considered by ERISA
   fiduciaries in their investment decisions and proxy voting if they
   have an adverse impact on the pecuniary interests of plan
   beneficiaries. It is likely that Secretary Walsh will issue new
   regulations that explicitly allow ERISA fiduciaries to consider ESG
   factors in investment decisions and proxy voting.




2. TSP. The Climate Risk
   EO directs Secretary Walsh to assess how the Federal Retirement
   Thrift Investment Board has used ESG factors in its investment
   decisions for the TSP.




3. Report. Secretary
   Walsh is to report to the president on the actions he has taken
   with respect to the aforementioned directives on ERISA and TSP
   within 180 days (namely, by November 20, 2021).

6) Office of Management and Budget (OMB). The
Climate Risk EO directs the director of OMB (Acting Director
Shalanda Young) and the National Economic Council director to
develop recommendations for the National Climate Taskforce on how
to integrate climate-related financial risk into federal financial
management and report (particularly for federal lending programs),
including through new accounting standards for federal financial
reporting. Acting OMB Director Young is also directed to identify
the climate-related financial risks to the federal government,
develop methods to quantify that risk as part of the
president’s budget projections, and take steps to reduce that
risk when formulating the president’s budget and implementing
the federal government appropriated budget. The OMB director and
the Chair of the CEA (Cecilia Rouse) are directed to include
annually an assessment of the federal government’s climate risk
exposure in the president’s budget.

7) FARC. The Federal Acquisition Regulatory
Council (FARC) is directed to consider amending the Federal
Acquisition Regulation (FAR) to require major federal government
contractors to not only disclose greenhouse gas emissions and
climate-related financial risks, but also to set emission-reduction
targets. FARC also is directed to consider climate change risk in
its procurement decisions, giving preferences to contracts with
lower emissions.

8) Federal Lending Programs. The executive
order directs Secretaries of Agriculture (Tom Vilsack), Housing and
Urban Development (Marcia Fudge) and Veterans Affairs (Denis
McDonough) to consider how to incorporate climate-related financial
risk into the operations of their respective lending programs,
which include the loans and guaranties offered by FHA, VA, USDA and
Ginnie Mae. These actions could include revising underwriting
standards, loan terms and conditions, asset management and
servicing. The Climate Risk EO also reestablishes the Federal Flood
Management Standards, which were revoked by a prior executive order
in August of 2017.

Footnotes

1Discussed in more detail in our related March 9, 2021,
Legal Update “US SEC Announces the Creation of a
Climate and ESG Task Force.”(go back)

2Discussed in more detail in our related March 26, 2021,
Legal Update “US Federal Reserve Announces New
Climate Committee and Provides More Guidance on Its Approach to
Addressing Climate Change Risks.”(go back)

3https://content.govdelivery.com/accounts/USTREAS/bulletins/2da3fca.(go back)

Originally published by Harvard Law School Forum on
Corporate Governance 11 June 2021.

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