Whole of Government: Financial Risks

President Biden’s executive order on climate-related financial risk builds on his whole of government approach to the growing threats from climate change—the only approach that makes sense to protect all of us from climate-linked financial upheaval.

The President directs agencies to consider the financial risks due to climate change in a wide variety of areas, from the safety of the entire financial system to the US government’s own budget to pension funds seniors rely on. Climate change poses a risk to all these areas and our entire economy. Not only have we not yet acted forcefully enough to manage and mitigate these risks, we do not even fully understand the risks some areas are facing, like what companies or banks own the most risky real estate or other assets or how would the financial system and insurance companies handle multiple, even more severe storms? 

The Executive Order seeks to change that: it tasks the Financial Stability Oversight Council (FSOC) to write a comprehensive report on the financial risks, current regulatory efforts and recommendations for further actions. And, we know we need much more action from our financial regulators, including the Securities and Exchange Commission and the Federal Reserve.

FSOC is made up of the heads of the major federal regulators and was created following the 2008 crisis, “for identifying risks and responding to emerging threats to financial stability”. FSOC’s first meeting focused on climate change risks and the President’s EO pushes the FSOC, under Secretary Yellen’s leadership, to dive into climate as the emerging threat to financial stability we know it is.  Many federal regulatory bodies are largely independent agencies, so one of the best way to urge and support regulatory action is to give them the data and research that demonstrates the risk climate change poses to achieving their varying mandates and recommendations on how to mitigate those risks. That is a major goal of this work.

The Order also uses the tools more directly under the President’s authority, like ways the federal government can better understand the emissions from what it buys and the risks to our federal budget from climate change, including projecting lost tax revenue from increasingly more frequent and strong storms. Another piece is about what factors investment managers for pension funds can consider when making investment on behalf of pension recipients like my retired family member. Trump tried to make rules that forbade those investment managers from considering climate when making investment decisions, despite research that already shows climate change is affecting financial returns. The President aims to protect pensioners by ensuring climate risk is considered. 

There is much work to be done to protect our financial system, the economy, retirees, the most vulnerable, and all of us from the financial risks from climate change. President Biden is showing that he wants to use all the tools at his disposal to create the right protections against the potential damage climate change poses to our economy. We need the whole of government to deal with this massive set of risks, and to shield the more than 330 million people in our country from climate-change driven financial disaster.