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

On May 20, 2021, President Biden signed Executive Order 14030
(EO 14030).1 Stating that the “intensifying
impacts of climate change present physical risk to assets, publicly
traded securities, private investments, and companies,” EO
14030 seeks to increase disclosure of climate-related financial
risk by both the public sector and private sector. As a result, we
can expect expanding disclosure and reporting obligations regarding
climate-related risks and enhanced scrutiny of organizations
subject to those obligations. A thorough understanding of what to
expect from EO 14030’s call for a comprehensive,
government-wide consideration of climate change-related financial
risks, and how the Order may impact existing federal programs is
critical to mitigating risk and ensuring compliance. 

Summary of Executive Order 14030:

President Biden’s EO 14030 calls for “a comprehensive,
[g]overnment-wide strategy” on climate-related financial
risk.

First, the Order directs White House
policymakers to develop a strategy for identifying and disclosing
climate-related financial risk to government programs, assets, and
liabilities within 120 days. This strategy is to identify the
public and private financing needed to reach economy-wide, net-zero
emissions by 2050. Its goal is to limit global average temperature
rise to 1.5 degrees Celsius. 

Second, the Order tasks the Financial
Stability Oversight Council (FSOC) and its member agencies to
assess climate-related financial risk to the federal government and
the overall U.S. financial system. It asks FSOC members
“to consider” reporting recommendations in 180 days to
reduce such risks to financial stability. The recommended
discussion may include: the necessity of enhanced climate-related
disclosure by regulated entities to mitigate risk to the financial
system; actions FSOC agencies are now taking on climate-related
disclosures; and new regulations for identifying and mitigating
such risks.

Third, the Order directs the
Department of Labor to identify regulatory actions under ERISA and
the Federal Employee Retirement System Act to assess the threats
that climate risk may have to savings and pension plans. This
includes reconsidering rules that prohibit investment firms from
considering environmental, social, and governance (ESG) factors,
including climate-related risks, in investment decisions related to
workers’ pensions. The Order directs the Labor Department to
report on these and other measures that might be implemented within
180 days, including how the Federal Retirement Thrift Investment
Board has taken ESG factors into account.

Fourth, the Order asks White House
policymakers for recommendations for incorporating climate-related
financial risk into federal management and reporting,
“especially” federal lending programs. These should
include new accounting standards for federal financial reporting of
such risks. The Order also directs the Federal Acquisition
Regulatory Council to consider amendments to the Federal
Acquisition Regulation to require that major federal suppliers
“publicly disclose greenhouse gas emissions, and
climate-related financial risk, and to set science-based reduction
targets.” The Order encourages agencies to examine the
use of the social cost of greenhouse gas emissions in procurement
decisions. Similarly, lending and grant agencies like Agriculture,
Housing and Urban Development, and Veterans Affairs are to consider
integrating such risk assessment into their lending policies and
programs.

EO 14030 extends other recent federal efforts to increase
consideration of climate-related risks in the financial system. In
September 2020, the Commodities Futures Trading Commission issued a
subcommittee report on Managing Climate Risk in the U.S.
Financial System
.2  In early-March
2021, the SEC then announced the creation of a Climate and ESG Task
Force in the Division of Enforcement.3 This
included a call for submission of “ESG related tips, referrals
and whistleblower complaints.” Later that month, the SEC
requested public comment on potential changes to climate risk
reporting, and on ESG disclosures more generally. A Public
Statement by Acting Chair Allison Herren Lee outlined 15 detailed
questions to guide public comment, available at https://www.sec.gov/news/public-statement/lee-climate-change-disclosures
Comments must be submitted by June 14, 2021
.

The Federal Reserve also established two committees to evaluate
climate-related financial risk. This includes a Supervision Climate
Committee, formed in January 2021.4 This committee
is examining how climate change affects individual banks supervised
by the Federal Reserve. In March, the Federal Reserve then
announced a Financial Stability Climate Committee. This committee
is tasked with identifying and addressing climate-related risks at
a macroprudential level. 

On May 28, after signing EO 14030, President Biden sent his FY
2022 budget to Congress. This includes $44.0 million in new
resources for DOJ “to advance environmental justice, tackle
climate change, and enhance environmental
stability.”5

Key Takeaways

  • EO 14030 directs federal agencies to pursue policy and
    regulatory processes that may create significant, new accounting
    and reporting obligations, increase compliance obligations, and
    create enforcement and litigation risks for private firms across
    numerous industry sectors.

  • Beyond financial disclosure obligations, as the federal
    government announces more regulatory standards, consumer-facing
    advertising and other claims about climate change and
    “sustainability” may be subject to enhanced scrutiny for
    “greenwashing” by federal regulators such as the FTC, the
    DOJ, state attorneys generals, and private
    litigants.6 This may give rise to an increase in
    claims under various consumer protection statutes.

  • Accounting and disclosure changes to ERISA and FAR may generate
    collateral risk and litigation for companies that do business with
    or receive funding from federal agencies. The government is likely
    to make use of the False Claims Act to pursue investigations and
    claims involving alleged failure to comply with disclosure and
    reporting requirements.  Similarly, whistleblowers are likely
    to employ the qui tam provisions of the FCA to
    bring actions on behalf of the government and share in any
    recovery.

  • New disclosure and reporting requirements from federal
    financial regulators on ESG, including specifically climate change,
    should be incorporated into existing compliance programs. In order
    to meet these new requirements, additional or enhanced
    data-gathering, regarding new streams of information, may be
    required.

  • Before formal regulatory changes are
    adopted, current legal and regulatory standards
    based on “reasonable” standards of conduct may
    immediately begin receiving expanded interpretation by regulators,
    enforcement agencies, or private litigants. The DOJ, SEC, CFPB, and
    state and local regulators may take the position that current or
    past conduct is subject to obligations to consider and account for
    climate-related financial risks. Organizations should consider
    this risk in assessing current and prior conduct and the benefits
    of timely implementation of any necessary remediation
    measures.

Footnotes

1 Executive Order 14030, 86 Fed. Reg. 27,968
(May 25, 2021), available at https://www.govinfo.gov/content/pkg/FR-2021-05-25/pdf/2021-11168.pdf

2 Managing Climate Risk in the U.S. Financial
System
 (Sept. 9, 2020), available at https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf

3 SEC Announces Enforcement Task Force Focused on
Climate and ESG Issues 
(Mar. 4, 2021), available
at https://www.sec.gov/news/press-release/2021-42

4 Financial Stability Implications of Climate
Change
 (Mar. 23, 2021) available
at   https://www.federalreserve.gov/newsevents/speech/brainard20210323a.htm

5 Press Release: Department of Justice Fiscal Year 2022
Funding Request, available at https://www.justice.gov/opa/pr/department-justice-fiscal-year-2022-funding-request

6 Earthworks (Mar. 16, 2021), Chevron faces
unprecedent complaint over misleading consumers on climate
action
, available at https://www.earthworks.org/chevrongreenwashing/

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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