US Climate Roadmap
Maria Christopher Bell
28 October 2021
As extreme weather, forest fires, and floodwaters ravage communities across the US, the Biden Administration has published its Roadmap to Build a Climate-Resilient Economy. COP26 presents an important opportunity for the US to present - and test - its new position and ambitions on climate.
Building on the whole-of-government approach previously announced by the US President in his first few weeks of office, the Roadmap furthers the approach of treating climate/sustainability regulation as an essential component in preserving the long-term stability of the US economy. It incorporates the principles of climate financial risk management underpinning the TCFD framework and promoted by the Network for Greening the Financial System, a coalition of central banks and prudential supervisors which the US Federal Reserve joined late last year.
The Roadmap outlines the steps the federal government has taken thus far to mitigate the consequences of climate change and proposes additional steps for insulating US communities from its impacts. According to the report, the physical and financial tolls of extreme weather events have accentuated the need for better data, tools, disclosures, and mitigation strategies. Despite repeated warnings from the scientific community about the repercussions of rising temperatures, much of the decision-making in industry and government continues to rely on outdated models that assume a stable environment or emphasize short-term returns at the expense of long-term stability.
Climate Risk Accountability Framework
The Roadmap first sets out a Climate Risk Accountability Framework that encompasses five key principles:
1. Transitioning to a net-zero US economy requires the mobilization of public and private finance.
Because disadvantaged communities will shoulder the burden of climate-related financial risks, the Roadmap advises that any programs implemented to address climate change should also include investments in the economic stability of those communities. Such environmental justice concerns have formed the bases of both EO 13990 and the Administration’s Justice40 program.
3. Climate change poses institutional risks to the federal government itself.
As an institution that owns physical assets (e.g. government buildings) and administers national insurance and lending programs (e.g. the National Flood Insurance Program), the federal government remains vulnerable to climate-related damage in many of the same ways as private industry and local communities. Areas of the economy in which the federal government plays an integral role—such as homeownership, agriculture, and pensions—will likely experience some of the most direct and immediate repercussions of climate change.
4. Financial institutions’ evaluation techniques often fail to capture the potential shocks of climate events and thus present an incomplete picture of investment risk.
Climate change could diminish the value of the assets underlying financial instruments and spark liquidity squeezes that affect consumers and companies alike. Yet the financial models that govern current investment decisions tend to underestimate these possibilities, instead focusing on outdated data that does not fully reflect the evolving environmental changes caused by climate change.
5. US leadership in the twenty-first century will stem from proactive, multilateral efforts to tackle the climate crisis.
It is undeniable that the US’s status as one of the major global emitters, as well its prior policy positions on climate, have undermined its credibility in promoting sound climate policies abroad. Nevertheless, the US can play an important role in engaging with the international community, and the successful implementation of at least some components of this Roadmap should help it do so credibly.
Objectives of the whole-of-government strategy
With this Framework in mind, the Roadmap describes a “whole-of-government” strategy consisting of six main objectives:
- Promote the resilience of the US financial system
The Roadmap recognizes that holistic financial analyses must involve consideration of climate risk. Evaluation criteria that assume stability in the environment tend to discount the potential threats of climate change in ways that can inflate the true values of underlying assets. In order to limit such failures, the SEC plans to publish new disclosure rules that require public companies to make more climate-related information available to financial decision-makers. Moreover, the Federal Insurance Office (housed in the US Department of the Treasury) will examine its existing supervision and regulation of insurers, with a view toward closing climate-related loopholes and expanding affordable insurance coverage in underserved areas.
- Safeguard life savings and pensions from climate-related risk
Life savings and pensions programs, currently regulated under the Employee Retirement Income Security Act of 1974, must similarly account for the material risks of climate change. Under the Trump Administration, the Department of Labor implemented new rules that effectively imposed “heightened scrutiny” on ESG-focused investments, limiting the ability of institutional investors to incorporate climate-related metrics in their investment decisions. Earlier this month, the Department of Labor promulgated a Proposed Rule that clarifies climate change does in fact pose material risks that should be included in a fiduciary’s risk/return model.
- Shape federal procurement policy to address climate-related risk
The federal government purchased over $600 billion in goods and services in FY 2020. Such contracting power offers an opportunity to nudge industries in the direction of clean energy priorities. The Federal Acquisition Regulatory Council will consider applying climate-related disclosure requirements to federal contractors and formalizing a preference for suppliers that lower their greenhouse gas emissions.
- Incorporate climate-related risk into federal financial management
The federal budget has generally not specifically considered or addressed potential impacts of climate change, including increased costs and lost tax revenue. The OMB has sought to remedy this by revising the federal government’s financial reporting requirements to address climate-related risks, and the Administration has confirmed that future budgets will include disclosure on the federal government’s climate risk exposure. Individual federal agencies are complementing this effort by measuring and reporting the climate-related financial risks unique to their operations.
- Conduct federal lending and underwriting to address climate-related risk
Federal lending agencies have committed to assessing the potential effects of climate-related financial risk to their underwriting standards, loan terms and conditions, and asset servicing procedures, particularly in programs related to homeownership and land maintenance. Notably, HUD, the USDA, and the VA have introduced plans to quantify climate risk and reshape their policies to focus on mitigation strategies.
- Create resilient infrastructure and communities
Recent weather events have underscored the need for infrastructure that can withstand the physical impacts climate change. Floods in particular have caused significant damage to telecommunications and energy infrastructure, roads and bridges, and homes and businesses. The Roadmap emphasizes the need for greater resiliency in federal facilities and operations, as well as protection for critical financial and technology infrastructure. Federal agencies have earmarked funds for preparation efforts in local communities, recognizing the substantial savings from pre-disaster construction versus post-disaster rebuilding.
The Biden Administration cites the Roadmap as one component of its overarching goal to spur “job creation and shared prosperity.” This is a fundamental change of course from the Trump Administration, which tended to frame clean-energy initiatives as antithetical to local economic interests and at times denied the scientific consensus around climate change. While it remains to be seen whether and to what extent the Biden Administration will achieve its climate aspirations, the Roadmap represents an important first step.
Authors: Ken Rivlin, Felise Cooper, Maria Christopher Bell, Brendan Holman, Nick Ognibene and Kelly Sporn