This post is based on a comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule by Chairman Richard C. Breeden, Chairman Harvey L. Pitt, Commissioner Philip R. Lochner, Jr. Commissioner Richard Y. Roberts, and Commissioner Paul S. Atkins. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.

We write to provide our perspective on the Commission’s recent proposal in the above-referenced release (the “Proposal”). In our view, the Proposal suffers from several serious deficiencies, many of which have been raised and examined by other commenters. We focus here on deficiencies that place the Proposal at odds with the Commission’s appropriate role and statutory mandate, into which, as former Chairmen and Commissioners, we believe we have particular insight.

We fear that the Proposal’s disregard of financial materiality, together with what we view as the almost certain judicial reaction (based on existing case law) to inevitable challenges to an eventual rule, ultimately will do irreparable damage to the SEC’s regulatory and enforcement program. The Commission’s reputation and ability to pursue its mission would be placed at risk. We strongly urge the Commission to rescind or substantially modify the Proposal.

I. The Standard for Climate-Related Disclosure Should Remain Financial Materiality

The Commission has long recognized that materiality is the “cornerstone” of the federal securities laws. [1] Familiar black-letter securities law holds that information is material if “there is a substantial likelihood that a reasonable investor would consider it important” in making an investment decision; [2] or alternatively, if there is a “substantial likelihood” that, in the eyes of the reasonable investor, the facts at issue “significantly altered the ‘total mix’ of information made available.” [3] The “reasonable investor” is the critical reference point in this analysis. The standard is objective; [4] the subjective desires of particular investors, whether few or many, do not change it. The standard is oriented toward financial outcomes, [5] for it inquires about the relevance of information to investors in securities, and the Supreme Court has explained that the defining feature of such financial activity is the expectation of profit. [6] Information is relevant to someone whose aim is the expectation of profit if it bears on whether that expectation will be realized. Such information is the only sort that passes muster as material under the objective standard, for that standard abstracts investors from their subjective, particular preferences, sweeping in only information that is relevant to all reasonable investors—and information relevant to risks and returns is the only sort that all reasonable investors necessarily care about.

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