Section 1: Policy

What the EO says: This section establishes the overall policy of the Biden administration: climate-fueled disasters and the necessary transition away from fossil fuels pose risks to our financial stability, and the president directs federal agencies to address that risk and its drivers to facilitate a smooth and equitable transition. 

What relevant agencies must do: To adequately seize the moment, the federal government must use all of the tools at its disposal to rein in the climate crisis and its associated financial harms. This entails two primary components of action for federal regulators:  

1. Working to ramp down the financial sector’s contributions to climate risk; 
2. Ensuring that our financial system remains resilient in the face of the mounting impacts of the crisis. 
    

Both are essential components of an all of government approach to climate action. Each relevant federal financial regulator should initiate regulatory action, where appropriate, as quickly as possible to accomplish these goals. We have no time to waste, and we can’t afford to leave any tools on the table. 

Section 2: Climate-Related Financial Risk Strategy

What the EO says: In this section, the Director of the National Economic Council and the National Climate Advisor are tasked with outlining a “Government-wide strategy” for addressing climate-related financial risk by Friday, September 17th.

What relevant agencies must do: The best way to reduce climate-related financial risk is to reduce the production and use of fossil fuels that worsen the climate crisis. This production wouldn’t happen without financing. So this government-wide strategy should recommend that the federal government reduce its own financing of fossil fuels wherever possible, as quickly as possible, in line with science-based targets and national commitments. The strategy must also call on all federal agencies to use their authority to encourage (or require, where possible) the private sector to reduce financing of fossil fuels in line with our national climate targets. By shifting financing from fossil fuels toward clean energy, this strategy can help jumpstart a more just and sustainable economy and prevent increased climate-related risks to our financial sector. 

The report must also emphasize that unless needed government intervention addresses climate financial risks and their drivers, the costs will ultimately be borne most heavily by low-income communities and communities of color. Taking action to address Wall Street’s contributions to the climate crisis is not only the fiscally prudent, responsible thing to do, it is a matter of racial and economic justice, in line with the President’s commitments.  

The administration should also promptly publish this “strategy” as a report available to the public. 

Section 3: Assessment of Climate-Related Financial Risk by Financial Regulators

What the EO says: In Section 3, the Secretary of the Treasury is tasked with working with the independent federal financial regulators that make up the Financial Stability Oversight Council (FSOC) to issue a report outlining how these agencies can integrate climate change risks into their policies and programs by November 16th. 

What relevant agencies must do: The FSOC was created by Congress after the 2008 financial crisis to facilitate inter-agency coordination, information-sharing, planning, and mitigation of financial stability threats, with the goal of avoiding another financial meltdown caused by unaddressed systemic risks. Put simply, FSOC was formed to help our government effectively deal with complex problems posing systemic risks to our financial system and broader economy—precisely like climate change. 

To fulfill this role, the FSOC’s report under Section 3 (a) of the Order should include a roadmap for each FSOC member agency, outlining the full range of concrete actions they can and should take to decrease regulated entities' contributions to the climate crisis and associated financial risk, as well as to bolster the financial system against those associated risks. For instance, the report should call on banking regulators to quickly leverage the tools at their disposal to address climate risks and their drivers, including (but not limited to):

• Requiring banks to disclose the climate risks they face, including the greenhouse gas pollution that they finance, to help investors, regulators, and the general public understand whether the company’s assets and balance sheets align with a sustainable, low-carbon economy;
• Requiring climate stress tests to model the impacts of climate change on individual financial institutions and the financial system, determining their resilience to such shocks;  
• Requiring banks to maintain greater amounts of capital (known as “capital requirements”) when they hold risky, high-carbon assets, thus making these assets more expensive by forcing the internalization of some of their associated risks.

Finally, this report must demonstrate an understanding that financial regulators ultimately have the authority to directly limit financial institutions’ investment in the drivers of climate change (fossil fuels) and can require that investment portfolios align their emissions with science-based targets. This report must reflect that, and lay the groundwork for them to do so.

Section 4: Resilience of Life Savings and Pensions

What the EO says: In Section 4, the Secretary of Labor is tasked with crafting a report identifying actions that can be taken to protect the life savings and pensions of U.S. workers and families from the threats of climate-related financial risks. 

