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President Joe Biden directed US agencies for the first time to
consider the social cost of GHGs when purchasing goods and services
and for vendors to publicly disclose the climate risks their goods
and services pose.
The directives were included in Biden's 20 May Executive Order on
Climate-Related Financial Risk that laid out a blueprint
for how the federal government will assess and account for the
social cost of GHGs as well as climate-related financial risks for
goods and services it purchases, loans it underwrites and
guarantees, and assets it manages.
Biden has made tackling the climate crisis a priority since
taking office on 20 January. The latest order reflects actions the
president indicated he would pursue to make sure that climate
impacts are addressed by every branch of the federal
government.
In the 20 May order, Biden highlighted that the intensifying
impacts of climate change present a physical risk to assets,
publicly traded securities, private investments, and companies,
such as increased extreme weather risk leading to supply
disruptions. He also noted that the global shift away from
carbon-intensive energy sources and industries presents a
transition risk to companies, workers, and communities.
If the federal government doesn't take these actions now, Biden
warned "the competitiveness of US companies and markets, the life
savings and pensions of US workers and families, and the ability of
US financial institutions to serve communities" will be at
stake.
Lead by example
To prepare for these risks, the order directed the federal
government to lead by example.
Under this directive, the Federal Acquisition Regulatory (FAR)
Council, which governs federal procurement practices, has been
asked to look at amending regulations to enable federal agencies to
consider the social cost of GHGs in all procurement decisions "and,
where appropriate and feasible, give preference to bids and
proposals from suppliers with a lower social cost."
In a 21 May telephone conversation, Dan Graham, vice-chair of
Vinson & Elkins' government contracts practice group, said
Biden's order contemplates a "sea change in federal procurement
practices."
From a legal standpoint, Graham said the FAR Council can
accommodate the changes in regulations to incorporate the climate
directive as long as it stays within statutory boundaries, such as
making sure all bids are competitive
Implementing this directive though is another matter altogether,
Graham said.
"The real question is who in the federal acquisition workforce
or the FAR Council is qualified to assess the social cost of
carbon…Will this mean hiring new personnel and staff?" Graham said,
adding that "the federal acquisition workforce hasn't done it
before and there is no one there to my knowledge who has the
qualifications."
Potential changes in finance
The 20 May order is not just limited to the climate risk posed
by goods and services that federal agencies will purchase. It also
includes a series of deadlines for various federal agency heads and
White House advisers, including a directive to rescind two US
Department of Labor (DOL) rules that took effect less than 10 days
before Biden took office.
National Climate Advisor Gina McCarthy and National Economic
Council Director Brian Deese are also given 120 days to develop a
government-wide climate-risk strategy to identify and disclose
climate-related financial risk to government programs, assets, and
liabilities.
This strategy, the order said, also will identify the public and
private financing needed to reach Biden's economywide net-zero
emissions goal by 2050—while advancing economic opportunity,
worker empowerment, and environmental mitigation, especially in
disadvantaged communities and communities of color.
It also gives McCarthy and Deese 180 days to submit a report
detailing actions that can be taken under federal employment
retirement laws to protect the life savings and pensions of US
workers and their families from the threats of climate-related
financial risks.
These actions include publishing a rule by September of this
year to suspend, revise, or rescind two DOL rules -- "Financial
Factors in Selecting Plan Investments" and the "Fiduciary Duties
Regarding Proxy Voting and Shareholder Rights" -- that would
restrict retirement plan advisors from considering corporate
environmental, social and governance (ESG) risk as a factor when
making investments. DOL in March
announced it would not enforce these rules.
Of particular interest to investors and analysts alike is the
directive to Secretary of the Treasury Janet Yellen, in her
capacity as the chair of the US Financial Stability Oversight
Council (FSOC), to prepare a report within 180 days to recommend
actions to reduce risks to financial stability. Congress created
the FSOC in 2010 after the subprime mortgage crisis to identify and
monitor risks as well as to respond to emerging threats to
financial stability.
This report also would include plans that the council's member
agencies—the Securities and Exchange Commission (SEC), the
Commodity Futures Trading Commission (CFTC), Federal Deposit
Insurance Corporation (FDIC), the Consumer Protection Bureau, and
the Federal Housing Commission—are taking to incorporate
climate-related financial risk into regulatory and supervisory
practices.
IHS Markit CleanTech Executive Director Peter Gardett, who
tracks global climate-related investments, said "the order is
descriptive, not prescriptive, but it clears the way for some
extremely powerful potential changes in finance stemming from a new
approach to climate risk."
