Inside Track: Planning, Environment & Sustainability - In the media, In practice and courts, Cases and Legislation - Real Estate and Construction

Highlights

  • The Biden Administration on May 20, 2021, issued its latest and
    long-awaited Executive Order (EO) on climate-related financial
    risk.

  • The EO will affect a number of business sectors, including
    financial institutions, insurance companies, U.S. Securities and
    Exchange Commission (SEC)-regulated entities and government
    contractors, and will require a number of studies and reports to be
    filed by government agencies within the next 120 to 180 days.

  • Demonstrating how climate change and environmental justice
    issues remain a top priority within the Biden Administration, this
    EO is the latest in a series of actions designed to encourage
    economy-wide transition by targeting the financial sector and
    potentially squeezing capital markets for companies perceived as
    less sustainable.

The Biden Administration on May 20, 2021, issued its latest and
long-awaited Executive Order (EO) on climate-related financial risk. This EO
reflects how the administration is continuing to take a “whole
of government” approach to climate risk with an emphasis on
financial risk as reported in an earlier Holland & Knight
alert. (See “The U.S. Financial System and Climate Risk:
Putting the Report of the CFTC’s Climate-Related Market Risk
Subcommittee in Context
,” Jan. 21, 2021.) The EO will
affect a number of business sectors, including financial
institutions, insurance companies, U.S. Securities and Exchange
Commission (SEC)-regulated entities and government contractors, and
will require a number of studies and reports to be filed by
government agencies within the next 120 to 180 days. Demonstrating
how climate change and environmental justice issues remain a top
priority within the Biden Administration, this EO is the latest in
a series of actions designed to encourage economy-wide transition
by targeting the financial sector and potentially squeezing capital
markets for companies perceived as less sustainable.

On its face, this EO creates a plan to create a plan. Embedded
in the “plan to make a plan” are two realities: First,
the federal government is undertaking a significant effort to
examine how its assets and investments are impacted by climate
change, and second, the federal government and the independent
financial regulators are extending the asset and investment
analysis of climate risk to the financial sector. The results of
the analysis are a foregone conclusion for this administration:
Climate-related risk poses a threat to the stability, strength and
resilience of the global economy. This effort is the starting point
for the federal government and the banking system to analyze and
quantify the risks in a consistent manner and then mitigate
them.

Opposition was also speedy. Sen. Pat Toomey (R-Pa.) released a
statement on the day that the EO was released, saying,
“Today’s executive order demonstrates that the Biden
Administration is preparing to misuse financial regulation to
further environmental policy objectives. … Not only would such
regulation exceed the scope of financial regulators’ respective
missions and authorities, but it would also distort capital
allocation, raise energy costs for consumers and slow economic
growth.”

The EO directs the director of the National Economic Council and
the National Climate Advisor, working with the Secretary of the
U.S. Department of the Treasury and the director of the Office of
Management and Budget (OMB), to develop a comprehensive,
government-wide strategy within 120 days for:

  • measuring, assessing, mitigating and disclosing climate-related
    financial risk to federal programs, assets and liabilities

  • financing needs in order to achieve net-zero greenhouse gas
    emissions by no later than 2050, limiting the average global
    temperate increase to 1.5 degrees Celsius, and adapting to chronic
    and acute impacts of climate change

  • identifying areas in which public and private investments can
    play complementary roles  in meeting financial needs

Financial Institutions

The EO reminds financial institutions that they need to account
for physical and transition risks that threaten to disrupt the
competitiveness of companies in the United States, or the ability
of those financial institutions to serve their local communities.
Even more directly, the financial services industry is on notice
that they have a clear role in decreasing greenhouse gases and
protecting against climate-risk. If it was unclear that the
direction of this effort was to disclose the financial services
industry role through a new reporting regime in an effort to
encourage significant reductions, Treasury Secretary Janet
Yellen’s remarks upon publication of the EO made
that objective clear: “Achieving net-zero emissions in the
United States will require transformational investments in our
energy sector and the broader economy, and the global financial
sector will be a crucial player, helping channel capital into
investments that green our society.” Financial
institutions  are urged to exercise prudent fiscal management.
One way in which they can do so is to provide clear and accurate
disclosure of climate-related financial risk, consistent
with EO 13707, taking steps to mitigate risks,
particularly disparate impacts on disadvantaged communities and
communities of color, consistent with EO
13985
.