What relevant agencies must do: This report must recommend that fund managers, including the Federal Retirement Thrift Investment Board, incorporate climate risk and sustainability into their investment guidelines so that they must weigh these risks when investing on behalf of workers and retirees. Such action should, where possible, mean limiting investments in fossil fuel companies or other climate change-driving assets and divesting from those currently within their portfolios as quickly as possible. 

Additionally, the report should include guidance for federal investment fund managers to use when voting on shareholder resolutions pertaining to those funds in which federal workers and retiree’s dollars are invested. This guidance should outline how fund managers should integrate consideration of climate-related financial risk and its drivers in voting decisions, supporting those shareholder resolutions that drive funds away from climate-risky investments towards more sustainable portfolios, in line with scientifically-backed climate commitments. 

Section 5: Federal Lending, Underwriting, and Procurement

What the EO says: In Section 5, various federal officials are charged with assessing how federal lending, underwriting, and procurement decisions can better integrate the realities of the climate crisis. 

What relevant agencies must do: As one of the world’s largest purchasers, lenders, and insurers, the federal government has immense influence, and has already taken some steps in the right direction. For instance, the overhaul to the Federal Flood Insurance Program via Risk 2.0 was able to better integrate and price-in the risks climate change poses to policy-holders’ assets. This trend should continue, including through the following: 

• With regards to federal lending programs as referenced in Section 5 (a) of the Order, the White House Office of Management and Budget (OMB) should outline a strategy that will align federal lending with science-based targets to achieve a 50% reduction in greenhouse gases by 2030. For instance, past programs like the Mainstreet Lending Program, meant to bolster the US economy through sound investments in viable businesses, lent significant sums to fossil fuel corporations (as of December 2020 outstanding loans to oil and gas companies from this program totaled $2.2B). In addition to the direct impact this money had, such lending also made clear to other fossil fuel companies that they could count on the federal government as a backstop while continuing to worsen the climate crisis. Programs must bar federal financing for fossil fuel corporations. 
• With regards to federal procurement, as referenced in Section 5 (b) of the Order, the Federal Acquisition Regulatory Council (the body charged with overseeing federal procurement processes and practices), in collaboration with the White House Council on Environmental Quality, should require major federal suppliers to publicly disclose pollution they are financing and climate-related financial risks. These suppliers should also be required to set science-based pollution reduction targets in line with the US goal of cutting greenhouse gas emissions 50% by 2030. To the extent feasible, the Federal Acquisition Regulation (the FAR, which outlines the “rules” for federal procurement contracts) should be amended to penalize existing contractors whose plans fail to meet these standards. 
• With regard to specific federal lending programs referenced in Section (c) of the Order, the Secretaries of Agriculture, Housing and Urban Development, and Veterans Affairs should outline recommendations for fully integrating climate risk considerations into the loan underwriting standards for their agencies.

Section 6: Long-Term Budget Outlook

What the EO says: Section 6 explicitly recognizes the increased costs to the federal government associated with climate change, and orders the Director of the White House Office of Management and Budget, in consultation with several others, to use their budgetary tools to measure and mitigate those costs via the formulation of the President’s budget and its implementation. 

What relevant agencies must do: The federal budget, and what gets included (and what doesn’t), is a hugely powerful tool, both symbolically and substantively. This section presents another critically important opportunity for the Administration to prepare our government to withstand the impacts of climate change, and to reduce its contributions to the crisis. 

As part of this section, the Director of OMB should make public the methodologies they will use to quantify the economic risks posed to the federal government by the impacts of climate change, as requested in Section 6 (a), and ensure they adequately reflect the financial impacts of both physical and transition risks. 

In response to Section 6 (c), which directs OMB to “reduce the Federal Government’s exposure to long-term climate-related financial risk” via the budget process, OMB must explain how it will reduce contributions to the climate crisis and the financial risk inherently associated with it. This should include consistent adherence to all recommendations listed in sections above, including aligning federal investments with science-based targets, avoiding investments in fossil fuels wherever possible, and enhancing investments in clean energy solutions to the climate crisis. This guidance should be presented as part of the President’s Fiscal Year 2023 Budget Request. 

Conclusion

While the Biden administration has already taken promising actions, it is critical that the administration continue to leverage all of the tools at its disposal—and one of the most impactful is the authority of financial regulators to stop the flow of money into fossil fuels and other drivers of climate change. We know it’s possible, and absolutely necessary for federal regulators to fulfill their mandate to protect the economy—now it’s time for action.