How Companies can Align with Biden's Executive Order on Climate-Related Financial Risk

Climate change is an imminent U.S. financial risk. According to a study conducted by the National Bureau of Economic Research, continued temperature increases and failure to drastically cut emissions could result in a 10.5% cut in U.S. GDP alone by 2100.

The federal government is taking tangible steps to mitigate this risk with a recent executive order. The Biden administration has set forth a list of priorities for the Financial Stability Oversight Council and the National Climate Advisor to assess and create action plans to address climate-related financial risks. The administration has recognized both the physical and transition risks posed to companies and communities as a result of climate change and gives 120 days to develop a federal plan to identify and disclose on climate risk.

After the 120-day timeframe for review, the following elements outlined in the latest executive order on climate are likely to set the stage for official action.

Government-wide assessment and strategy

A comprehensive and cross-departmental strategy to measure, quantify, and disclose on climate risks will ensure that American people and businesses are better informed of the financial risk at stake as a result of climate change. It will also enable policies to improve the long-term stability of the U.S. financial system. This increased transparency around the scope and scale of the real economic risks posed by climate change and climate-driven extreme weather events (and their affiliated losses) will help federal agencies, the general public, and the private sector to make more informed investment and insurance decisions.

For example, this thorough review could provide increased access to information that will allow businesses to make risk-informed decisions about facility siting, resilient building and energy technologies, and supply chain operations. Taking these climate considerations into account will increase the long-term stability of federal operations and maintain the competitiveness of U.S. companies and markets.

Plan to finance net zero

The path to net zero may not be free, but it does not need to be at the sake of economic growth and job creation. The new Executive Order will also lay the groundwork for understanding U.S financing needs to achieve a net zero greenhouse gas emissions goal by 2050. Public and private collaboration will be required to implement the technologies and policies needed to limit global average temperature rise to 1.5 degrees Celsius. Public-private partnerships will also support adaptation to the increasing impacts of climate change on livelihoods, infrastructure, and business operations. The new mandate will surface and examine opportunities to advance economic opportunity, worker empowerment, and environmental mitigation, with special attention paid to historically disadvantaged communities and communities of color.

Federal procurement obligations

Under the executive order, recommendations will be developed regarding an approach to integrating climate risk information into federal procurement strategies. Major federal agencies will be required to minimize the risk of climate change through their procurement activities, and consider the social cost of greenhouse gas emissions in procurement decisions. For example, when procuring energy, agencies may need to consider the climate impact of increasing use of renewables or integrating microgrids and smart digital technologies for greater resilience. Federal suppliers will also need to publicly disclose greenhouse gas emissions and financial risk, while setting science-based emissions reduction targets.

In order to meet these procurement requirements, federal agencies may also need to explore new ways of funding for key procurement activities. Innovative financial enablement models, such as Energy Savings Performance Contracting, Utility Savings Contracting, and Energy as a Service, allow flexibility in achieving these new objectives while ensuring continuity for mission-readiness planning.

3 things companies can do to align

Although this executive order primarily targets actions to be taken by federal agencies to mitigate climate-related financial risks, it sets the tone for the direction that U.S. financial institutions, states, and businesses will be expected to take in terms of assessing and putting a value on these risks. And this should be no surprise to companies – especially following the wave of investor action on climate and the ever-increasing emphasis on sustainable finance and risk disclosures.

Companies around the country have already mobilized around climate action, with major brands including Kellogg, Clorox, and PepsiCo taking recent bold actions to reduce their U.S.-based greenhouse gas emissions. Organizations from all segments and sizes can take 3 tangible steps to follow the lead being set by both ambitious organizations and the government:

1. Measure – Collect, centralize, and analyze your energy procurement, efficiency and sustainability data. Digital tools can help you identify opportunities to reduce resource consumption, cut emissions across your operations, and save money.
    
2. Mitigate – Turn data into action. Build a roadmap to factor climate risk into your business strategy and decarbonize your own operations while building long-term resilience against climate change risks. Engaging your supply chain on decarbonization scales the reach and impact of your efforts while ensuring continuity of business in the case of market disruption.
    
3. Disclose – Increase transparency and demonstrate progress by communicating your business’s environmental, social, and governance (ESG) metrics and sustainability commitments and actions. With increased investor and governmental focus on climate risk, businesses should be actively integrating the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) into their reporting strategies.

Schneider Electric believes that the U.S. government’s climate-related financial risk review will result in climate change being deemed a systemic risk to the financial markets. This shift could unlock both opportunities and pressure on businesses to act on climate. In our recent webinar, our experts were joined by three of our clients spanning real estate investment, energy, and retail – Simon Properties, EQT, and Auchan – to discuss how mapping climate risk helps them achieve organizational objectives, resilience, and new growth. Watch the recording now.