Climate-Related Financial Risk

Background

Regulatory Changes

The executive order issued by President Biden in 2021 directed significant reforms in the way federal agencies interacted with climate-related financial risks. It led to the integration of climate considerations into financial regulations across several departments, notably requiring the Financial Stability Oversight Council to assess climate-related financial risks to the U.S. financial system comprehensively. This assessment also necessitated a comprehensive data-sharing protocol among federal agencies to ensure an informed policy response across the government. Particularly, this directive shifted how regulatory bodies like the Federal Reserve and the Securities and Exchange Commission approached climate risks, incorporating these into their regulatory and supervisory frameworks without necessarily undergoing formal rulemaking procedures.

Impact on Federal Investment and Procurement

Biden’s order had a profound effect on federal investment strategies by emphasizing ESG (Environmental, Social, and Governance) considerations. The Federal Acquisition Regulatory Council amended its purchasing policies to favor suppliers with lower carbon footprints. Federal contractors were mandated to disclose their greenhouse gas emissions and set targets to reduce them, integrating climate-related financial risks into federal financial management and procurement processes. Federal agencies, notably the Department of Defense, were required to consider the social cost of carbon in their procurement strategies, thereby aligning their operational activities with broader national climate goals. This essentially prompted federal procurement to become a tool for climate policy enforcement by incentivizing privately held firms to innovate toward more sustainable practices.

Operational Adjustments

The directive catalyzed operational adjustments among federal agencies, necessitating the inclusion of climate risk assessments in budgetary analysis and fiscal planning. The Office of Management and Budget was directed to quantify climate risks explicitly within federal budget projections. For federal retirement investment bodies, like the Federal Retirement Thrift Investment Board, it mandated an evaluation of how climate risks were factored into investment strategies, positioning public pensions to potentially divest from high-risk, carbon-intensive assets. Collectively, these operational shifts sought to insulate American public financial interests from the physical and transitional impacts of climate change, establishing a fiscal foundation more resilient to climate-related economic disruptions.

Reason for Revocation

Ideological Shifts

President Trump's decision to revoke the executive order on climate-related financial risk was emblematic of a broader ideological shift away from proactive climate regulation toward a more growth-centric economic approach. This pivot aligned with a deregulatory philosophy prioritizing short-term economic growth over longer-term sustainability considerations. Deregulation was perceived as a catalyst for economic expansion, removing what was considered to be bureaucratic encumbrances to investment and innovation. This ideological stance was driven by a belief that market forces should be trusted to address environmental challenges without significant governmental intervention.

Regulatory Burden Concerns

A primary rationale for the revocation was attributed to concerns about regulatory burdens imposed on businesses, particularly in sectors like energy and manufacturing. The Trump administration argued that the extensive disclosure requirements and operational adjustments mandated by the order were stifling business innovation and growth by imposing onerous compliance costs. This sentiment was particularly echoed by stakeholders in industries reliant on fossil fuels, who viewed the regulations as skewed against their operational favorability in the marketplace. The administration contended that easing these regulatory constraints could spur economic activity, enhance competitiveness, and improve job creation.

Economic Prioritization

Trump's recalibration of policy priorities underscored a realignment towards traditional energy sources, suggesting that energy independence and economic development should supplant climate-centric policymaking. The revocation was partly driven by the agenda to revitalize the fossil fuel industry and safeguard employment within this sector, which felt threatened by the shift towards net-zero emissions goals. This policy shift was posited as necessary to lower energy costs, thereby ostensibly benefiting consumers and preserving jobs in communities heavily dependent on fossil fuel industries.

Strategic Realignment

The revocation also exemplified a broader strategic realignment on global climate change policy, signaling a U.S. retreat from multilateral commitments on climate action. The administration sought to redefine national sovereignty in determining energy policy, asserting that international pressure to adhere to stringent climate commitments constrained domestic policymaking flexibility. This move signaled to international partners that the U.S. might prioritize national economic interests over collaborative global climate objectives.

Winners

Fossil Fuel Industry

The revocation is expected to benefit the fossil fuel industry significantly, particularly oil and gas corporations such as ExxonMobil and Chevron. These companies would likely see a reduction in compliance costs and operational constraints, enabling freer exploration and production activities. The easing of federal climate-related regulations allows these firms to operate with more financial predictability and potentially attract more investments unencumbered by stringent environmental requirements. The relaxation of procurement policies that previously favored low-emission energy could lead to increased demand for fossil fuels, especially in federal contracts.

Financial Institutions

Large financial institutions, particularly those with substantial fossil fuel investments, stand to gain from the repeal of these regulations. Investment entities with significant portfolios in fossil energy might see improved asset valuations as regulatory pressures ease, allowing them to allocate capital without considering climate-related financial disclosures as a primary risk factor. It also potentially reduces the complexity of compliance, allowing banks and insurers to streamline their risk assessment processes and focus more resources on traditional financial metrics instead.

Conservative Political Advocates

Advocates of deregulation and orthodox economic policy positions are likely to view the revocation as a victory for policy neutrality and economic pragmatism over the perceived overreach associated with climate-focused mandates. Political figures and lobbying groups that prioritize economic growth, energy independence, and minimal government intervention are expected to herald the repeal as a step toward restoring traditional economic dominance without the encumbrance of ambitious environmental targets.

Losers

Renewable Energy Sector

The renewable energy sector, which benefited from the previous order's emphasis on climate disclosures and sustainable procurement, is poised to face setbacks. Companies and innovators invested in solar, wind, and other renewable technologies may experience increased competition against a reduced regulatory burden on fossil fuels. The lack of enforced federal procurement preferences for low-carbon technologies might lead to diminished market opportunities, potentially stifling growth and innovation in green technologies.

Environmental Advocacy Groups

Environmental groups, who viewed these regulations as essential to mitigating climate change, are significant casualties of the policy reversal. Their advocacy efforts centered around integrating climate considerations into financial assessments and federal procurement policies. The repeal undermines their campaigns by diluting federal commitments to combating climate change, diminishing the perceived urgency and governmental role in steering climate action through economic means. This outcome represents a profound setback to their broader climate advocacy goals.

Vulnerable Communities

Communities disproportionately affected by climate-related disruptions, including many low-income and minority populations, are likely to suffer in the long term. The original order included plans to address and mitigate disparate impacts on these communities, aiming for equitable investment in climate resilience. Without mandated actions to incorporate and mitigate climate risks in federal policies, these vulnerable groups may face exacerbated socio-economic challenges, increasing their financial and environmental vulnerabilities as climate impacts continue to manifest.