‘Monumental shift’ – PRI hails President Biden’s sweeping plans to address climate-related financial risk

Influential investor body welcomes Biden’s pressure on DOL to roll back Trump-era ESG rules for workplace pension schemes

The Principles for Responsible Investment (PRI) has hailed US President Joe Biden’s sweeping plans to strengthen the country’s financial system against climate risk as a “monumental shift”.

In a speech yesterday, Biden announced an executive order requiring the country’s financial regulators and public bodies to mobilise on climate risk and investment before the end of the year. An executive order is a directive from a US President that manages operations at a federal government level. Since they are not legislation, they do not require approval from Congress.

“The Biden administration’s executive order represents a monumental shift to align US policy with what financial leaders already know to be true: investing in companies and industries with a proven commitment to environmental, social, and corporate governance issues is good for business,” said Fiona Reynolds, CEO of the influential investor body in response to the announcement yesterday.

In particular, Reynolds welcomed Biden’s instruction to the US Department of Labor (DOL) to consider revising Trump-era ESG rules around fund selection and proxy voting, which came into force just days before Biden took office. 

The federal agency has already said that it would not enforce the controversial rules, which were roundly criticised for potentially restricting the ability of workplace retirement plans to offer sustainable investments and exercise shareholder rights on ESG issues. But Biden has now asked the DOL to “consider publishing”, by September, a proposed revision to “suspend, revise, or rescind” the rules. 

Eoin Murray, Head of Investment at the international arm of Federated Hermes also welcomed the “pressure” being placed on the DOL to acknowledge ESG factors as systemic risks, the result of which would, he said, change the landscape of retirement plans in the US for the better.

European Sustainable Investment Forum (Eurosif) head Victor van Hoorn praised the scope of Biden’s order, saying: “While we welcome very much the focus on climate risks for the financial system, what is really very positive to see is President Biden’s focus on the ‘Whole Government’ or ‘Total Economy’ approach”, which entails “not only looking at the role of finance, but also looking at how economic and fiscal policy can give a boost to the transition”.

On the question of convergence with sustainability work going on internationally, and in particular in the EU, Hoorn said he hoped that the US will draw lessons from what is happening abroad, but conceded, “it’s likely the US will take a different approach to the EU’s, simply because the US tends to prefer light-touch, market-driven tools”.

Jean-Jacques Barbéris, Director of the Institutional and Corporate Clients Division & ESG at Europe’s biggest investor, Amundi, agreed that the “question of coordination and convergence of standards remains nonetheless a great challenge ahead”, but described Biden’s announcement as “a great milestone”. 

As part of the wide ranging order, Biden tasked Secretary of the Treasury, Janet Yellen – in her capacity as Chair of the Financial Stability Oversight Council (FSOC) – to report on measures needed to “enhance climate-related disclosures by regulated entities to mitigate climate-related financial risk to the financial system or assets”.

FSOC was set up to monitor financial risks after the 2008 crisis, and its members include Federal Reserve chair Jay Powell, Securities and Exchange Commission (SEC) chair Gary Gensler and the heads of other US financial regulators as members.

The body should include an overview of efforts being undertaken by FSOC member agencies “to integrate consideration of climate-related financial risk in their policies and programs”, the President said. 

He gave the FSOC 180 days to complete the task, meaning it will have to present the outcome by mid-November, shortly after the global climate summit COP26. 

As part of the executive order, the country’s National Economic Council, National Climate Advisor and Director of the Office of Management of Budget will have to work with Yellen on a “comprehensive, government-wide strategy” addressing the financing requirements of reaching Net Zero and adapting to climate change. The deadline for that work is mid-September, before COP26 takes place. 

Biden described “consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk” as the “policy of my Administration”.

In March, the SEC launched a public consultation on revising US corporate climate disclosure rules. In its response, European investment group Cardano warned the SEC that the competitiveness of US funds is at risk if it doesn’t keep up with Europe on climate disclosure.

This sentiment was echoed by Biden himself yesterday, who warned in his speech that: “The failure of financial institutions to appropriately and adequately account for and measure these physical and transition risks threatens the competitiveness of US companies and markets, the life savings and pensions of US workers and families, and the ability of US financial institutions to serve communities”.