On May 20, 2021, the Office of the President released an Executive Order, entitled “Executive Order on Climate-Related Financial Risk” (the “Order”). The Order explicitly acknowledges that the impact of climate change presents physical risk to assets, publicly traded securities, private investments, and companies. In addition, it notes that the global shift away from carbon-intensive energy sources and industrial processes presents transition risk to many companies, communities, and workers, but notes that this global shift also presents generational opportunities to enhance U.S. competitiveness and economic growth. The Order states that the failure of financial institutions to appropriately and adequately account for and measure these physical and transition risks threatens the competitiveness of U.S. companies and markets, the life savings and pensions of U.S. workers and families, and the ability of U.S. financial institutions to serve communities.
The Order outlines the policy of the Biden Administration: to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk, including both physical and transition risks; to act to mitigate that risk and its drivers, while accounting for and addressing disparate impacts on disadvantaged communities and communities of color; to spur the creation of well-paying jobs; and to achieve the target of a net-zero emissions economy by no later than 2050.
Climate-Related Financial Risk Strategy
The Order tasks several governmental agencies to develop, within 120 days, a comprehensive, government-wide strategy to implement clear and accurate disclosure of climate-related financial risk. Such strategy would address the goals of the Administration by: (i) creating a framework for the measurement, assessment, mitigation, and disclosure of climate-related financial risk to Federal Government programs, assets, and liabilities; (ii) outlining financing needs associated with achieving net-zero greenhouse gas emissions for the U.S. economy by no later than 2050; and (iii) identifying areas in which private and public investments can play complementary roles in meeting these financing needs while advancing economic opportunity, worker empowerment, and environmental mitigation, especially in disadvantaged communities.
Assessment of Climate-Related financial Risk by Financial Regulators
The Order specifies that the Secretary of the Treasury will engage with the Financial Stability Oversight Council (“FSOC”) in (i) assessing climate-related financial risk, both physical and transitional, to the financial stability of the Federal Government and U.S. financial system, and (ii) sharing climate-related financial risk data and information among FSOC member agencies and other executive departments and agencies as appropriate. The FSOC will issue a report to the President within 180 days of the date of the Order outlining any efforts by FSOC member agencies to integrate consideration of climate-related financial risk in their policies and programs, including both existing practices as well as recommendations for actions necessary to enhance climate-related disclosures by regulated entities. Notably, both the Chairman of the Securities and Exchange Commission and the Chairperson of the Commodity Futures Trading Commission are voting members of FSOC, and therefore, this Order lays the groundwork for such agencies to begin to incorporate climate-related financial risks into financial regulation.
Resilience of Life Savings and Pensions
The Order directs the Secretary of Labor to consider publishing, by September 2021, a proposed rule suspending, revising, or rescinding two regulations implemented by the prior Administration, which are currently subject to a non-enforcement policy, that restricted ERISA fiduciaries from basing investment decisions on non-pecuniary goals such as environmental, social, and governance factors. The Secretary of Labor is also directed to identify agency actions that can be taken under ERISA to protect the pensions of U.S. workers and families from the threats of climate-related financial risk. The Order further instructs the Secretary of Labor to identify potential measures available to protect federal pensions and to assess how the fiduciaries of the pension plans for federal workers, have taken environmental, social, and governance factors, including climate-related financial risk, into account in their investment decisions.
Federal Lending, Underwriting, and Procurement
The Order also calls for the development of recommendations on the integration of climate-related financial risk into federal financial management and reporting, especially as it relates to federal lending programs. It additionally requires departments to consider new requirements for major federal suppliers’ disclosure of greenhouse gas emissions and climate-related financial risks to ensure federal procurements minimize these risks.
The Order represents a major policy shift from the prior administration and signals to U.S. and global market participants that a key priority of the Biden Administration is to create greater transparency and consistency in climate-related financial disclosures. The Order is an early step towards this goal, and the next major development will be the production of the reports commissioned by the Order. A key open question is whether any disclosure framework would be prescriptive in nature, or based on materiality standards, similar to current disclosure rules. In addition, it will be interesting to compare any agency recommendations with other global ESG disclosure regimes, such as SFDR. Regardless, the Order makes clear that change (and additional regulation) is coming. Seward & Kissel LLP will continue to monitor developments in this area.
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If you have any questions regarding the information discussed above, please contact your Investment Management Group attorney at Seward & Kissel LLP.