Biden issues sweeping climate risk Executive Order to US financial regulators

May 21, 2021|Written by Graham Caswell|Federal Reserve

US president Joe Biden has issued a comprehensive executive order directing federal government agencies and financial regulators to develop strategies for identifying, managing and disclosing climate-related financial risk.

A government-wide climate-risk strategy will be developed over the summer. Financial regulators have been asked to make recommendations on reducing climate-related risks to financial stability within 180 days.

The presidential directive gives national climate advisor Gina McCarthy and director of the National Economic Council Brian Deese four months to develop a government-wide climate-risk strategy. This will “identify and disclose climate-related financial risk to government programs, assets, and liabilities”, and examine the financing needed to reach economy-wide net-zero emissions by 2050.

The federal government will annually assess and disclose its climate-related fiscal risk exposure and work to reduce that exposure. The executive order also asks for recommendations on incorporating climate-related financial risk into federal procurement, underwriting and lending.

Treasury secretary and former Federal Reserve governor Janet Yellen has been asked to work with the Financial Stability Oversight Council (FSOC) to develop recommendations to reduce risks to financial stability and to “the stability of the federal government.”

Her report, due by the end of the year, will include plans FSOC member agencies are taking to improve climate-related disclosures and to incorporate climate-related financial risk into regulatory and supervisory practices. There are eight voting members of the FSOC, including current Fed governor Jerome Powell, Treasury Secretary Yellen, and the heads of six finance-related federal agencies.

An executive order on climate risk had been expected and initial reaction from climate policy experts was positive. “This order sends an important message that the Biden administration understands the urgent need to address climate-related financial risks,” said David Arkush, managing director of Public Citizen’s Climate Program. “It makes clear that financial regulators have a responsibility to mitigate those risks – including the ones financial institutions create by financing emissions.”

Sierra Club spokesperson Ben Cushing was also upbeat, calling the order “promising”. “These actions have the strong backing of the American people, who support a bold climate agenda,” he said, pointing out that “US financial firms continue to be world’s largest financiers of fossil fuels and climate destruction”.

However others expressed concern about the year-end deadline for the FSOC report. Stop The Money Pipeline – a coalition of 150 organisations campaigning to end fossil fuel financing – urged the administration to deliver the reports before the COP26 meeting. The importance of climate justice was also emphasised in civil society’s reaction.

“Economic, racial, and environmental justice principles and priorities need to be integrated into these regulatory moves every step of the way,” said Alex Martin, senior policy analyst at Americans for Financial Reform Education Fund. “Wall Street’s business-as-usual approach will not work for climate or for people.”

Climate risk disclosure was part of Joe Biden’s ‘day one’ campaign manifesto with a pledge to “require public companies to disclose climate risks and the greenhouse gas emissions in their operations and supply chains”.

US disclosure requirements are the responsibility of the Securities and Exchange Commission, an FSOC member. The regulator in the process of updating its 2010 climate disclosure requirements to develop “a more comprehensive framework that produces consistent, comparable, and reliable climate-related disclosures”.

This page was last updated May 28, 2021

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