The Biden Administration is implementing a robust climate change agenda across the executive branch with a particular focus on the role U.S. financial regulators can play in addressing climate risks. On May 20, the White House issued an executive order that would look to leverage both the public and private sectors to address climate-related financial risk. It’s an example of what the President calls his “whole-of-government” approach—similar to Treasury Secretary Yellen’s “whole-of-economy” approach.
Penta has spent the past several months closely monitoring the actions of financial regulators and has compiled relevant agency announcements, which demonstrate how the Biden administration will seek to use the financial sector to curb climate change.
Penta focused its research on the most active financial regulators, including:
Based on this research into the executive branch and Federal Reserve’s current positions and actions, combined with additional insights and analysis, Penta has laid out a roadmap of the likely future policy plans related to finance and climate policy.
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The Biden administration and Secretary Yellen have made it clear that Treasury will be at the center of U.S. attempts to meet its 2030 emissions targets, which were officially announced by the White House during the climate summit. The goal is to cut CO2 emissions to 50-52% of their 2005 levels.
In remarks to the Institute of International Finance on April 21, 2021, Secretary Yellen reiterated that the Treasury Department will take what she has called a “whole-of-economy” approach to its efforts to address climate change. Secretary Yellen clearly recognizes and has emphasized, that the goals the Biden administration and progressives have put forth require the cooperation of the private sector. We expect Treasury will continue to make a concerted effort to include both private and public stakeholders in their efforts to marshal resources towards cleaner, sustainable investments.
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Secretary Yellen has repeatedly emphasized the need to build international cooperation on climate-related investments and disclosures. Secretary Yellen and Treasury recognize the U.S. needs to garner the support of worldwide actors, including developing countries, to achieve significant progress on climate change and to ensure that American efforts don’t place the country at a competitive disadvantage. Climate Envoy John Kerry is likely to lead those efforts and play a central role in facilitating said relationships albeit in close coordination with Treasury.
Treasury Department has expressed that it wants to see countries require “reliable, consistent, and comparable” climate-risk financial disclosures. It has also indicated that it would like to support international efforts to “better identify climate-aligned investments and encourage financial institutions to credibly align their portfolios and strategies.” Since developing countries are quickly becoming large emitters on their paths to economic growth, we expect Secretary Yellen to incentivize the adoption of clean energy alternatives to ensure these countries cooperate.
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Progressives have voiced their displeasure with the Morton pick, criticizing his connection to the private sector and expressing concerns he may think “climate action can happen voluntarily.” Many of said progressives expressed that they would have preferred Secretary Yellen appoint former Deputy Treasury Secretary and Federal Reserve governor Sarah Bloom Raskin, for she has been an activist for greater regulation of financial firms’ climate-related activities. This could present a challenge to Secretary Yellen and Morton as they try to make headway on their priorities. We anticipate Morton to make public and private overtures to progressives, especially on policy proposals involving the private sector.
On the international front, Morton, like Secretary Yellen, has communicated that he will seek to “mobilize more private capital to developing countries to help them transition to a lower-carbon economy” by using MDBs. Expect Morton to frame many of his actions as a competitive race between nations and an opportunity for the U.S. to lead on the world stage.
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Though the Financial Services Oversight Committee (FSOC) hasn’t traditionally been an active player in the climate debate, progressives have been pushing for the committee to consider the systemic risks posed by climate change. Treasury Secretary Yellen has made clear that it will be one of the Department’s primary tools to minimize climate-related financial risks. She views FSOC’s role as a means to “understand [financial-sector risks associated with climate change], to coordinate across U.S. regulatory agencies in assessing the risks and, if necessary and appropriate, acting to mitigate risks to overall U.S. financial stability.” President Biden’s May 20 Executive Order also underscores FSOC’s key role.
We expect that many of the Treasury’s climate policy announcements and decisions will be made at or through FSOC. Further, we expect the FSOC report mandated by Biden’s executive order to home in on the role of financial institutions, asset managers, and insurers in minimizing climate-related financial risk.
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With Gary Gensler’s confirmation as SEC Chair and Satyam Khanna serving as Senior Policy Advisor for Climate and ESG, the SEC is expected to aggressively move forward on evaluating its climate agenda.
Gensler, who originally received strong support from progressives, was criticized for naming a corporate defense lawyer as Director of the Division of Enforcement, prompting her to resign. Sen. Elizabeth Warren said Gensler has a chance for a “redo,” suggesting that he will act quickly on progressive priorities, such as climate disclosure.
During his Senate Banking Committee confirmation hearing, Gensler signaled support for issuing a disclosure rulemaking on climate risk. However, Gensler must deal with competing priorities and is targeting the second half of 2021 for SEC action on climate risk disclosure, as regulatory changes would require a lengthy rulemaking process. Expect pushback from Republican Commissioners Hester Peirce and Elad Roisman, who have questioned the SEC’s increased focus on climate. Republican members of Congress, led by Sen. Pat Toomey (R-PA), will also criticize SEC action on climate.
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With climate change at the center of the U.S. and global political agenda, the Fed will continue to address the issue as it relates to financial stability. However, the Fed will continue to face warnings of politicization. Republican lawmakers have argued that climate policy remains outside of the Fed’s jurisdiction.
Last December, in a letter to Powell, 47 GOP lawmakers discouraged the central bank from imposing stress tests on lenders to measure their vulnerability to climate change.
Then again in March, Senate Banking Committee Republicans told Powell in a letter that they were concerned the Fed might use its supervision of the banking system to “further environmental policy objectives,” which “would be beyond the scope of the Federal Reserve’s mission.”
Powell is now seen as a heavy favorite on Wall Street to be nominated for a second term, which was not the conventional wisdom when Biden took office. If Powell is nominated for another four-year term in early 2022, expect Republicans to make his climate focus a point of emphasis during his confirmation hearing, but Powell and the Fed are unlikely to be deterred from including climate change in its policy considerations.
The Biden Administration has made clear that financial regulators play a critical role in the fight to curb climate change, and it will continue to receive pressure from progressives to execute an aggressive climate agenda. As Biden’s political appointees get settled into their roles, expect the pace of climate-related policy actions coming from financial regulators to accelerate, leaving no potential vehicle for progress untouched. However, opposition from Republicans will remain stalwart, and if the economic recovery from the COVID-19 pandemic continues to fall below expectations, the political appetite for vast changes to the economy could waver, making implementation of the climate agenda more challenging.
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