In recent years, the US has lagged behind other countries on climate-related financial regulation. But on May 20, President Biden issued a far-reaching executive order (EO) with the potential to fundamentally transform how climate risks and opportunities are quantified and disclosed by all kinds of US organizations.
The order has two main goals. First, to create a climate-related financial risk strategy for the US government itself, that will enable the measurement, assessment, mitigation and disclosure of climate threats to its programs, assets and liabilities. Brian Deese, Director of the National Economic Council, and Gina McCarthy, the National Climate Advisor, have been tasked with drafting this strategy within 120 days. This initiative allows the government to lead by example, and offer other organizations a template for getting to grips with climate risks themselves.
The second objective is to prompt US financial regulators to embed climate-related financial risk considerations into their policies and programs. In the EO, Biden directs Treasury Secretary Janet Yellen to prepare a report within 180 days on efforts by the members of the Financial Stability Oversight Council (FSOC) to factor climate into their regulatory practices.
Biden’s order specifies that this report should discuss “any actions to enhance climate-related disclosures” by entities under the FSOC’s watch, plus a “recommended implementation plan for taking those actions”.
US public companies should be under no illusions. This EO sets the stage for mandatory climate-related disclosure. The FSOC is made up of nine federal agencies — including the Federal Reserve, Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) — and a number of state-level regulatory representatives and independent experts. With them all included in the EO, no corner of the US economy will be left out of this initiative.
In addition, the US-based subsidiaries of non-US companies will be covered, too, which may incentivize these entities’ parent companies in Canada, Europe, and elsewhere to align their disclosure practices with those proposed by the FSOC. The US Treasury’s prominent role on the G20 Sustainable Finance Working Group also means the disclosure frameworks defined by the agency are likely to influence those being drawn up in other jurisdictions.
The type and quality of the FSOC’s recommended actions to enhance climate-related disclosures, though, will be decided by the member agencies themselves. If the level of ambition and prescription are high, new disclosure requirements could have a powerful effect on climate mitigation efforts, and lead to a rapid repricing of public companies’ assets. For example, if energy firms have to disclose their direct and indirect emissions and how these compare with a standardized net-zero emissions pathway, investors would be able to immediately see which are the most and least exposed to climate transition risks, and redirect capital accordingly.
Certain investors are already asking for these kinds of disclosures. Climate Action 100+, an initiative with 570 institutional investor members, asks firms to provide enhanced disclosures so that they can assess the robustness of their business plans against a range of climate scenarios.
However, principles-based disclosure requirements, perhaps built on the voluntary frameworks already in circulation, would also represent a sea-change for US companies. The Task Force on Climate-related Financial Disclosures (TCFD), which produced climate disclosure recommendations in 2017, is currently supported by over 2,000 organizations worldwide. However, only around 300 are US-based entities. In contrast, there are over 800 supporters in Europe. Mandatory reporting on TCFD lines will transform the uptake of climate disclosure among US firms, and push them to embed climate risk in their governance, strategy and risk management.
Wherever the FSOC’s recommendations land, then, organizations are going to have to come to terms with the need to produce, as Biden’s EO explains, “consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk”.
Manifest’s SaaS platform expedites climate-related disclosure
Biden’s order has started the clock on mandatory climate-related reporting requirements for all kinds of regulated US organizations, and validated the efforts of prominent investors and supporters of the TCFD to push for comprehensive climate disclosure. Manifest Climate regularly works with publicly listed companies in a variety of sectors to understand what climate means for their business and guide them on their journey to deliver credible climate reporting that meets the needs of regulators and investors. Contact us today.