Joe Biden’s new decree on financial system climate risk – Quartz


Climate change poses a serious risk to the financial system. Catastrophic impacts such as sea level rise and drought threaten critical supply chains, mortgages and infrastructure, and the increasingly shift to fossil fuels could destabilize banks’ investments in fossil fuel companies. Savings accounts and pension funds are threatened. Yet so far only a minority of global banks have attempted to calculate their exposure to climate risk, let alone made it public.

That could change soon in the United States, following a new executive order issued by President Joe Biden on the evening of May 20, which mandates the development of new rules and priorities for a host of federal agencies whose work concern the financial system. The ordinance broadly aims to identify and mitigate climate-related risks and directs the Secretary of the Treasury, the Director of the National Economic Council (NEC) and other senior officials to report in the coming months on how the financial regulations, federal loans, and procurement policy should be redesigned to encourage more private sector capital to flow into clean energy and other climate-friendly investments.

The order sets an ambitious agenda, but leaves most of the important details undecided. Above all, the order is vague on its ultimate scope: how far will the government go to crack down on carbon-intensive finance? Is just getting banks and other businesses to disclose their carbon footprints precipitating progress in eliminating climate risk? Or do regulators need to be more proactive?

“The substantive question is how much emphasis will be placed on risk assessment and disclosure, versus regulatory oversight that mitigates the risk itself,” said Madison Condon, professor of environmental law. and financial at Boston University. “Regulators that oversee banks and lenders could take a step forward and actually penalize agencies whose loans are contributing to the climate crisis.”

Will the US follow the EU model on climate risk?

The ordinance states that the administration’s objective is to “advance the consistent, clear, intelligible, comparable and precise disclosure of climate-related financial risks … while taking into account and addressing the disparate impacts on disadvantaged communities and communities of color. ” To that end, it directs officials from various government departments to investigate climate risks in public pension plans, federal loans, and flood insurance programs, as well as the federal budget. He recommends overturning a Trump-era order that prohibited financial institutions from making investment decisions based on environmental, social and governance (ESG) factors. And it seeks to relax government purchasing power by forcing government contractors to disclose their carbon footprint and potentially giving preferential treatment to greener bidders.

These steps bring the United States closer to alignment with the European Union, which has grappled with these issues for some years now, and has taken some preliminary steps towards proactive surveillance. In April, the European Commission released a so-called ‘taxonomy of sustainable finance’, which set out specific rules on what types of investment can be considered green, rules that regulators could potentially use to force banks to transfer. their assets. But the rules have taken years of intensive lobbying to develop and remain uncertain over the crucial question of whether natural gas is considered green. If the US wanted to follow suit, it would need to develop a similar list or replicate the EU’s.

Still, the great climate diplomat John Kerry suggested in April that disclosure alone might be enough, saying that “suddenly people are going to be doing assessments taking into account the long-term risk for the investment due to the climate crisis.

There is no doubt that better disclosure requirements would help hold polluting companies accountable for their stated decarbonization goals, Condon said. Yet this may not be enough. Banks (and businesses, in general) will have to wait a few months until the agency’s reports reach the president’s office to get a better idea of ​​the work they have to do and the pressure to give up. fossil fuels.

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