The Biden administration has made it clear that "what gets
measured, gets managed, and that disclosure of the way physical
climate change results in financial losses will create a meaningful
mechanism for change," Gardett added.
Agencies already on a roll
Yellen and other federal regulators have already been
implementing what the Biden order puts down in writing. In her
first meeting as FSOC chair on 31 March, Yellen announced that climate change
risks would be a focus of emerging risks for the council moving
forward. At the same meeting, she asked staff at the US Federal
Reserve Board (Fed) to report on the steps it was taking to account
for financial risks, and for Fed Chairman Michael Powell to comment
on those efforts.
The SEC also is receiving public comment to improve reporting of
climate risk by publicly traded companies that critics say is
currently inconsistent and incomplete. The CFTC also announced in
March it was creating a unit to facilitate with price discovery of
any new derivative and futures products related to climate
risk.
According to IHS Markit's Gardett, companies and investors will
find out four months from now how the US government is matching its
national climate commitment under the 2015 Paris Agreement on
climate to activities in the real economy. Biden has announced a
goal to halve GHG emissions by 2030 compared with 2005 levels and
reach net-zero carbon levels by mid-century.
"By assigning dollar values to emissions reductions, investors
will hear from Brian Deese and Gina McCarthy what they need to know
about how the federal government will approach carbon accounting
under this administration," he added.
Arriving just ahead of the UN COP26 meeting on climate, Gardett
said, the FSOC's report also will carry weight not just for the
Biden administration that is trying to take the lead on tackling
climate, but also for investors. Gardett said the FSOC report has
the potential to "significantly and forcefully redirect the flows
of capital through lending, investing and financial product trade"
as well as altering the ways banks assign risk in their lending
portfolios.
"By assigning higher risk metrics to financed emissions, bank
regulators have the latent power to accelerate and compound the
shift of capital available to cleantech while limiting the balance
sheet space available to fossil fuels," Gardett said.
A bold statement
Ceres, a network of investors interested in pursuing sustainable
solutions, has been pushing for the changes contained in Biden's
order. In a June 2020 report, Ceres urged
the FSOC to make climate impacts a priority.
Steven Rothstein, Ceres Accelerator for Sustainable Capital
Markets managing director, said the 20 May order on climate
financial risk was long overdue, but was "a bold statement from the
Biden administration" that contains many valuable initiatives.
In a 20 May telephone interview, Rothstein said what caught his
eye was the order's directive requiring vendors to the federal
government to disclose climate risks for the goods they sell or
services they offer for the first time. "That's another example of
an important step that has never before been take in the United
States and another example of leadership under the Biden-Harris
administration," he said.
Asking the Treasury Secretary to require all agencies to address
climate risks and to report back in 180 days was another important
initiative included in the order, he said.
From an investor's perspective, the Department of the Treasury
and the federal agencies it oversees have a big stake in the
process, he said, adding that "climate change can be a significant
financial opportunity for the marketplace, but it also can be a
significant financial risk if it isn't properly anticipated."
In an April report, "Turning up the heat: the need for
urgent action by US financial regulators in addressing climate
risk," Ceres included a scorecard (see below) ranking federal
agencies on the basis of climate-related actions they had taken as
of 30 March.
"Some agencies are showing great leadership, turning up the heat
on climate action, while others are not yet there, and still others
are not taking any action," Rothstein added.
The SEC, the Fed, the CFTC and the Treasury were all ranked as
agencies that are proactively taking actions to address climate
risks, while the Municipal Securities Rulemaking Board, which deals
with municipal debt, the FDIC, and the National Credit Union
Administration were seen as lagging.
Source: Ceres Accelerator for Sustainable Capital Markets
Public signaling
The executive order should be read as "a lot of public signaling
on the work these agencies already are undertaking," said Margaret
Peloso, a Vinson & Elkins attorney specializing in climate
financial risk who participated in the 21 May conversation with
Graham.
"I think it might be premature to sit in judgment about a brand
new staff that wraps its arms around how to address climate-related
risk," Peloso said, adding it would be worth heeding what these
agencies do in the coming months.
The nonprofit Center for American Progress also welcomed the
steps contained in the order, saying they safeguard the financial
system from climate risk and would prompt a transition toward a
more sustainable economy.
"The White House's leadership today puts wind at the sails for
US financial regulators, who should swiftly integrate climate
change into their regulatory and supervisory frameworks to protect
the US economy from the devastating harms of a climate-driven
financial crash," Andres Vinelli, CAP vice president for economic
policy, said in a 20 May statement.
Posted 21 May 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst
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