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Biden Executive Order Instructs Federal Government To “Lead By Example” In Addressing Climate-Related Financial Risk – Government, Public Sector

By on June 1, 2021 0


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 law2 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.

Footnotes

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).

Because of the generality of this update, the information
provided herein may not be applicable in all situations and should
not be acted upon without specific legal advice based on particular
situations.

© Morrison & Foerster LLP. All rights reserved



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