Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations.
Climate change is real. With its consequences now being felt throughout the United States, the economy could be its next target—and soon.
On May 20, President Joe Biden ordered federal agencies to start planning how to protect the economy and financial systems from a meltdown due to climate change. It comes just days after new data from the Environmental Protection Agency (EPA) warned that the effects of climate change in the U.S. are speeding up, with events like droughts, wildfires and flooding from rising sea levels more common.
Climate change is posing grave risks to financial security, including infrastructure, investments and businesses. It’s also threatening key aspects of the economy such as supply chains, food supplies and power grids, according to a fact sheet on the executive order.
Here’s why Biden created the order, and what it will mean for you.
How Will Climate Change Affect the Economy and Financial Systems?
Although climate change can feel like an intangible threat for many, it’s real and it’s happening now. And its impact on the financial system is already starting to show.
Banks, for example, are starting to sell off mortgages on coastal homes to government-backed entities, such as Fannie Mae and Freddie Mac—an indication that they’re aware of the risk of rising sea levels flooding homes, and are offloading the risk to the government and taxpayers.
Some banks are also requiring as much as 40% down payments on homes in coastal areas, a signal that they want less of their own funds at risk.
Some experts warn climate change is triggering a fast-approaching local housing crash. The coastal housing market is greater than $1 trillion; in the next two decades, or sooner, it could completely collapse due to rising sea levels, increased risk of house damage and mortgage default, and plummeting property value. Like any housing crisis, that could produce ripple effects throughout the economy—fewer homes, higher prices and lenders being highly risk-averse.
It’s not just coastal regions seeing climate-change threats on their housing markets. Homeowners in extremely hot or drought-stricken areas that are prone to wildfires are having a harder time getting insurance; the insurance companies don’t want to carry the risk of a complete loss after a devastating blaze.
On a broader scale, climate change can completely disrupt crucial aspects of the economy, such as agriculture, infrastructure and the supply chains. Harsh weather and rising sea levels can flood crops and drown livestock; military bases and communication systems can be drowned by extreme weather; droughts will make water more expensive, which can make the cost of raw materials and production skyrocket.
All of these ripple effects will eventually make their way back to your wallet. Fewer homes mean more competition to become a homeowner—and higher home prices. A harder time getting fire or flood insurance means paying more for protection or being priced out of affording the coverage needed for a home. Economic disruption on the supply chain means fewer goods and higher prices.
Ultimately, it all means that the financial well being of the economy—and ourselves—is at major risk due to climate change.
What’s in Biden’s Climate Order?
The order, titled Executive Order on Climate-Related Financial Risk, is broad and leaves many questions unanswered. But for now, it remains a pivotal step forward in gearing up the country for the fight against climate change.
The order instructs two key roles in the government—the National Climate Advisor and the Director of the National Economic Council—to develop a full climate-risk strategy, within 120 days of the order, that identifies how climate change is putting government programs and assets at risk.
Under the order, a broad range of government agencies and financial institutions are required to start figuring out how climate change is affecting certain products and programs, and devise plans to reduce their risk while facing climate change. That could mean tougher requirements for institutions, like banks and lenders, to invest in clean energy or climate-friendly capital. Under the order, investment firms will also be required to disclose to customers climate-related risks in products, like pensions and life savings.
But some people are already questioning just how far the Biden administration will go to implement these changes in the financial system. Given that the executive order is broad, questions about how far it will go to enforce climate-friendly actions by banks and companies unanswered.
As Quartz climate reporter Tim McDonnell points out, “The order is vague about its ultimate scope: How far will the government go to crack down on carbon-intensive finance? Does the mere act of making banks and other companies reveal their carbon footprint precipitate progress on eliminating climate risk? Or do regulators need to be more proactive?”
This isn’t the first move by the federal government toward evaluating financial risk due to climate change. In April, Treasury Secretary Janet Yellen created a “Climate Hub” within the Treasury Department that focuses on financial risk due to climate change. It also addresses how policies can help mitigate disproportionate impacts of climate change on “disadvantaged communities,” but hasn’t yet released information about which communities those are and what type of policy proposals are to come.