The New Executive Order on ESG Regulations

ESG has quickly become the most discussed topic in the financial world, and it is easy to see why – ESG promises to fundamentally change the way businesses are assessed and taxed. The ESG approach expands the scope of assessments and regulations to account for investments in businesses that negatively affect the environment. This means that banks and financial institutions will have to introduce new variables in their assessments of businesses to invest in, which will result in an industry-wide change in SOPs.

There has been a lot of speculation about what ESG related regulations may look like. This blog has covered the topic in many blogs – most recently in blogs titled Climate Risks Will Soon Be an Essential Part of Risk Management Frameworks and The Impact of ESG on Compliance Management. Most of the discussions were based on the new appointments being made in regulatory bodies and speeches given by people that will be responsible for the regulatory framework over the next few years. However, there is no need for speculation because information is now available from the most direct source possible: The White House.

President Biden has authored a new executive order recently which deals with climate risks and clarifies the regulatory actions that the government plans to take related to ESG. Everyone in the financial sector who is concerned about what regulations would look like in the future needs to read the full text of the executive order available here. The executive order is divided into 6 sections each covering a different aspect of ESG.

Section 1: Policy

The first section sets the tone for the entire executive order by talking about the policy aims of the government. It states that the global transition away from carbon-intensive energy sources and industrial processes poses a risk to many businesses, communities, and workers during the transition period. Simultaneously, this global shift creates generational opportunities to strengthen the US economy and competitiveness, while also creating well-paying jobs for workers. Financial institutions’ failure to account for and assess these physical and transition risks appropriately and adequately jeopardizes the competitiveness of US businesses and markets, the life savings and pensions of US workers and families, and the ability of US financial institutions to serve communities. The Federal Government should set an example in this effort by prudently prioritizing Federal investments and managing fiscal resources prudently.

ESG regulations have quickly become the most discussed topic in the financial world because they fundamentally change the way businesses are assessed & taxed. Click To Tweet

Section 2: Climate-Related Financial Risk Strategy

The second section of the executive order is the one concerned with the most immediate steps that the government will take for climate risks. the second section of the states that the National Economic Council, the National Climate Advisor, the Secretary of the Treasury, and the Office of Management and Budget have four months to develop a financial risk strategy for the government to mitigate climate related risks.

Section 3: Assessment of Climate-Related Financial Risk by Financial Regulators

The third section outlines what the Financial Stability Oversight Council is required to do to implement the executive order. It outlines the areas where FSOC will be focusing on when it comes to financial regulators and climate risks. The FSOC is given 6 months to provide a detailed report to the president that gives recommendations on improving the assessment and mitigation of climate related financial risks.

Section 4: Resilience of Life Savings and Pensions

The 4th section of the executive order focuses on life savings and pensions. In this section the government clarifies that it will be including climate-based risk assessments in its own valuations for investments related to life savings and pensions. The government believes that it is important to invest in the areas that will not be impacted by climate risks to ensure that people saving for retirement and pension have their investments protected. This is significant because it will divert a lot of funding and investment towards greener technologies and businesses.

Section 5: Federal Lending, Underwriting, and Procurement

This section states that the Secretary of the Treasury, the Director of OMB, and the Director of the National Economic Council will develop recommendations for the National Climate Task Force on approaches to integrating climate-related financial risk into Federal financial management and financial reporting, particularly as that risk relates to Federal lending programs. Where appropriate, the suggestions must assess options for improving accounting standards for federal financial reporting and identify any potential to stimulate market adoption of such standards.

Section 6: Long-Term Budget Outlook

As a result of the effects of unabated climate change, the federal government is exposed to increased costs and revenue losses. This section talks about the long-term plans of the government to mitigate such revenue losses and manage costs. This section is the vaguest section, as it outlines the responsibilities and aims of several government departments, but does not outline any immediate steps that need to be taken.

There is a 7th section of the executive order as well, but it deals with general provisions that apply to the executive order itself. The executive order clarifies what changes we can expect from the government in the coming few years.

Interested in knowing how your organization can easily manage risk, compliance, and regulatory changes caused by ESG related regulatory changes? Get in touch with our risk and compliance experts for a demonstration of the Predict360 Regulatory Compliance and Risk Management platform.