The order is a key lever in the Biden Administration’s climate agenda and puts the US closer in step with developments in Europe.

By Paul A. Davies and Andra Troy*

On May 20, 2021, President Joe Biden signed into effect an Executive Order on Climate-Related Financial Risk (Executive Order) aimed at addressing the threat that climate change poses to US financial stability. The Executive Order requires federal agencies, including financial regulators, to undertake work to advance clear and comparable disclosure of climate-related financial risks and act to mitigate such risk and its drivers.

The Biden Administration has taken a number of actions to enact a “whole of government” approach to climate change, including re-entering the Paris Agreement and directing every governmental agency to address environmental justice, the impacts of greenhouse gas emissions, clean energy financing, and more.

“The intensifying impacts of climate change present physical risk to assets, publicly traded securities, private investments, and companies,” said President Biden in the Executive Order. “The failure of financial institutions to appropriately and adequately account for and measure these physical and transition risks threatens 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.” The Executive Order’s whole of government instruction for a government-wide climate-risk strategy calls for identifying the public and private means to achieving net carbon neutrality by 2050.

Key Points of Executive Order

The Executive Order specifically instructs Treasury Secretary Janet Yellen to work with the Financial Stability Oversight Council (FSOC) to:

• Assess climate-related financial risks, both physical and transitional, to the stability of the US federal government and financial system
• Share climate-related financial risk information among FSOC member agencies and other executive agencies as appropriate
• Produce a report within 180 days of the order on the efforts of FSOC member agencies to integrate climate-related financial risk considerations, including any potential recommendations or current practices to enhance climate-related disclosures by regulated entities

The focus on creating greater transparency and consistency in climate-related financial disclosures echoes the calls from investors and corporates alike for action in relation to ESG disclosures. The Executive Order further requires consideration from Labor Secretary Marty Walsh to suspend, revise, or rescind two Trump-era rules that sought to prohibit investment firms from taking ESG considerations into account when making investment decisions, reflecting the increased demand for ESG investing globally.

Formal ESG disclosure regulation has been developing across the Atlantic in recent times, with the European Commission’s adoption of the Corporate Sustainability Reporting Directive (CSRD) earlier this year a prime example. While the Biden Administration appears to be focusing on climate-related risk disclosures, it could potentially take a broader approach. In particular, the Biden Administration could incorporate the ESG framework being developed by the IFRS Foundation — a framework the European Commission has indicated it intends to work with in relation to the CSRD. This possibility may be supported by National Economic Council Director Brian Deese, who whilst announcing the Executive Order made clear the importance of harmonizing US standards with those of other nations. This potential harmonization will be a key issue to monitor moving forwards.

Key Takeaways

The Executive Order is as a key lever in the Biden Administration’s climate agenda to cut US greenhouse gas emissions by almost half by 2030 and to net zero by 2050. Consolidation and (to the extent possible) homogenization of climate-related and broader ESG reporting standards has been a key issue for companies and investors worldwide since the marked increase in interest in climate and ESG-focused investing over the past number of years. Now the US is laying a path towards mandating federal agencies and public companies to further disclose climate risk data, putting the US closer in step with developments in Europe.

Given the detail to still be announced in the form of the reports commissioned by the Executive Order, it will be interesting to monitor what additional climate-related disclosure obligations are placed on US public companies moving forward, and how any such obligations align with those that are or will be required by European legislation and international standards (such as those of the Task Force on Climate-related Financial Disclosures (TCFD)). Notably, the Executive Order was signed just two days after the release of the International Energy Agency’s Net Zero by 2050 roadmap (a document whose importance US climate envoy John Kerry said he believed in “very deeply”) and a few months before the COP 26 summit in Glasgow. Given the timing, it is clear that climate-related financial risks and mandatory disclosures will continue to be a priority for legislators and governments globally.

Latham & Watkins will continue to monitor developments in this area.

This post was written with the assistance of James Bee in the London office of Latham & Watkins.

*Admitted to practice in New York only