The financial sector and public enterprises in the environmental bubble | Holland & Knight LLP
On May 20, 2021, the Biden administration issued its latest and much anticipated Executive Order (OE) on climate-related financial risk. This EO reflects how the administration continues to take a “whole-of-government” approach to climate risk with a focus on financial risk, as noted in a previous alert from Holland & Knight. (See “The US Financial System and Climate Risk: Context for the Report of the CFTC’s Climate Market Risk Subcommittee“, January 21, 2021.) The OE will affect a number of industries, including financial institutions, insurance companies, entities regulated by the United States Securities and Exchange Commission (SEC), and government contractors, and will require a number of studies and reports to be filed by government agencies in the next 120 to 180 days. Demonstrating how issues of climate change and environmental justice remain a top priority within the Biden administration , this OE is the latest in a series of actions designed to encourage economy-wide transition by targeting the financial sector and potentially squeezing capital markets for companies perceived to be less sustainable.
At first glance, this OE creates a plan to create a plan. Two realities are built into the “plan to make a plan”: first, the federal government is undertaking a significant effort to examine how its assets and investments are affected by climate change, and second, the federal government and independent financial regulators. extend the analysis of climate risk assets and investments to the financial sector. The results of the analysis are obvious to this administration: climate risk poses a threat to the stability, strength and resilience of the global economy. This effort is the starting point for the federal government and the banking system to analyze and quantify risks consistently, and then mitigate them.
Opposition was also swift. Senator Pat Toomey (R-Pa.) Issued a statement on the day of the publication of the OE, saying: “Today’s executive order demonstrates that the Biden administration is preparing to abuse financial regulation to make advancing environmental policy goals.… regulation goes beyond the remits and respective authorities of financial regulators, but would also distort the allocation of capital, increase energy costs for consumers and slow economic growth. ”
The OE leads the Director of the National Economic Council and the National Climate Adviser, in collaboration with the Secretary of the US Department of the Treasury and the Director of the Office of Management and Budget (OMB), to develop a comprehensive strategy for the government wide. within 120 days for:
- measure, assess, mitigate and disclose climate-related financial risks to federal programs, assets and liabilities
- financing needs to achieve zero net greenhouse gas emissions by 2050 at the latest, limiting the global average temperature rise to 1.5 degrees Celsius and adjusting to chronic and acute impacts of change climatic
- identify areas where public and private investments can play complementary roles in meeting financial needs
The OE reminds financial institutions to consider the physical and transition risks that threaten to disrupt the competitiveness of businesses in the United States, or the ability of these financial institutions to serve their local communities. More directly still, the financial services sector is aware that it has a clear role to play in reducing greenhouse gases and protecting against climate risks. While it was not clear that the direction of this effort was to disclose the role of the financial services industry through a new reporting regime in a bid to encourage deep cuts, Treasury Secretary Janet Yellen remarks during the publication of the OE made this goal clear: “Achieving net zero emissions in the United States will require transformational investments in our energy sector and the economy at large, and the global financial sector will be a critical player, helping to channel capital into investments that green our society ”. Financial institutions are urged to exercise prudent fiscal management. One of the ways they can do this is to provide clear and accurate disclosure of climate-related financial risks, in accordance with the OCOM 13707, taking measures to mitigate risks, in particular the disparate impacts on disadvantaged communities and communities of color, in accordance with the OCOM 13985.
The Secretary of the Treasury, as Chairman of the Financial Stability Supervisory Board (FSOC), is responsible for committing its members to:
- publish a report to the president within 180 days on efforts to mainstream climate-related risks into policies and programs, including actions to improve climate-related disclosures by regulated entities, approaches to mainstream climate climate-related financial risk in regulatory and supervisory activities, processes to identify climate-related risks to US financial stability, and recommendations on how climate-related risks can be mitigated
- share data on climate-related financial risks between FSOC agencies and executive departments
- assess climate-related financial risk in a detailed and comprehensive manner for the government’s financial stability
The localization of the directive on Secretary Yellen’s responsibilities to the FSOC demonstrates the complexity and likely length of time associated with creating a comprehensive climate risk reporting regime for financial institutions and the resulting pressure to limit emissions greenhouse gases. On release, the coordination aspect of the task was clear in Secretary Yellen’s statement remarks: “The FSOC will work with regulators to share views, identify common obstacles and find solutions to those obstacles. A key task is to bring together the views of each agency to assess how climate risks may affect the stability of the entire financial system. “
The text of the OE is carefully drafted to reflect the independence of regulators. OE does not apply directly to Commodity Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), Federal Reserve (Fed), National Credit Union Association (NCUA), SEC , the Consumer Financial Protection Bureau (CFPB) or the Federal Housing Agence des Finances (FHFA). On the contrary, the clearest instruction the President can give to these regulators is that they “consider” assessing the risk of climate change. This is not a clear directive, with explicit deadlines for creating climate risk disclosure regimes. These diets, however, may well be the predictable outcome. However, the political realities – rule making and a significant industry setback – most likely mean it will be more than a 120-day process.
The Secretary of the Treasury is also responsible for directing the Federal Insurance Office to assess any loopholes in the oversight or regulation of insurers with respect to climate-related issues, and to work with states to determine if there is a potential for significant disruption in private insurance coverage in areas of the country that are particularly vulnerable to climate change.
Other government agencies
The Director of OMB, in collaboration with the Director of the National Economic Council, is responsible for developing recommendations to the National Climate Working Group on integrating climate-related financial risks into financial reporting and federal financial management. These organizations are encouraged to develop improved accounting standards. The OE restores the federal standard for flood risk management, which was originally established in 2015, by restoring OCOM 13690.
Secretaries of Agriculture, Housing and Urban Development (HUD) and Veterans Administration are encouraged to consider incorporating climate-related financial risk into their underwriting standards, lending terms, management. assets and maintenance.
The Secretary of Labor is responsible for determining what steps can be taken under the Employees’ Retirement Income Security Act (ERISA) to protect the savings and pensions of American workers from the threat of climate-related financial risks , and consider suspending, revising or rescinding certain Trump-era regulations that would not allow ERISA Trustees to consider environmental, social and governance factors in making investment decisions.
Government contractors can also be affected by the latter EO. The Federal Acquisition Regulatory Council (FAR Council), in consultation with the Chairman of the Council on Environmental Quality (CEQ), is responsible for reviewing whether the Federal Acquisition Regulation (FAR) should be amended to require major federal suppliers to disclose their emissions greenhouse gases. climate-related emissions and financial risks, and setting science-based reduction targets. The FAR Board is also invited to consider modifying the FAR to require that the social cost of greenhouse gas emissions be assessed in purchasing decisions and potentially give preference to offers with a lower social cost. Heads of agencies who are required to submit climate action plans in accordance with OCOM 14008 should include actions that integrate climate-related financial risk into their purchasing policies.
In short, the demand from “whole government” is substantial given the short time frame, but concerns about a “radical change” event in 2021 should be warned. Process, policy and politics are likely to create an extended period of focused deliberation.