Biden-Harris Administration Acts on Climate-Related Financial Risk

US President Joseph Biden issued the Executive Order on Climate-Related Financial Risk on May 20, 2021, directing federal agencies across the US government to take action addressing climate-related financial risk.

The executive order requires, among other things:

• The development of a government-wide strategy to address climate-related risk related to US government operations and financing needs to achieve net-zero emissions by 2050
• A report addressing climate-related risk and disclosures in the US financial system
• An assessment of climate-related risk in the US insurance system
• An assessment of climate-related risk to retirement plans, including an assessment of Trump-era regulations on the consideration of environmental factors in retirement plan investments
• Recommendations on approaches to integrate climate-related financial risk into federal financial management and financial reporting, especially as it relates to federal lending programs
• Implementation of new climate-related disclosures related to federal suppliers
• Consideration of climate-related financial risk in developing the federal budget

The administration’s increased focus on climate-related financial risk is occurring alongside a growing corporate focus on environmental and sustainability issues, which, collectively, are likely to increase the corporate appetite for renewable energy generation and drive additional investment in renewable energy projects. Renewable energy procurement by large corporate buyers has experienced significant growth in recent years, increasing from 2.76 gigawatts (GW) in 2017 to 10.6 GW in 2020. Corporate investment in renewable energy through power purchase agreements in particular increased from $11.1 billion in 2018 to an estimated $15.9 billion in 2020. Corporate procurement and investment in renewable energy is expected to expand further as more and more companies continue to work toward achieving their sustainability goals.

As it relates to climate-related risk and disclosures in the US financial system, the executive order directs the US secretary of the treasury to engage the Financial Stability Oversight Council (FSOC), established under the Dodd-Frank Wall Street Reform and Consumer Protection Act to monitor the US financial system, to do the following:

• Assess, “in a detailed and comprehensive manner, the climate-related financial risk, including both physical and transition risks, to the financial stability of the US federal government and US financial system”
• Facilitate the sharing of climate-related financial risk data among FSOC member agencies and other government departments and agencies, as appropriate
• Issue a report within six months describing efforts by FSOC member agencies “to integrate consideration of climate-related financial risk in their policies and programs,” including a discussion of the following:
  • Actions needed “to enhance climate-related disclosures by regulated entities to mitigate climate-related financial risk to the financial system or assets and a recommended implementation plan for taking those actions”
  • Current approaches to incorporating the “consideration of climate-related financial risk” into regulatory and supervisory activities, and impediments to adoption
  • Recommended processes to identify climate-related financial risk to the financial stability of the United States
  • Other recommendations on how to mitigate climate-related financial risk, including through new or revised regulatory standards

The release of the executive order is one of several actions the Biden-Harris administration has taken in recent months to address climate-related financial risk. On April 22, 2021, the administration released its US International Climate Finance Plan, which highlighted efforts the administration intends to undertake to drive investment in developing countries to reduce or avoid further greenhouse gas (GHG) emissions and mitigate the impacts of climate change and steps it will take to improve global climate disclosures.

The International Climate Finance Plan also states that the US Department of the Treasury, in coordination with other US agencies and regulatory bodies, will continue to, among other things, do the following:

• Co-chair the G20 Sustainable Finance Working Group, which in 2021, will (1) work on improving sustainability disclosure and reporting, and (2) consider how to improve the reliability and compatibility of approaches for identifying climate-aligned and sustainable investments
• Engage in work at the Financial Stability Board (FSB) and other international bodies to improve the data available for assessing and monitoring climate-related financial risks, and coordinate with US regulators and other agencies working on climate-related financial data in the financial standard-setting bodies
• Coordinate with US regulators engaging in financial standard-setting and other forums to improve approaches for assessing and managing climate-related financial risks
• Support and help guide, in coordination with US regulators, work undertaken by international bodies to develop consistent, comparable, and reliable climate-related financial disclosures that are compatible with the US domestic framework and regulatory process
• Support US financial institution engagement with, and implement best practices emerging from, voluntary, private-sector coalitions working on targets, strategies, and metrics intended to achieve net-zero emissions portfolios and institutional strategies

In addition, the US Securities and Exchange Commission (SEC) has separately undertaken several recent initiatives related to climate disclosures, including (1) directing the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings, which may result in an update to 2010 SEC guidance on public company disclosure requirements related to climate change matters; (2) soliciting public comments related to updating the aforementioned 2010 guidance; and (3) directing the Division of Examinations to place a greater focus on climate-related risks in 2021.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Boston
Carl A. Valenstein

Chicago
Julie A. Stapel

Philadelphia
Kenneth M. Kulak
Mark A. Lazaroff

Pittsburgh
Elizabeth S. Goldberg
Celia A. Soehner 

Washington, DC
Kirstin E. Gibbs
Bryan M. Killian