President Joe Biden is directing federal agencies to identify and address financial risks posed by climate change in a sweeping executive order that could affect much of the government budget and many private industries.
The Thursday order is the latest action by the Biden administration to enlist the financial sector in fighting climate change, both through dedicated efforts to reduce climate-related economic risks and actions to minimize public investment in fossil fuels.
“The global financial sector will be a crucial player, helping channel capital into investments to green our society,” Treasury Secretary Janet Yellen told reporters. “But in order for the financial sector to do that, it also must be resilient to the risks that climate change poses.”
In April, during Biden’s climate summit, the White House released the first international climate finance plan. As part of that plan, Biden pledged that the United States would double the amount of money it offers to developing countries to help curb climate change within the next three years and move away from financing fossil fuel-intensive projects overseas.
Administration officials, including climate envoy John Kerry, have teased the domestic climate finance order for weeks, and the directive Biden signed Thursday differs little from a draft circulated last month.
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The executive order directs Yellen to collect data on the risks climate change poses to the financial system and orders the Financial Stability Oversight Council, which Yellen oversees, to issue a report on actions the government can take to mitigate those risks. A White House fact sheet doesn’t say the order requires corporate climate-related disclosures, but it directs the FSOC to include member agencies’ plans to improve such disclosures as part of its report.
The Securities and Exchange Commission has already signaled it is likely to require public companies to disclose their greenhouse gas emissions and the risks they face from climate change. The agency is taking comment on a climate disclosure framework, and top SEC officials have met with big U.S. banks and business lobbies on the issue.
The executive order doesn’t directly call on the SEC to require disclosures from companies, as it is an independent agency, but top Biden officials suggested mandatory corporate climate disclosure standards were nearly a done deal.
“There are a lot of companies and organizations that have been helping to lead the way when it comes to understanding climate risks and voluntarily disclosing them, but it simply isn’t enough,” White House national climate adviser Gina McCarthy told reporters. “This cannot be voluntary. This cannot be optional. The stakes are simply too high.”
Climate activists have long called on federal agencies to require public companies to report their greenhouse gas emissions and the physical risks they face from climate-related damages, such as severe weather. To date, such disclosures have been voluntary and, therefore, inconsistent and incomplete.
“You simply cannot manage risks without measuring and disclosing them first,” said Mindy Lubber, CEO and president of the sustainable investment group Ceres. “Mandatory rules are essential and will enable decision makers to make informed and sound investment and financial market decisions to address the climate crisis.”
Republican politicians, however, have raised alarm at the federal government wielding disclosure requirements and other financial regulatory tools to curb greenhouse gas emissions, saying it will encourage banks and financial firms to choke off capital to fossil fuel producers.
Biden’s executive order also calls on the government to determine how exposed federal spending is to climate change damages, publishing an assessment of those risks each year. The White House budget director is then tasked with limiting the government’s exposure to climate risks.
Acting White House Office of Management and Budget Director Shalanda Young cited statistics that the last 15 years of climate-related damages have cost the federal government more than $1 trillion. In 2016, under the Obama administration, the OMB conducted an initial assessment of climate-related financial risks, finding taxpayers could face more than $100 billion in additional costs each year later this century without action to curb emissions.
Through Biden’s executive order, the OMB is “going to pick that work back up and take additional steps to minimize the federal government’s risk exposure to climate change and to reduce long-term costs to taxpayers,” Young told reporters.
Specific agencies must take steps to address climate financial risks under the order, too. Biden is directing the Labor Department to reverse Trump administration rules that restricted investment firms from considering environmental, social, and governance, or ESG, factors as part of employee pension plans. The Labor Department announced in March it would refrain from enforcing those rules.
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Biden also wants federal agencies to incorporate climate change into their lending, underwriting, and procurement decisions. For example, major federal suppliers must report their greenhouse gas emissions, and agencies must reduce the climate change risks resulting from their purchases.
