Biden EO on Climate-related Financial Risks Sends Clear Mandate to Clean Up Global Supply Chain

May 21, 2021
Harris Allgeier

Hot on the heels of the recent Cybersecurity Executive Order (EO) and February’s order on securing the supply chain, on Thursday, May 20th, the Biden administration published another EO, this time on climate-related financial risk. The order instructs federal agencies to take steps to identify and mitigate the financial impacts of climate change to citizens, federal programs, and businesses.

The order outlines the clear danger posed to global supply chains by climate change. It also articulates the need for quantifiable metrics to assess climate-driven supply chain risk and financial risk, as well as the need to integrate those metrics into broader risk models.

The need for addressing these long-standing risks is clear. 2020 saw an unprecedented rise in climate-related natural disasters. In the first 9 months of the year alone, 16 weather disasters caused well over $1 billion dollars in direct damages, and untold losses in terms of supply chain disruption. In some places, sea levels are rising as fast as an inch per year. While no single government action can address the staggering impact these disruptions have on supply chains and economic activity, the EO is certainly an impressive and thorough start.

Breaking Down the EO

Beginning with an overview of policy objectives, the EO directs senior policy advisors, the Secretary of the Treasury, and the Director of the Office of Management and Budget to develop, within 120 days, a comprehensive strategy for the “measurement, assessment, mitigation, and disclosure of climate-related financial risk.” There are certainly immediate steps agencies can take to identify their own risk, but any realistic measurement of the true impact of climate-related financial risk must include a deep and continuous analysis of an agency’s supply chain.

The order also makes a clear call for better information sharing of climate-related financial risk information, instructing the Financial Stability Oversight Council (FSOC) to facilitate “the sharing of climate-related financial risk data and information among FSOC member agencies and other executive departments and agencies as appropriate.” This kind of information sharing has historically proven to be a challenge in and outside the federal government, with many organizations struggling under the burden of siloed, legacy systems that use inconsistent metrics and monitoring methods.

This EO makes a clearer case than ever for agencies to adopt common-use tools that can monitor climate-related financial risk, and seamlessly share that information for maximum, government-wide benefit.

The order further instructs several federal agencies to begin a comprehensive review of existing climate-related financial risks to “ensure that major Federal agency procurements minimize the risk of climate change, including requiring the social cost of greenhouse gas emissions to be considered in procurement decisions and, where appropriate and feasible, give preference to bids and proposals from suppliers with a lower social cost of greenhouse gas emissions.”

Measuring the Social Impact of Climate-related Financial Risk in Supply Chains

The EO also immediately directs the Federal Acquisition Regulatory Council (FARC) to consider amending the Federal Acquisition Regulation (FAR) to require major federal suppliers to disclose not just “greenhouse gas emissions and climate-related financial risk” but to also require “ the social cost of greenhouse gas emissions to be considered in procurement decisions and, where appropriate and feasible, give preference to bids and proposals from suppliers with a lower social cost of greenhouse gas emissions.”

Should the FARC agree with this recommendation, there would be an immediate and immense impact to Federal contractors. Objectively assessing and reporting on the often indirect, but very real, social impacts of climate-related financial risk could prove a difficult task without widespread adoption of intelligent tools that can comprehensively measure and report on an organization’s entire supply chain ecosystem.

The order also directly countermands rules set in place by the Trump administration, directing the Labor Secretary to undo actions taken by the previous president that sought to stop investment firms from accounting for ESG factors in managing pensions and retirement accounts.

While the specific outcomes of this EO are still up to choices made at the agency directorate-level, when taken in context with other global regulatory actions, such as Germany’s Initiative Lieferkettengesetz, or the EU’s Sustainable Finance Disclosure Initiative, a clear mandate emerges: Governments are beginning to put teeth behind their words and are prioritizing climate and ESG risk as key area of concern. A time is coming where organizations can no longer skate by on just their word. They will have to provide detailed and objective proof of their commitment to a sustainable environment and mitigating risks from climate change across the entire global supply chain.

Interos

The Interos cloud solution gives you an instant and continuous view of climate-related financial risk across every connection in your digital and physical supply chains. With the power of artificial intelligence and machine learning, any organization can create a living map of their business ecosystem so they can monitor ESG and financial risk in real time, model scenarios, and predict outcomes. Learn more here, or contact us for a demonstration.

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