SEC Issues Rules on Sustainable and Responsible Investment Funds

On 20 December 2022, the Securities and Exchange Commission (“SEC”) issued SEC Memorandum Circular No. 11, series of 2022, to provide guidance on the disclosures and reporting of Sustainable and Responsible Investment (“SRI”) Funds (“Rules”).

The Rules apply to both (1) newly formed or existing investment companies that seek to qualify, or have qualified as SRI Funds, including sub-funds of an umbrella fund, which adopt sustainability considerations or environmental, social, and governance (“ESG”) factors as its key investment focus, and (2) non-SRI investment companies that incorporate or seek to include sustainability or ESG factors or considerations in its investment objective and disclose such information in its Registration Statement.

Newly Formed or Existing Investment Companies Seeking to Qualify as SRI Funds

Newly formed or existing investment companies, including any sub-fund of an umbrella fund, seeking to qualify as SRI Funds must comply with the following minimum requirements:

1. Adoption of one or more sustainability principles or considerations or ESG factors as key investment focus which must be reflected in the Registration Statement; 
2. The expected exposure or minimum asset allocation percentage consistent with the SRI Fund’s sustainable investment objective should account for at least 2/3 of its net asset value (“NAV”) at all times; 
3. A name accurately and fairly reflecting the sustainability or ESG factors set out in the SRI Fund’s investment objective and/or strategy;
4. Amendment of the Registration Statement of existing investment companies seeking to qualify as SRI Funds or the Main Prospectus and/or Sub-Fund Supplement (in case of an umbrella fund) to reflect the requirements of the Rules; and
5. In addition to letter (b) above, when a feeder fund or a fund-of-funds seeks to qualify as an SRI Fund, the target fund/s must be aligned with the sustainable investment objective of the SRI Fund, and the total ESG investments of each target fund/s should account for at least 2/3 of the SRI Fund’s NAV. 

The Rules provide several sustainability principles that an SRI Fund may consider. These include the United Nations Sustainable Development Goals, United Nations Global Compact Principles, Common Principles for Climate Mitigation Finance Tracking, Green Bond Principles of the International Capital Market Association, Climate Bonds Taxonomy of the Climate Bonds Initiative and any other nationally or globally acceptable ESG or sustainability principles or criteria.

In addition, the Rules provide sustainable investment strategies that may be adopted by SRI Funds to achieve its investment objectives relating to sustainability or ESG. These include (a) negative or exclusionary screening, (b) best in class/positive screening, (c) ESG integration, (d) active ownership, (e) thematic investment, (f) impact investing and (g) other sustainable investment strategies practiced nationally or globally.

Multiple strategies may be adopted by a single SRI Fund to achieve its investment objectives. However, an investment company shall not qualify as an SRI Fund if the adoption of negative or exclusionary screening or ESG integration is only for financial returns and not accompanied by any other sustainable investment objective. 

Disclosure Requirements

Covered entities are now required to disclose the following information in the Prospectus or Sub-Fund Supplement (in case of an umbrella fund) and Product Highlight Sheet of an SRI Fund:

1. Name of Fund;
2. Notification to the public on the qualification as SRI Fund;
3. Key ESG investment/s or focus;
4. ESG criteria and investment selection process;
5. Asset allocation;
6. Reference benchmarks and indices;
7. Sustainable investment strategy;
8. Sustainable investment strategy-related risks;
9. Steps to ensure that the SRI Fund’s overall impact is aligned with other ESG factors;
10. Assessment methodologies to measure and monitor attainment of sustainable investment objective;
11. Stewardship policies;
12. Policies and procedures on breach of ESG investment threshold or inconsistency with sustainable investment objective; and
13. Any other information (other initiatives of the SRI Fund to promote adherence to internationally recognized sustainability standards and practices or any additional information considered necessary by the SRI Fund and its Fund Manager).

Regular Assessment, Monitoring, and Reportorial Requirements

Under the Rules, the SRI Fund and its Fund Manager are to regularly assess how the SRI Funds have attained its sustainable investment objective through the performance of periodic assessments. SRI Funds must also submit annual or quarterly reports containing the following information: (a) a confirmation of compliance with SRI Rules; (b) a description of how the SRI Fund has attained its sustainable investment objective; (c) basis of the assessment; and (d) comparison of the current and previous assessment period in tabular format.

Administrative Sanctions

Violation of the Rules shall, depending on the section violated, subject the investment company and/or its Fund Manager to (a) reprimand for the first offense; (b) a penalty of at least PHP20,000.00 plus PHP400.00 per day of continuing violation up to PHP100,000.00 plus PHP600.00 per day of continuing violation for the second offense; and (c) a penalty of at least PHP40,000.00 plus PHP800.00 per day of continuing violation up to PHP200,000.00 plus PHP1,200.00 per day of continuing violation for the third offense. The registration statement of an SRI Fund and the Investment Company Adviser License of the Fund Manager may be suspended or revoked by the SEC after due notice and hearing in case of a fourth or succeeding offense for the same violation. 

The foregoing penalties shall be without prejudice to any other actions and sanctions that may be taken or imposed by the SEC pursuant to related laws and issuances.
To access the complete Rules, please refer to this link.