The Treasury Secretary, as chair of the Financial Stability
Oversight Council (FSOC), is directed to engage its members to:

  • issue a report to the president within 180 days on efforts to
    integrate climate-related risks into policies and programs,
    including actions to enhance climate-related disclosures by
    regulated entities, approaches to incorporate climate-related
    financial risk into regulatory and supervisory activities,
    processes to identify climate-related risk to the financial
    stability of the United States, and recommendations regarding how
    climate-related risks can be mitigated

  • share climate-related financial risk data among FSOC agencies
    and executive departments

  • assess climate-related financial risk in a detailed and
    comprehensive manner to the financial stability of the
    government

Locating the directive to Secretary Yellen’s
responsibilities to the FSOC demonstrates the complexity and likely
long timeline associated with the creation of a fulsome
climate-risk reporting regimen for financial institutions and the
resulting pressure to limit greenhouse gas emissions. Upon release,
the coordination aspect of the task was clear in Secretary
Yellen’s remarks: “FSOC will work with regulators
to share perspectives, identify common impediments, and find
solutions to those impediments. A critical task is pulling together
individual agency perspectives to assess how climate risks may
impact the stability of the entire financial system.”

The text of the EO is carefully drafted to reflect the
independence of the regulators. The EO does not directly apply to
the Commodity Futures Trading Commission (CFTC), Federal Deposit
Insurance Corporation (FDIC), Federal Reserve (Fed), National
Credit Union Association (NCUA), SEC, Consumer Financial Protection
Bureau (CFPB) or Federal Housing Finance Agency (FHFA). Rather, the
clearest instruction that the president can give to these
regulators is for them  to “consider” assessing the
risk of climate change. It is not a clear directive, with explicit
deadlines to create climate-related risk disclosure regimes. Those
regimes, nonetheless, may well be the predictable outcome. However,
the political realities – rulemaking and significant pushback
from industry – very likely mean that this will be more than
a 120-day process.

The Treasury Secretary is also instructed to direct the Federal
Insurance Office to assess any gaps in the supervision or
regulation of insurers when it comes to climate-related issues, and
to work with the states to determine whether there is the potential
for any significant disruption in private insurance coverage in
portions of the country that are particularly vulnerable to climate
change.

Other Government Agencies

The director of the OMB, working with the director of the
National Economic Council, is directed to develop recommendations
to the National Climate Task Force on integrating climate-related
financial risk into financial reporting and federal financial
management. These organizations are encouraged to develop enhanced
accounting standards. The EO reestablishes the Federal Flood Risk
Management Standard, which was originally established in 2015, by
reinstating EO 13690.

The secretaries of Agriculture, Housing and Urban Development
(HUD) and the Veterans Administration are encouraged to consider
integrating climate-related financial risk into their underwriting
standards, loan terms, asset management and servicing.

The Secretary of Labor is directed to determine what actions can
be taken under the Employee Retirement Income Security Act (ERISA)
to protect the savings and pensions of U.S. workers from the threat
of climate-related financial risks, and to consider suspending,
revising or rescinding certain Trump-era regulations that would not
allow ERISA fiduciaries to take environmental, social and
governance factors into consideration in making investment
decisions.

Government Contractors

Government contractors may also be impacted by this latest EO.
The Federal Acquisition Regulatory Council (FAR Council), in
consultation with the chair of the Council on Environmental Quality
(CEQ), is charged with considering whether the Federal Acquisition
Regulation (FAR) should be amended to require major federal
suppliers to disclose their greenhouse gas emissions and
climate-related financial risk, and to set science-based reduction
targets. The FAR Council is also directed to consider amending the
FAR to require the social cost of greenhouse gas emissions to be
evaluated in procurement decisions and potentially give preference
to bids with a lower social cost. The heads of agencies that are
required to submit Climate Action Plans pursuant to EO 14008 must include actions that
integrate climate-related financial risk into their procurement
policies.

Conclusion

In short, the ask of the “whole of government” is
substantial given the short time frame, but concerns about a
“sea change” event in 2021 should be caveated. Process,
policy and politics are likely to create an extended period of
purposeful deliberation.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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