Biden targets climate-related financial risk

President Joe Biden on Thursday issued an executive order intended to gather information about the financial risks posed by the climate crisis, including potentially imposing rules seeking climate-related disclosures from companies.

‘We know that the climate crisis, whether through rising seas or extreme weather, already presents increasing risks to infrastructure, investments and businesses. Yet, these risks are often hidden,’ a White House statement reads. ‘With so much at stake, this executive order ensures that the right rules are in place to properly analyze and mitigate these risks. That includes disclosing these risks to the public and empowering the American people to make informed financial decisions.’

The order in part encourages Treasury Secretary Janet Yellen as chair of the Financial Stability Oversight Council to work with member agencies – including the SEC, Consumer Financial Protection and Commodity Futures Trading Commission – to assess climate-related financial risk to the stability of the federal government and US financial system.

It also urges Yellen to work with member agencies to consider issuing a report within the next 180 days on actions the council recommends to reduce risks to financial stability – including plans the agencies are making to enhance climate-related disclosures and other sources of data, and to incorporate climate-related financial risk into regulatory and supervisory practices.  

The SEC has already indicated that reporting around climate change is on its radar. Then-acting chair Allison Herren Lee in March asked for feedback from companies and others on climate change disclosure.

Around the same time, Senator Elizabeth Warren, D-Massachusetts, asked current SEC chair Gary Gensler at his confirmation hearing: ‘Is there any reason companies should be able to hide their climate risks from investors?’ He responded that there is not, provided the risks are material. Later in the hearing, he noted that trillions of dollars have been invested in ways to seek material information about climate risk.

Biden’s executive order also directs US Secretary of Labor Marty Walsh to consider suspending, revising or removing any rules from the Trump administration era that would have barred investment firms from considering ESG factors such as climate-related risks in their investment decisions related to workers’ pensions.

The US Department of Labor’s (DoL) Employment Benefits Security Administration earlier this year said it will not enforce such rules.

The President’s executive order asks the DoL to report on other measures that could protect the life savings and pensions of US workers and families from climate-related financial risk and to assess how the Federal Retirement Thrift Investment Board has taken ESG factors such including climate-related risk into account.

Among other things, the order also requires the national climate adviser Gina McCarthy and Brian Deese, as director of the National Economic Council, to develop in the next 120 days ‘a comprehensive government-wide climate-risk strategy to identify and disclose climate-related financial risk to government programs, assets and liabilities.’

The White House adds: ‘This strategy will identify the public and private financing needed to reach economy wide net-zero emissions by 2050 – while advancing economic opportunity, worker empowerment and environmental mitigation, especially in disadvantaged communities and communities of color.’

Yellen tweeted in response to the order: ‘Our pensions, our savings – our future livelihoods – depend on the financial sector to build a more sustainable [and] resilient economy. We all need to have the best tools [and] the best data to make well-informed decisions. @POTUS's [executive order] puts us on a path to get there.’

Ceres CEO and president Mindy Lubber says in a statement that the executive order is a ‘bold, thoughtful and important step toward ensuring that every business across every sector of our economy is adequately preparing for the climate crisis.’

She adds: ‘With this new action by the Biden administration, investors, taxpayers and businesses will have the information they need to plan for a sustainable future and help our nation reach its critical climate goals. By requiring climate risk disclosure, companies will gain the insight they need to assess their climate footprint and exposure so that they can protect themselves and embrace opportunities.

‘The momentum behind the call for more transparency, including mandatory climate disclosure rules among US financial regulators and companies, is simply a recognition that voluntary disclosure isn’t getting the job done. You simply cannot manage risks without measuring and disclosing them first. Mandatory rules are essential and will enable decision makers to make informed and sound investment and financial market decisions to address the climate crisis.’