President Biden announced on Thursday an Executive Order on Climate-Related Financial Risk, with wide-ranging transparency, disclosure and investment implications for investors, companies and regulators.
According to the White House, the executive order aims to help the federal government to address the climate crisis and mitigate the economic risks of climate change, beginning with the measurement and reporting of the financial impact of those risks.
According to a fact sheet issued by the White House:
“We know that the climate crisis, whether through rising seas or extreme weather, already presents increasing risks to infrastructure, investments, and businesses. Yet, these risks are often hidden.
“With so much at stake, this Executive Order ensures that the right rules are in place to properly analyze and mitigate these risks. That includes disclosing these risks to the public, and empowering the American people to make informed financial decisions.”
Among the most relevant actions for investors and issuers mandated by the order is a call on financial regulators to assess climate related financial risks, specifically encouraging Secretary of the Treasury Janet Yellen to consider plans to improve climate-related disclosures, and to incorporate climate-related financial risk into regulatory and supervisory practices.
These actions may move the U.S. significantly closer to the deployment of mandatory climate and sustainability disclosures by companies, which is currently under consideration by the SEC. Yellen has recently expressed support for sustainability reporting initiatives, such as the TCFD climate reporting framework, and the IFRS initiative towards developing a climate disclosure standard, and has committed to working with the SEC on its review of sustainability reporting requirements. Such a move would also bring the U.S. in line with other jurisdictions’ mandated sustainability reporting rules, including the UK and European Union.
Another significant aspect for investors of the President’s order is a call on the Department of Labor to consider reversing Trump-era rules that are broadly viewed as obstacles to ESG investing. These would include rules announced by the DOL putting strict limits on ESG investing in private employer-sponsored retirement plans (ERISA), as well as a set of rules regarding proxy voting, impacting the ability of investment managers to promote sustainability goals through their investments, and suggesting that proxy voting on ESG issues is not in the interests of investors. In March of this year, the DOL already announced that it would not seek to enforce these new rules.
The administration’s move towards mandatory climate reporting was broadly welcomed by sustainability-focused investment organization. Ceres CEO and President Mindy Lubber said:
“With this new action by the Biden administration, investors, taxpayers and businesses will have the information they need to plan for a sustainable future and help our nation reach its critical climate goals. By requiring climate risk disclosure, companies will gain the insight they need to assess their climate footprint and exposure so that they can protect themselves and embrace opportunities.
“This important executive order will bring our nation forward and make our businesses more competitive internationally, where strong climate standards already exist in many countries.”