Climate change is an imminent U.S. financial risk. According to a study conducted by the National Bureau of Economic Research, continued temperature increases and failure to drastically cut emissions could result in a 10.5% cut in U.S. GDP alone by 2100.
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Climate-Related Financial Risk: (Net) Zeroing in on Key Private Equity Considerations under the Biden Administration’s Executive Order
On May 20, 2021, President Biden signed an Executive Order on Climate-Related Financial Risk, which outlines various initiatives to promote policies related to physical and transition risks associated with climate change and to prioritize federal investments in support of those policies. In this alert, we focus on key aspects of the order that could have implications for private equity funds and areas of consideration for asset managers as a whole.
Executive Order On Climate-Related Financial Risk: One Small Step For Climate, One Giant Leap For Federal Climate Policy
On May 20, 2021, President Biden signed a long-anticipated Executive Order on Climate-Related Financial Risk (the “Executive Order”). The Executive Order establishes a policy “to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk,” addressing such broadly varying actions as potential regulation of climate risk in the U.S. financial system and addressing the Department of Labor’s (“DOL”) Trump-era ESG investing rules.
Climate change poses a grave risk to the financial system. Catastrophic impacts like sea level rise and drought threaten critical supply chains, home mortgages, and infrastructure, and the escalating transition away from fossil fuels could destabilize banks’ investments in fossil energy companies. Savings accounts and pension funds, in turn, are in jeopardy. Yet so far, only a minority of global banks have attempted to calculate their exposure to climate risk, and even fewer have publicly disclosed it.
President Biden signed an executive order on climate-related financial risk, a cross-governmental plan that directs federal agencies to identify and mitigate financial risks presented by climate change to Americans, businesses, and the government itself. The administration said that Americans are already facing risks due to worsening extreme weather events and other climate threats and they deserve to understand how these risks affect their financial security.
Remarks by Secretary of the Treasury Janet L. Yellen on the Executive Order on Climate-Related Financial Risks
Achieving net zero emissions in the United States will require transformational investments in our energy sector and the broader economy, and the global financial sector will be a crucial player, helping channel capital into investments that green our society.
But in order for the financial sector to do that, it also must be resilient to the risks that climate change poses.
President Joe Biden will direct agencies to mitigate the financial risk of climate change to homeowners, consumers, federal workers, businesses and the government itself in a sweeping executive order signed Thursday.
President Biden issued an executive order Thursday that directs agencies government-wide to launch or expand efforts to analyze and lessen economic risks stemming from climate change.
Why it matters: The order lays the groundwork for new oversight and mandates that would affect banking and other sectors. It signals growing concerns that the government lacks sophisticated understanding of how global warming creates new or growing jeopardy for financial and government institutions and consumers.