President Biden issued an Executive Order asking the Secretary of the U.S. Department of the Treasury to work with the Financial Stability Oversight Council to assess risks that climate change poses to the financial system. The Executive Order highlights the growing regulatory focus on climate-related financial risks, which will likely manifest itself through a growing number of related supervisory initiatives. This White Paper describes the Executive Order, along with recent guidance and statements of the U.S. federal and state financial services regulators, and offers a look ahead at what's next.
President Biden's Executive Order on Climate-Related Financial Risk ("Climate Risk Executive Order") instructs the Secretary of the U.S. Department of the Treasury ("Treasury Secretary"), as Chairperson of the Financial Stability Oversight Council ("FSOC"), to work with members of the FSOC to assess the risks that climate change poses to the U.S. financial system, laying the foundation for future regulatory direction. The FSOC is a collaborative body that brings together the expertise of the federal financial regulators, state regulators, and an independent insurance expert, appointed by the President, to identify risks and respond to emerging threats to U.S. financial stability
Management of environmental, social, and governance ("ESG") risks is emerging as a top challenge for financial institutions and their customers. While U.S. regulators have not yet issued significant rules with respect to what a financial institution must do to address these risks, international and U.S. regulators and policymakers are focused on development of an appropriate ESG-related regulatory and supervisory framework.
The Climate Risk Executive Order contemplates, among other actions, that the FSOC will issue a report to the President, by November 17, 2021, that describes the efforts of the FSOC member agencies to integrate consideration of climate-related financial risk into their policies and programs and that recommends risk mitigants, including new or revised regulatory standards. As the agencies collaborate and develop new regulatory standards on climate-related risks, financial institutions may expect to see additional climate-related supervisory guidance and new regulations.
This White Paper describes the Climate Risk Executive Order, along with recent guidance and statements of the U.S. federal and state financial services regulators, and offers a look ahead at what's next. The environmental portion of ESG generally considers how a financial institution performs as a steward of natural resources. Although the "E" in ESG is receiving the greatest regulatory attention, international and domestic legal and regulatory ESG-related initiatives will continue to evolve at an increasing pace, with attention to issues beyond climate change. Jones Day will publish additional analyses as significant ESG-related initiatives are announced.
EXECUTIVE ORDER ON CLIMATE-RELATED FINANCIAL RISK
An important goal of the Climate Risk Executive Order is to encourage the FSOC member agencies to share climaterelated financial risk data and information among themselves and with other executive branch departments and agencies to help ensure sound decision-making. (Read our previous Alert, "White House Instructs Agencies to Analyze and Mitigate "Climate-Related Financial Risk.") The Climate Risk Executive Order directs the Treasury Secretary, as the Chairperson of the FSOC, to engage with FSOC members to consider several enumerated climate-related actions by the FSOC. Altogether, these actions are intended to promote the FSOC member agencies' assessment, coordination, and sharing of information on climate-related financial risks. Although the Climate Risk Executive Order does not apply to the independent agencies that are members of the FSOC, such as the federal bank regulators, these agencies are likely to participate in the FSOC's analysis and activities pursuant to the Climate Risk Executive Order as well as to engage in additional analysis and activities aligned with the objectives of the Climate Risk Executive Order.
The Climate Risk Executive Order envisions that the FSOC member agencies will assess climate-related financial risks, including physical and transition risks, to the stability of the U.S. financial system, in a detailed and comprehensive manner. Physical risks the agencies will review include the potential for loss resulting from climate-related damage to the value and use of assets and from disruption of business operations, capital, and economic activity. Transition risks the agencies will review include the potential for loss resulting from decreasing valuations due to gravitation toward a lower-carbon economy, consumer sentiment about environmental risks, and technological innovations.
Pursuant to the Climate Risk Executive Order, the FSOC will issue a report to the President, by November 17, 2021, on efforts by the FSOC member agencies to integrate consideration of climate-related financial risk into their policies and programs. This report to the President is separate from the FSOC's annual report to Congress, and the Climate Risk Executive Order provides that the FSOC's annual report to Congress will include an assessment of climate-related financial risks.
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