This post is based on a comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule by Professor Scott Hirst. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.

This letter (the “Letter”) suggests a simple, but far reaching, change to the Commission’s proposed climate-related disclosure rule (the “Proposed Rule”): The Commission should let investors in a registrant decide which of the disclosure obligations in the Proposed Rule apply to the registrant. More specifically, the Commission should allow a registrant to opt-out of particular disclosure obligations, if such an opt-out has been approved by a vote of the registrant’s investors. Below I suggest further details on how the opt-out should be structured. I refer to this as an “investor-optional” disclosure rule, in contrast to the Commission’s proposed mandatory disclosure rule.

As I explain further below, the Commission should make the Proposed Rule investor-optional for four main reasons:

1. Investor-optionality is consistent both with the claims of the Commission supporting the Proposed Rule—that investors demand climate disclosure—and those of the Proposed Rule’s critics—that investors do not want climate disclosure, because it would impose additional costs on them, and current disclosure is sufficient for their needs. Letting investors decide whether climate disclosure is appropriate for their protection is the only way to resolve the tension between these two claims.
2. Making the Proposed Rule investor optional would nullify the strongest attacks on the validity of the Proposed Rule. If these apply at all, they apply only to a mandatory rule. By substantially reducing the likelihood of the Proposed Rule being invalidated, investor-optionality would increase the expected benefit from the Proposed Rule.
3. Investor-optional climate disclosure would be better for investors than a mandatory rule. In no plausible state of the world would it be worse for investors than a mandatory rule, and in most plausible states of the world it would be better.
4. Failure to make the Proposed Rule investor-optional would be potential grounds for its invalidation. At a minimum, because investor-optionality is a reasonable alternative, the Administrative Procedure Act requires the Commission to consider it. And because investor-optionality is likely to be better for investors than a mandatory rule, it will be extremely difficult for the Commission to justify implementing a mandatory rule rather than an investor-optional rule. If the Commission did so without adequate justification, its decision would be arbitrary and capricious, and therefore subject to invalidation.

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