MEMO: One year since President Biden’s Executive Order on Climate Finance, progress is minimal

One year ago, President Biden issued an executive order that solidified the administration’s commitment to using all of the federal government’s resources and authority to combat the threat that climate change poses to the U.S. financial system. Among its sweeping mandates, the order required every federal agency to assess the climate-related financial risk to the stability of the U.S. financial system and issue “recommendations on how identified climate-related financial risk can be mitigated, including through new or revised regulatory standards as appropriate.”

The initial promise of President Biden’s Executive Order has been followed by a year of uneven progress. A handful of financial regulators have taken early steps in following through on the order, however progress has not met the urgency of the threat.

A Slow Start: The FSOC Report and Uneven Progress at the Agencies

Despite the order’s mandate that Treasury Secretary Yellen lead on this issue as the chair of the Financial Stability Oversight Council (FSOC), the report issued in October 2021 by FSOC missed a key opportunity to chart a comprehensive course to mitigate climate risk in the financial sector. On one hand, the report was important, in that it:

affirmed the serious risk the climate crisis poses to the U.S;
emphasized that regulators have the authority and obligation to address climate change;
acknowledged the need for policy responses that address the disproportionate climate impacts on vulnerable communities; and
articulated steps regulators can take in the near term, including the need for corporate disclosure of climate risks and supervisory guidance on how to manage those risks.

However, the report fell short in several key areas. Most glaringly, it failed to include key tools to limit risks to the financial system, the economy, and communities posed by Wall Street’s risky investments in fossil fuels, and it failed to acknowledge that financial institutions are increasing climate-related financial risk by heavily financing the expansion of the fossil fuel industry.

Since the report was published, regulators have taken key steps to address climate-related financial risk. These steps are significant, but the draft proposals below will only meet their promises if they are kept strong, finalized quickly, and implemented and enforced consistently across regulators with appropriate vigor:

The Office of the Comptroller of the Currency (OCC) and the The Federal Insurance Office (FIO), released draft supervisory guidance for how banks should manage the risks related to climate change (OCC, FIO). The guidance is an important step in preserving financial stability and protecting vulnerable communities from the financial impacts of climate change.
The Federal Insurance Office (FIO) issued a Request for Information on the Insurance Sector and Climate-Related Financial Risk, assessing the significant risks posed by climate change to insurers, consumers, underserved communities, and the broader financial system.

The Securities and Exchange Commission (SEC) released a draft rule that will require publicly traded companies to publicly disclose their greenhouse gas emissions, as well as the climate risks their businesses face. It also stepped up enforcement on existing requirements for climate-related risk disclosures.
The FDIC, OCC, and Federal Reserve Board collectively released a proposed rule to modernize regulations that implement the Community Reinvestment Act (CRA). The proposal incorporates climate resiliency and, if implemented, could facilitate increased investments in communities for projects that safeguard against the impacts of climate change.
The Department of Labor (DOL) released a proposed rule that would allow and encourage private retirement plan fiduciaries to consider environmental, social, and governance (ESG) factors and select ESG funds as they manage workers and retirees’ invested savings.

These initial steps from regulators demonstrate forward momentum in climate-related financial regulation, but the progress remains uneven and does not meet the urgency that this moment demands. Progress has been stymied by opposition from the fossil fuel industry and the administration’s slow pace in nominating regulators and adequately supporting those nominees to confirmation.

What must happen now:

It is clear from intense opposition to existing rulemaking that the fossil fuel industry and aligned Republican leadership are set to oppose all regulatory action on climate-related financial risk. The Biden Administration and regulatory bodies must respond with greater urgency to fulfill their mandate, not just given by the Executive Order, but by their duty to protect American households from the overwhelming systemic financial threats that climate change poses.

Looking toward the next year and beyond, Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen must address climate-risk head on. As the chief regulators responsible for protecting the economy from systemic risks, their failure to rein in the continued reckless behavior of Wall Street puts economic stability at risk. Everyday Americans will pay the price if federal inaction continues, with the heaviest burden falling disproportionately on marginalized communities, working people, and people of color.

