The Securities and Exchange Commission’s proposed rule on climate-related disclosures would require several quantitative metrics be incorporated in the notes to firms’ financial statements. We are concerned that this proposal disregards the independence of the accounting standard-setting process. It would seriously compromise the integrity of the financial statements that investors rely on to make important investment decisions.

For decades, our financial accounting system has been built on a joint responsibility system whereby an independent, expert, private-sector body produces accounting standards under the SEC’s oversight. This structure was deliberately chosen after careful consideration and for good reason. While the SEC has authority under the 1933 Securities Act and the 1934 Securities Exchange Act to promulgate accounting standards, private sector standard-setting bodies have historically fulfilled this responsibility. The first of these bodies was the Committee on Accounting Procedure, established in 1939, which was succeeded by the Accounting Principles Board in 1959, and finally by the Financial Accounting Standards Board (FASB) in 1973.

FASB was formed following a recommendation from the Wheat Committee, chaired by the renowned corporate securities lawyer Francis Wheat and formed in 1971 by the American Institute of Certified Public Accountants. The committee specifically examined whether accounting standards should be set by a private sector body or the government. It concluded that standards should be set by the private sector to protect from political pressures and guard against serving the will of special interest groups instead of investors. The SEC endorsed FASB’s creation and announced it would consider the board’s standards as having substantial authoritative support, a position the SEC holds to this day.

FASB’s structure was designed to counteract political and special interest pressures. Board members serve full-time, are appointed by Financial Accounting Foundation trustees to five-year terms, and they come from a variety of backgrounds related to the financial reporting field. Funding for FASB is provided from the private sector, not the government, and primarily comes from accounting support fees paid by public companies.

SEC oversight of FASB is a critical part of the board’s structure. Interaction between FASB and the SEC includes the SEC recommending items for FASB’s technical agenda. The fact that the SEC has the ultimate authority to promulgate accounting standards and can take on this role at any time ensures continued productive relations between the two entities.

FASB’s standard-setting process is held to a strict protocol to ensure only the highest quality standards are adopted. The board’s Rules of Procedure set out a deliberative standard-setting process that is designed to seek the input of all stakeholders, including through public roundtables and board deliberation at public meetings. Cost–benefit analysis is integrated throughout the standard-setting process.

Rather than acting pursuant to this system that has worked well for decades, the SEC’s climate proposal seeks to subvert FASB’s authority. The removal of accounting standard-setting from an independent process creates a precedent that threatens the integrity of the financial statements and their continued usefulness to those who need them to make investment decisions. Many of the concerns the Wheat Committee expressed regarding government accounting standard-setting are implicated by the proposal. Furthermore, the envisioned carbon disclosure standards would not benefit from the extensive due process prescribed by FASB or the expertise that board members bring to the process.

In arguing this, we do not criticize the Biden administration’s desire to combat climate change. Rather, we stress that pursuing environmental policy by infringing upon long existing and successful finance policy attempts to address one problem by opening the door to a host of others.