Executive Order on Climate-Related Financial Risk

On May 20, 2021, President Biden issued an “Executive Order on Climate-Related Financial Risk” (“E.O.”), setting forth the Administration’s policy regarding the evaluation and incorporation of climate-related financial risk into the government’s purchasing, lending, and financial sector oversight activities.  By directing a wide range of agencies to develop plans and coordinate efforts to assess climate-related financial risks, including “transition risks,” this latest E.O. underscores the strength of the Biden’s Administration’s commitment to achieve net zero greenhouse gas (“GHG”) emissions economy-wide by 2050, as well as the breadth of the “all of government” reorientation toward climate and environmental equity being driven in pursuit of that objective.  As agencies outside of the financial sector (such as the U.S. Environmental Protection Agency) have already begun to take aggressive and concrete steps in furtherance of the foundational E.O. 14008, Tackling the Climate Crisis at Home and Abroad, issued earlier this year, the plan reflected in the E.O. on Climate-Related Financial Risk should be expected to seek tangible impact in both the near and longer term.

The directives set forth in the E.O. can be grouped broadly into internally- and externally-facing government activities, the highlights of which are summarized as follows:

Internally-Facing Government Activities

• Leaders of the National Economic Council, National Climate Advisor, Treasury Department, and the Office of Management and Budget are directed to develop in 120 days a comprehensive strategy (a) to assess, measure, mitigate, and disclose climate-related financial risks to federal programs; and (b) to evaluate what, financially, will be needed to achieve the Administration’s climate goals (including net-zero GHG emissions by 2050), and (c) how to leverage public and private investment to achieve these goals in an equity-advancing manner.
• The Financial Stability Oversight Council is directed to consider* (a) assessing climate-related financial risks (including physical and transition) to the financial stability of the U.S. government and financial system and reporting on such risks to Congress; (b) sharing such information with other departments and agencies; and (c) issuing a report in 180 days on FSOC member agency efforts to integrate such risks into their policies and programs, including enhancing climate-related disclosures by regulated entities.
• The Federal Insurance Office is directed to assess how climate is (and is not) accounted for in the supervision and regulation of the insurance industry, and whether areas that are particularly climate-vulnerable could face disruption in private insurance coverage.
• The Secretary of Labor is directed to evaluate, and report within 180 days, on (a) actions the government can take under existing law (including ERISA and FERS) to protect U.S. citizens’ savings and pensions from climate-related financial risk; (b) his consideration of whether to revise or repeal two Trump administration rules intended to curtail the incorporation of ESG factors into retirement-plan investment decisions; and (c) an assessment of how the federal government incorporates ESG factors in its retirement planning for federal employees.
• OMB, consulting with other offices, agencies, and departments, is directed to (a) identify, and develop methodologies to quantify, the climate-related financial risk exposures inherent in the assumptions and projections of the President’s Budget; (b) report on the climate-risk exposure of the government as part of the President’s Budget; (c) improve how the government accounts for climate-related expenditures; and (d) use the President’s Budget formulation and execution to reduce the government’s long-term climate-risk exposure.

Externally-Facing Government Activities

• The leaders of the OMB, National Economic Council, and Treasury are directed to develop recommendations on how to integrate climate-related financial risk (and accounting standards for the same) into federal lending programs, among other federal financial management and reporting activities.
• The Federal Acquisition Regulatory Council is directed to consult with the leaders of the Council on Environmental Quality and other agencies to consider* (a) amending the Federal Acquisition Regulation (FAR) to require major federal contractors to disclose GHG emissions and climate-related financial risk, “and to set science-based reduction targets” and (b) consider climate change risk in procurement decisions and give preference to suppliers with lower GHG emissions. This provision puts a finer point on the direction in Executive Order 14008 to consider ways to “promote increased contractor attention on reduced carbon emissions and Federal sustainability.”
• The Secretaries of Agriculture, Housing and Urban Development, and Veterans Affairs are directed to consider* how better to incorporate climate-related financial risk into the lending policies and programs they administer (including the Federal Housing Administration and the Government National Mortgage Association, a.k.a. Ginnie Mae).
• Federal agencies are directed to, in their Climate Action Plans (required by Executive Order 14008), report on actions to also incorporate the financial risks of climate change in their procurement activities.
• Executive Order 13690, relating to the flood resiliency of taxpayer-funded projects, is reinstated.

As summarized above, the substance of this E.O. builds on earlier Biden Administration efforts (e.g., the Securities and Exchange Commission’s creation of a Climate and ESG Task Force) and those of the previous administration (e.g., the Commodity Futures Trading Commission’s report on Managing Climate Risk in the U.S. Financial System) to put a spotlight on the risks to the U.S. financial system,  and indeed the whole of the U.S. government, from climate change. And the principles underlying this E.O. are certainly not new—indeed, they have been advocated by private organizations such as the Task Force on Climate-Related Financial Disclosures for some time. However, this E.O.—consistent with the Biden Administration’s “whole-of-government” approach—reflects and incorporates in a new way the Administration’s twin themes of economic and environmental justice for communities of color and other disadvantaged communities, and acknowledges that climate impacts may fall disproportionately on these groups.

To be sure, certain elements of the E.O. (identified with asterisks above) direct agencies only to “consider” these evaluations and actions, which ordinarily might make the implementation of these sections much less certain—and much more subject to an individual agency’s discretion. But given the Biden Administration’s repeatedly stated commitment to fighting climate change aggressively and quickly, evidenced in previous Executive Orders and pronouncements from Special Presidential Envoy for Climate John Kerry, the term “consider” may be intended more as code, to shield an agency from claims of prejudgment on judicial review, than to provide the agency actual discretion.  

In sum, this E.O. places the presidential imprimatur on federal agencies’ prior attempts to sound the alarm on climate-related financial risks. With explicit executive direction, it is more likely than ever that the federal government will follow through on not only heightened disclosure requirements for itself and regulated entities, but also with requirements for substantive changes in both its suppliers’ businesses and in projects that benefit from federal procurement, lending and insurance programs.