Biden Signs EO to Evaluate and Mitigate Climate Related Financial Risk

Executive Order Mitigate Climate Related Financial Risk

Last week, President Biden signed an executive order (EO) on climate-related financial risk, a cross-governmental plan that directs federal agencies to identify and mitigate financial risks presented by climate change to Americans, businesses, and the government itself. The administration said that Americans are already facing risks due to climate threats including worsening extreme weather events, and they deserve to understand how these risks affect their financial security.

Why This Matters

Climate change costs the federal government billions every year. Last year, 22 weather and climate disasters cost the government a total of $95 billion dollars in damages.

First, it's crucial that the federal government understands its own climate risk, which is the major prescription given by the executive order.

Second, the immense purchasing power of the government should be used to buy from suppliers who have a lower social cost of greenhouse gas emissions to encourage the private sector to slash its emissions.

What's also important about this EO, as National Climate Advisor Gina McCarthy said on a press call, is that some form of mandatory risk disclosure from companies is already underway, which will be a crucial part of a stable economy in the climate change era.

NOAA: Billion-Dollar Disasters - By the Numbers (1980-2020).

Knowing The Risk

The Biden administration said that the plan aims to inform the American people about climate-related risks to their financial security, strengthen the US financial system, and inform concrete decisions on how to best mitigate climate risks.

The plan includes:

  • Requiring Gina McCarthy and the National Economic Council Director to develop a comprehensive, government-wide climate-risk strategy within 120 days to identify and disclose financial risk to government programs, assets, and liabilities.
  • Encouraging the Treasury Secretary, Janet Yellen, to work with the Financial Stability Oversight Council to assess risk to the federal government and US financial system's stability, and to consider issuing risk-reduction recommendations within 180 days.
  • Directing the Labor Secretary, Marty Walsh, to consider suspending, revising, or rescinding any rules from the prior administration that would have barred investment firms from considering environmental, social, and governance factors in decisions related to workers’ pensions. It also asks the DOL to report on potential measures to protect the life savings and pensions of US workers and families from climate-related financial risk.
  • Developing recommendations for the improvement of Federal financial management and reporting to incorporate climate-related financial risk emissions and climate-related risks.
  • Directing the federal government to develop and publish an annual assessment of its climate-related fiscal risk exposure, then reduce the federal government's exposure through the President's Budget and oversight of budget execution.

While the EO only asks the Treasury and Labor Secretaries to "consider" specific actions, Yellen remarked:

Achieving net zero emissions in the United States will require transformational investments in our energy sector and the broader economy ... But in order for the financial sector to do that, it also must be resilient to the risks that climate change poses ... As Chairperson of the Financial Stability Oversight Council (FSOC), I am prioritizing this work.

McCarthy also remarked: "This cannot be voluntary, this cannot be optional, the stakes are too high."

Advocates are praising the order and say that it is crucial to protect the economy as the nation revolutionizes its energy infrastructure. Others are happy to see the federal government wielding the full force of its regulatory power. The Sierra Club's financial advocacy campaign manager Ben Cushing said:

Regulators have the tools to rein in these risky, dirty financing activities and safeguard our communities, and they need to use those tools now. These actions have the strong backing of the American people, who support a bold climate agenda and action to prevent another financial crash caused by Wall Street’s short-sighted gambles.