Crucial next steps for regulators include:

Strengthening and finalizing the SEC’s climate risk disclosure rule, including Scope 3 emissions disclosure for all filers.
The Federal Reserve, FDIC, and OCC must finalize principles for climate financial risk management at large banks, and issue additional guidance, adopting best practices from counterparts in Europe and the Network for Greening the Financial System.
Regulators must issue guidance for conducting scenario analyses and announce plans to conduct a system wide climate stress test to evaluate whether capital surcharges, concentration and/or portfolio limits or other macroprudential stabilizers are needed.
FSOC must withdraw 2019 guidance that made designation of Systemically Important Financial Institutions more difficult, and adopt new guidance that includes climate risk in its criteria for designating a nonbank as one such institution.
The DOL must strengthen and finalize its ESG fiduciary duty proposed rule to further encourage ESG investing strategies and set minimum standards for consideration of systemic risks like climate change, racial and economic inequality, and threats to democracy.
The SEC must propose and finalize a rule to standardize the naming conventions and disclosure requirements for “ESG”, “green”, and “low-carbon” investment funds, to stamp out the rampant greenwashing in the current marketplace, and require investment advisers to disclose how they consider ESG factors in their asset management.
The Federal Reserve, FDIC, and OCC must finalize a strong Community Reinvestment Act that helps climate-vulnerable communities secure the investment they need to mitigate and adapt climate risk to their homes and lives.

The sooner regulators act to meaningfully limit the drivers of systemic climate financial risk, the greater the likelihood of a smooth transition to a financial system that can withstand changes that the climate crisis is and will continue to inflict on our economy. This will also safeguard our economy and communities, especially working people, poor communities, and communities of color, from the threat of a climate-driven economic crash.

Quotes:

“In the year since President Biden issued this executive order, his administration has taken crucial preliminary steps to make the financial industry more resilient to growing climate risks. But as the climate crisis worsens, it is increasingly urgent for the federal government to take decisive action that would protect our economy – and especially our working families – from the threat of a climate-driven financial crash. Federal financial regulators already have all of the tools they need to rein in Wall Street’s risky investments and help facilitate a stable and just transition to clean energy. Now, we just need them to act,” said Adele Shraiman, campaign representative with the Sierra Club’s Fossil-Free Finance campaign.

“What we’re advocating for here is nothing more than for this country’s financial regulators to fulfill their obligations under the law. We need to see regulators tune out the noise from fossil fuel and Wall Street interests which would rather see existing legal mandates go unimplemented in order to protect their profits. Congress can only exempt climate crisis-induced instability from financial regulatory law by actually passing (terrible) laws for which there is obviously insufficient support, not by bullying regulators,” said Dorothy Slater, senior researcher at the Revolving Door Project.

“In the lead up to the Global Financial Crisis we saw the housing and financial industries downplay risks to communities and financial stability of the subprime mortgage and credit default swap markets. Today, we’re seeing the fossil fuel and financial industries downplay the risks to communities and financial stability of fossil fuel production and carbon markets. The administration has taken important steps to study climate-related financial risk, but now is the time for it to take action to mitigate those risks,” said Moira Birss, Climate at Finance Director at Amazon Watch.

“One year ago, the Biden Administration made clear that it understood the imperative to address climate-related financial risks. The past year’s volatile fossil fuel prices emphasize the need to urgently manage the threat that reliance on oil and gas poses to our financial system. It’s time for regulators to acknowledge how financial institutions contribute to climate-related financial risk through their funding of expansion of fossil fuels and to take critical next steps to protect our economy,” said David Arkush, Climate Program Director at Public Citizen.

“From record-breaking heatwaves in India and to extreme and deadly flooding in South Africa, climate chaos is already devastating frontline Black and Brown communities across the globe. These crises underscore why the Biden administration and financial regulators must use every tool at their disposal to urgently reign in Wall Street’s reckless financing of the climate-chaos causing fossil fuel industry. As we saw in the wake of the 2008 financial crash, in the U.S. and abroad, communities of color will be hit first and worst by shocks to our financial system and will be doubly harmed by extreme weather events as climate change worsens,” said Erika Thi Patterson, Action Center on Race and the Economy.

“When President Biden signed his Executive Order on climate-related financial risk, it was an historic acknowledgement of the threat that a climate-fueled recession poses to the financial security of every American. Unfortunately, one year later the economic risk that climate change poses to Americans’ homes, retirement savings, and small businesses has only grown. While some agencies have taken vital first steps, much more action is needed. As Chair of the Financial Security Oversight Council, Secretary Yellen must prioritize action in the next year to rein in the American people’s exposure to climate-related financial risk from both physical and transition related sources,” said Lena Moffitt, Evergreen Action Chief of Staff.