Looks like this runs into the same problem as #97646 (comment) - the preprocessor is not available in BaseMaterial3D. Either that's an engine bug that can be fixed, or this PR is not actually the right approach, and something more like #89966 is right.

Set proximity_fade_enabled
  :46 - Tokenizer: Unknown character #35: '#'
  Shader compilation failed.
--Main Shader--
    1 | // NOTE: Shader automatically converted from Godot Engine 4.4.dev's StandardMaterial3D.
...
   44 | 	// Proximity Fade: Enabled
   45 | 	float proximity_depth_tex = textureLod(depth_texture, SCREEN_UV, 0.0).r;
E  46-> 	#if CURRENT_RENDERER == RENDERER_COMPATIBILITY
   47 | 	vec4 proximity_view_pos = INV_PROJECTION_MATRIX * vec4(SCREEN_UV * 2.0 - 1.0, proximity_depth_tex * 2.0 - 1.0, 1.0);
   48 | 	#else
   49 | 	vec4 proximity_view_pos = INV_PROJECTION_MATRIX * vec4(SCREEN_UV * 2.0 - 1.0, proximity_depth_tex, 1.0);
   50 | 	#endif
   51 | 	proximity_view_pos.xyz /= proximity_view_pos.w;
   52 | 	ALPHA *= clamp(1.0 - smoothstep(proximity_view_pos.z + proximity_fade_distance, proximity_view_pos.z, VERTEX.z), 0.0, 1.0);
   53 | }
   54 | 

Instead of using the preprocessor, you can do the if/else in C++ and add code to the generated string conditionally.

Instead of using the preprocessor, you can do the if/else in C++ and add code to the generated string conditionally.

Yeah, the hope was to avoid that, so that the material is correct in multiple renderers even after being converted to a ShaderMaterial. The superseded PR already takes a similar approach with conditionally added C++, and was apparently deferred for a while in the hope that we could use the preprocessor somehow instead.

@tetrapod00 You can use OUTPUT_IS_SRGB in the shader to determine if Compatibility is being used (where OUTPUT_IS_SRGB == true in Compatibility), as in #110684.

Superseded by #111437