A new national strategy report aims to combat climate-related risks to the US financial system.

On October 14, 2021, the Biden Administration issued “A Roadmap to Build a Climate-Resilient Economy” (the Roadmap), a national strategy report with tangible initiatives that build on ideas set out in the May 2021 Executive Order on Climate-Related Financial Risk. The Roadmap is an ambitious and wide-ranging reflection of the Administration’s “whole of government” approach to combating climate change and the climate-related risks that threaten the US economy.

Climate Risk Accountability Framework

The Roadmap is premised on recognizing the intrinsic connection between climate change and the US economy, and the vital role the US government must play to proactively address climate change risks. The Roadmap is therefore built on five core principles:

  • Mobilizing public and private finance to support the transition to a net-zero, clean energy economy, and to seize the “generational opportunity” for infrastructure and employment that this transition presents
  • Protecting climate-vulnerable and disadvantaged frontline communities through investments and infrastructure
  • Protecting the government and US residents against financial risk by ensuring that federal agencies are properly accounting for, disclosing, and mitigating climate-related risks
  • Safeguarding the US financial system by holding financial institutions accountable for properly measuring, disclosing, managing, and mitigating climate-related financial risk
  • Demonstrating global leadership by engaging in international efforts (including the G7, G20, COP26, the Financial Stability Board, and standard-setting bodies) to address climate-related risks and promote consistent and effective approaches to managing these risks

The Implementation Strategy

To implement its initiatives, the Roadmap focuses on six major work streams designed to identify, measure, disclose, manage, and mitigate the systemic risks posed by climate change:

  1. Promoting the resilience of the US financial system to climate-related financial risk: Initiatives include an assessment by the US Treasury’s Federal Insurance Office (FIO) of climate-related risks in the insurance sector, especially “the availability and affordability of insurance coverage in high-risk areas, particularly for traditionally underserved communities and consumers”; and anticipated rulemaking by the Securities and Exchange Commission (SEC) of new disclosure rules that will “bring greater clarity to investors about the material risks and opportunities that climate change poses to their investments” (see this Latham Client Alert for more information).
  2. Incorporating climate-related financial risk into federal financial management and budgeting: Initiatives include updating Office of Management and Budget (OMB) guidance to incorporate a discussion of climate-related risk; developing robust climate-related risk assessments and disclosure requirements for federal agencies; and including an assessment of the federal government’s climate risk exposure and impacts on the long-term budget outlook in the FY 2023 President’s budget.
  3. Using federal procurement to address climate-related financial risk: Initiatives include potentially amending the Federal Acquisition Regulation (FAR) to require major federal suppliers to publicly disclose greenhouse gas (GHG) emissions and climate-related financial risk as well as set decarbonization targets; and ensuring that major federal agency procurements minimize the risk of climate change, including requiring the social cost of GHG emissions to be considered in procurement decisions.
  4. Protecting life savings and pensions from climate-related financial risk: Initiatives include a US Department of Labor proposal to amend the “investment duties” regulation under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), which would allow fiduciaries of pension plans (and other benefit plans covered by ERISA) to choose investments using analyses that incorporate climate change risks and other environmental, social, and governance (ESG) criteria (see this Latham post for more information).
  5. Incorporating climate-related financial risk into federal lending and underwriting: Initiatives include better integration of climate-related financial risk into federal agencies’ underwriting standards, policies and procedures, loan terms and conditions, and asset management and servicing procedures.
  6. Building resilient infrastructure and communities: Initiatives include improving the resilience of communities and federal assets against the impact of extreme weather events through federal agency climate action plans and climate information products for the public.

Climate Change as a Systemic Risk

Labeling climate change as a systemic risk is more than mere rhetoric. It allows the Financial Stability Oversight Council (FSOC) — a group consisting of the heads of every major US financial market supervisory and regulatory agency — to use all means available under statutory authority to address the risks. Indeed, the May 2021 Executive Order already directed the FSOC to assess and collaboratively address climate-related impacts on US financial system stability. According to the Roadmap, the FSOC will soon publish a report as “the first step in a robust process of US financial regulators developing the capacity and analytical tools to mitigate climate-related financial risks.”

From day one, the Biden Administration has stressed that addressing the climate crisis is at the top of its agenda. The Roadmap is the Administration’s latest — but likely not the last — bold move to steer the US toward climate risk resilience with the end goal of integrating climate risks “throughout all relevant aspects of the economy and financial system.”

For information on a parallel EU effort, see Latham’s post European Commission Releases Legislative Package to Meet Emissions Target.