Biden prepares climate-related financial risk order

President Joe Biden is reported to be preparing a major executive order intended to identify and mitigate climate-related financial risk across government, and to secure the financial future of the United States and major sectors of the US economy.

According to Politico:

President Joe Biden is preparing to instruct federal agencies to take sweeping action to combat climate-related financial risks to government and the economy, including moves that could impose new regulations on businesses.

In a draft executive order obtained by POLITICO, Biden reaches into all corners of the federal government with plans that would touch every sector of American industry, including banking and insurance, oil and gas, housing, agriculture, and federal contracting, purchasing and lending.

This action is a vital response to the “macrocritical risk” posed by major climate-related impacts and disruptions. Macrocritical means such factors play a critical role in determining the overall size, health, and potential of an economy.

This order would build on work of the CPR Task Force (climate preparedness and resilience) that advised the Obama-Biden administration to ensure climate-related risks and costs were properly accounted for in budgets, both at the federal level and by entities receiving federal funds. That guidance was a response to the general lack of climate-related risk planning in mainstream budgeting at the time.

  • In September 2020, the Commodity Futures Trading Commission issued a report which found that unchecked climate disruption posed an existential threat to the entire US financial system, and to its ability to sustain the wider US economy.

  • In November 2020, the Federal Reserve Bank announced it would be seeking to join the Network for Greening the Financial System—a group of central banks working together to develop strategies for mitigating the cost of climate disruption.

  • Treasury Secretary Janet Yellen has recognized the fiscal challenges climate disruption will pose to the US going forward, and the need to lead in developing strategies to reduce cost and risk through mainstream financial activity.

Finance ministries have also been working to identify strategies for revealing and mitigating climate-related risk. The COP25 UN Climate Change talks in 2019 featured the historic meeting of 50 finance ministries. They focused on climate-related financial risk mitigation, and also on specific policies to drive a transition to climate-smart clean economies.

New Zealand this week became the first nation to formally require all banks to report their climate impact. That goes beyond measuring, reporting, and budgeting for risk, to ensure investors, public institutions, analysts, and consumers, have the information they need to determine whether a given institution is adding cost and harm, or investing to secure a better future.

It is worth noting that the International Monetary Fund announced in 2015 it would begin to count accumulating and foreseeable macrocritical risk against the budget projections put forward by governments. This standard, said then Managing Director Lagarde, would be applied to all nations, including donors and clients, and those not engaged with the IMF.

This is all about what Shan Agrawal and I called, in the Resilience Intel report on Interactive Risk Tracking, “safeguarding opportunity from situational risk”:

All value everywhere now carries risk tied to planetary systems. The specific character of the risk plays out differently in different contexts, and then those risks compound through critical interactions.

How we measure that risk—and whether we understand the overlapping implications of investment in unsustainable land use, or building, or energy practices—can ultimately determine whether we are investing to create value, or to undermine value creation. Four critical takeaways from the September 2020 CTFC report:

  1. Without a targeted, explicit price on carbon emissions, “financial markets will operate suboptimally,” with capital helping to exacerbate both risk and cost, while failing to invest in more efficient systems and solutions.

  2. The cascading effect of systemic, sub-systemic, and market-reaction shocks—where prices, values, and ratings, become highly volatile, as other metrics of economic health and wellbeing fail or become too unstable to be of use—could undermine otherwise stable institutions and investments.

  3. “[E]xisting legislation already provides U.S. financial regulators with wide-ranging and flexible authorities that could be used to start addressing financial climate-related risk now,” so more can (and should) be done to structure markets for the climate challenge.

  4. “Insufficient data and analytical tools to measure and manage climate-related financial risks remain a critical constraint.”

The main effect of the proposed executive action, it appears, would be to ensure there is more data available and in use, which then means more precise measurement of real-world vulnerabilities, risks, and costs. This would also help to achieve a faster timeline for developing the analytical tools that will be needed to routinely consider this information as a matter of everyday financial management.

Climate-related financial risk includes geophysical impacts like sea-level rise, but also market signals and inefficiencies. Photo credit: Joshua Sortino.

There will be some in industry who complain that they do not want new regulations, or that there will be cost burden they cannot afford. The reality is: leaders in business and banking have become increasingly alarmed at the catastrophic costs from unchecked climate disruption, and are calling for better mainstream tracking of climate-related financial risk.

April 17, 2021

310 major businesses and investors are calling on the US to cut carbon pollution by at least half by the year 2030

Their open letter reads, in part:

As business leaders, we care deeply about the future of the U.S. and the health of its people and economy. Collectively, our businesses employ nearly 6 million American workers across all 50 states, representing over $3 trillion in annual revenue, and for those of us who are investors, we represent more than $1 trillion in assets under management. We join the majority of Americans in thanking you for re-entering the U.S into the Paris Agreement and for making climate action a vital pillar of your presidency. To restore the standing of the U.S. as a global leader, we need to address the climate crisis at the pace and scale it demands. Specifically, the U.S. must adopt an emissions reduction target that will place the country on a credible pathway to reach net-zero emissions by 2050.

We, therefore, call on you to adopt the ambitious and attainable target of cutting GHG emissions by at least 50% below 2005 levels by 2030.