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White House Instructs Agencies to Analyze and Mitigate "Climate-Related Financial Risk"

Executive Order directs whole-of-government approach and broad regulatory effort.

On May 20, 2021, President Biden issued an Executive Order ("Order") directing agencies to analyze and mitigate "climate-related financial risk." Part of the administration's broader climate agenda, the Order requires agencies to develop a "comprehensive, Government-wide strategy" affecting the financial system and Federal Government. Designed to address what the President describes as "[t]he failure of financial institutions to appropriately and adequately account for and measure" climate risks, the Order and agencies' implementation of it will affect financial regulation, pensions, procurement, and Federal budget oversight.

The Order directs the Treasury Secretary, in her capacity as chair of the Financial Stability Oversight Council ("FSOC"), to assess risks to financial stability in coordination with FSOC member agencies. The Order encourages FSOC to consider the necessity of actions, including "new or revised regulatory standards," to enhance climate-related disclosures by regulated entities, and to recommend an implementation plan for those actions. Treasury Secretary Janet Yellen is prioritizing this effort, announcing that FSOC will work "to improve climate-related financial disclosures" and other data to measure potential exposures. Financial institutions and publicly traded entities in particular should watch these initiatives carefully, as they may presage substantial changes in the regulatory and enforcement landscape. At the same time, existing initiatives by climate task forces at the SEC and the CFTC should be monitored for related developments.   

The Order further directs the Secretary of Labor to identify agency actions under relevant laws—including the Employee Retirement Income Security Act of 1974—to "protect the life savings and pensions of United States workers" from climate-related financial risk. The White House Fact Sheet on the Order noted the Labor Secretary should consider suspending, revising, or rescinding any rules from the prior administration that would bar investment firms from considering environmental, social, and governance facts in investment decisions.

In addition, the Order influences procurement and budgetary processes. The Federal Acquisition Regulatory Council is directed to consider amending the Federal Acquisition Regulation to require suppliers to disclose emissions and ensure procurements minimize climate risk. Potential changes include a requirement to consider the social cost of emissions and a preference to bids with a lower social cost of emissions. As to budget processes, the Director of the Office of Management and Budget shall identify sources of climate-related risk and develop methods to quantify that risk within the projections of the President's budget.  

Regulated parties should be aware of forthcoming agency reports and actions integrating climate-related financial risk into agency policy, and be prepared to evaluate how potential rulemaking based on climate-related financial risk could impact their operations.

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