President Biden’s Executive Order on Climate-Related Financial Risk

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President Biden issued an Executive Order on May 20, 2021, with regards to assessing, measuring, and mitigating climate risk in the financial system. While it is clear that there will be more to come, this Executive Order provides some clarity around where the Administration intends to focus its efforts as it pertains to climate-related financial risk. Here are some opportunities that may present themselves to investors over the next few years.

Greater ESG disclosure in accordance with a universal framework.

Accurate ESG data is needed for investors, lenders, and governments to make educated decisions, but the lack of consistency among ESG data providers and incomplete reporting by organizations is preventing climate risk from being priced into the financial markets appropriately. International ESG standards are emerging, such as the framework developed by the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). The Executive Order states - “It is therefore the policy of my Administration to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk...”

Having the U.S. federal government weigh in on a standard will be a model for organizations worldwide and pave the way for mandatory reporting requirements. There is a recommendation in Section 5(b) of the Executive Order to consider requiring federal government contractors to disclose greenhouse gas emissions, set science-based reduction targets, and give preference to suppliers with a “lower social cost of greenhouse gas emissions." Other government bodies, such as the Securities and Exchange Commission (SEC) and The Federal Reserve (The Fed), are actively assessing their role in supporting the disclosure of climate-related data.

It is possible that a universal ESG framework will be supported and the mandated list of reported ESG factors expanded, instilling greater confidence in the financial markets and among investors.

Federal pension and retirement plans may begin integrating ESG factors into their investment process.

A few state pension plans, including CalPERS (California Public Employees’ Retirement System) and the New York State Common Retirement Fund (CRF), integrate ESG factors into their investment process. Section 4 of the Executive Order lists the “Resilience of Life Savings and Pensions” and orders the Secretary of Labor, Mr. Marty Walsh, to determine what can be done to protect federal pensions, including the Thrift Savings Plan (TSP), from climate-related financial risk.

It is possible that asset managers for federal pension plans will be required to integrate ESG factors, similar to what Mr. Hiro Mizuno required of Japan’s Government Pension Investment Fund’s (GPIF) external money managers".

Those that invest in the TSP, such as military members and government employees, may have ESG-integrated fund options available to them in the future.

401k and 403b investors may begin to see ESG-integrated fund options in their workplace plans.

Section 4(b) of the Executive Order addresses two (2) rules that came from the Department of Labor (DOL) during the Trump Administration. The rules discouraged plan fiduciaries from integrating “non-pecuniary” factors into the selection of investment options and proxy voting decisions. While “non-pecuniary” is not synonymous with ESG factors, there was enough room for confusion that plan fiduciaries would be less inclined to select ESG-integrated funds.

On March 10, 2021, the DOL stated that they would not be enforcing either of the rules pursuant to Executive Order 13990. If the Biden Administration rescinds the old rules or modifies them to clarify that integrating ESG factors is not a violation of fiduciary duty, it could pave the way for 401k and 403b investors to invest in funds integrating ESG factors.

This would be an important step for investors that have the majority of their wealth in their 401k and 403b plans at work. Having the ability to invest in funds that integrate ESG factors would allow them to take into account climate and transition risk in their retirement portfolio.

The U.S. Treasury may begin to issue green bonds.

Section 2(b) of the Executive Order asks for a Government-wide strategy regarding “financing needs associated with achieving net-zero greenhouse gas emissions for the U.S. economy by no later than 2050…”. Other sovereignties have already begun issuing green bonds, such as the UK, Germany, and France. It is possible that we will see U.S. Treasury green bonds issued for the first time to help fund sustainable infrastructure projects that build more resilient communities. Ms. Janet Yellen, the Secretary of the Treasury, stated in April of 2021 that “the investment needed to green our economy is enormous” and later, “private capital will need to fill most of that gap”. She mentions green bonds and sustainable assets as potential solutions but brings up the issue of inconsistent reporting and insufficient climate-risk data.

Having a U.S. Treasury green bond will give investors the ability to build a more complete ESG-integrated portfolio, paving the way for more ESG all-in-one fund solutions, such as ESG-integrated target-date funds.

Watching to see what comes next.

Impact investing has exploded in recent years with little help from the U.S. government or regulators, so it will be interesting to see what happens now that there is an Administration that is poised to take into account the materiality of ESG factors in future decisions. While we won’t completely know what is to come from this Executive Order for a few months, leaders across the world are having to explain what they are doing to take into account climate-related financial risk. That is a positive - measuring and mitigating this systematic risk will strengthen the stability of our financial system and its ability to weather climate and weather-related shocks.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients nationwide and is based in San Diego. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a virtual fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.