Special Alert | Immediate climate risk action

Executive Order directs regulators to climate risk quantification, disclosure, and mitigation

Amy S. Matsuo

Amy S. Matsuo

Principal and National Leader, Regulatory Insights, KPMG US

+1 919-244-0266

President Biden signed the Climate-Related Financial Risk Executive Order that directs federal financial agencies to develop, and execute on, a strategy to quantify, disclose, and mitigate the financial risk of climate change on assets held by both public and private entities. The Administration states that through the Executive Order it is setting forth a policy that includes advancing “consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk” (both physical and transition risks), and acting “to mitigate that risk and its drivers, while accounting for addressing disparate impacts on disadvantaged communities and communities of color.”

The Order directs:

  • The Secretary of the Treasury (as head of the Financial Stability Oversight Council - FSOC), the Director of the National Economic Council, the National Climate Advisor, and Director of the Office of Management and Budget (OMB) to develop, within 120 days, a government-wide climate-risk strategy to:
  • Identify, measure, mitigate, and disclose climate-related financial risks to federal government programs, assets, and liabilities.
  • Determine financing needs associated with achieving net-zero greenhouse gas emissions by 2050.
  • Recognize areas where private and public investments can play complementary roles in meeting these financial needs.
  • The Secretary of the Treasury (as head of the FSOC) to engage with the FSOC members to:
  • Assess climate-related financial risk (both physical and transition risks) to the financial stability of the government and the financial system.
  • Issue a report, within 180 days, on recommendations to improve climate-related disclosures and incorporate climate-related financial risk mitigation into regulatory and supervisory practices.
  • The Federal Insurance Office, as directed by the Secretary of the Treasury, to assess climate-related issues or gaps in the supervision and regulation of insurers, and work with state regulators to examine the potential for “major disruptions” of private insurance coverage in regions particularly vulnerable to climate change.
  • The Secretary of Labor to:
  • Consider suspending, revising, or rescinding existing rules that would bar investment firms from considering environmental, social, and governance factors, including climate-related risks, in investment decisions related to pensions.
  • Assess how the Federal Retirement Thrift Investment Board has taken environmental, social and governance factors into account.
  • Report, within 180 days, on other measures to be taken to protect pensions from climate risk.
  • The Director of OMB, Director of the National Economic Council, and the Secretary of the Treasury to develop recommendations for the National Climate Task Force on approaches to integrating climate-related financial risk into federal financial management and financial reporting. Federal suppliers may be required to publicly disclose greenhouse gas emissions and climate-related financial risk, and to set reduction targets.
  • The Department of Housing and Urban Development and the Department of Agriculture to consider integrating climate-related financial risks into the underwriting standards, loan terms and conditions, and asset management and servicing procedures related to their federal lending policies and programs.
  • The Director of OMB to:
  • Identify the primary drivers of federal climate-related financial risk exposure and develop ways to quantify climate risk for purposes of federal budget projections (to be completed in consultation with other agencies).
  • To develop and publish with the Council of Economic Advisers, an assessment of the government’s climate risk exposure.

In response to the Executive Order, Treasury Secretary Yellen issued a statement in support of the action. She stated, “Financial regulators, financial institutions, and investors need to have access to the best information and data to measure climate-related financial risks. FSOC will work with Council members to improve climate-related financial disclosures and other sources of data to better measure potential exposures.”

KPMG Regulatory Insights recently issued a Regulatory Alert on Climate Equity, which is available here.
Additional Regulatory and Special Alerts on climate change- and ESG-related issues are available here.

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