May 20 Executive Order on Climate-Related Financial Risk

On May 20, President Biden signed the Executive Order on Climate-Related Financial Risk (EO). Whether and how financial regulators address climate-related financial risk has been and continues to be a fraught political issue. With this EO, President Biden spurs US financial regulators to catch up with the international community and seeks to position the US as a global leader on climate-related financial risk management.

The EO provides a procedural framework around federal government priorities and next steps Treasury Secretary Janet Yellen indicated a month ago were already in motion. For example, just before the White House’s Climate Summit, Secretary Yellen outlined Treasury’s priorities on (1) understanding and mitigating climate-related financial risks; (2) mobilizing public lending towards climate mitigation and GHG reduction efforts; and (3) spurring private investment in green initiatives. Yesterday’s EO mandates that Treasury, in conjunction with member agencies of the Financial Stability Oversight Council (FSOC), issue a report within 180 days with recommendations on, among other items, incorporating climate-related financial risk into regulatory and supervisory practices. The report must address actions needed to enhance climate-related financial risk disclosures in order to provide greater transparency and consistency, which echoes a variety of stakeholders’ calls for greater clarity, including from investors, the environmental community, Treasury Yellen and certain SEC Commissioners, as discussed here and here.

Significantly, the EO requires consideration of amending Federal Acquisition Regulations to require major government suppliers to publicly-disclose GHG emissions and climate-related financial risk as well as to set science-based reduction targets. These potential new regulatory requirements echo California legislation, SB-260 Climate Corporate Accountability Act, currently working its way through Senate committees that would require disclosure of Scope 1, 2, and 3 emissions as well as progress reports on achieving GHG reduction targets. The federal rulemaking process required by the EO will be spearheaded by the Federal Acquisition Regulatory Council in consultation with the Chair of CEQ. Further consideration of approaches to incorporating climate-related financial risks into federal government loans issued by a number of agencies is also mandated.

Finally, consistent with the Biden-Harris Administration’s “whole government” approach to climate change, the EO requires the Director of National Economic Council and National Climate Advisor (in coordination with Treasury and OMB) to develop a government-wide strategy within 120 days to measure, assess, and mitigate federal government financial-related climate risk (which was already likely underway pursuant to the January EO discussed here) and ascertain financing needs associated with reaching net zero GHG emissions by 2050, which is the goal the administration announced in conjunction with the Climate Summit.

Stay tuned for additional developments stemming from this short EO that packs quite a punch.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.