SEC issues rules on Sustainable and Responsible Investment Funds

THE Securities and Exchange Commission (SEC) issued guidelines on Sustainable and Responsible (SRI) funds to encourage the expansion of sustainability-related products in the market and to provide direction on the disclosures and reporting of investment companies classified as SRI funds. Given the global trend and continuous growth of sustainable and responsible investing in recent years, the SEC recognizes the need to enhance the transparency of reporting related to sustainability-linked products, in effect also improving the comparability between funds which incorporate environmental, social and governance (ESG) in the investment process.

The rules require that SRI funds must adopt one or more sustainability principles, considerations or ESG factors in their investment focus, policies and strategies. Some of the sustainability principles they may consider include the United Nations Sustainable Development Goals, UN Global Compact Principles, Common Principles for Climate Mitigation Finance Tracking, Green Bond Principles of the International Capital Market Association or the Climate Bonds Taxonomy of the Climate Bonds Initiative.

As part of the minimum requirements, the name of SRI funds must also accurately and fairly reflect the sustainability or ESG factors set out in their investment objectives and strategies, neither misleading investors on the role of the ESG in their overall investment objective and strategy nor overemphasizing or overstating the SRI fund’s ESG features. The guidelines further impose a minimum asset allocation requirement that two-thirds of the fund’s net asset value at all times should be consistent with the SRI fund’s sustainable investment objective.

SRI funds may employ multiple investment strategies to achieve their investment objectives. The following strategies relating to sustainability or ESG may be adopted by these funds: negative or exclusionary screening, best in class/positive screening, ESG integration, active ownership, thematic investment, impact investing or other sustainable investment strategies practiced nationally or globally.

In terms of disclosure requirements, the guidelines state that the prospectus of such funds must clearly indicate the name of the fund, its qualification as an SRI fund, a list and description of key ESG investment focus, ESG criteria and investment selection process, asset allocation, reference ESG benchmarks and indices, sustainable investment strategy, existing and emerging risks associated with the SRI fund’s sustainable investment objective, risk management framework, alignment of the fund’s overall impact with other ESG factors, assessment methodologies to measure and monitor attainment of sustainable investment objectives, stewardship policies such us proxy voting and shareholder engagement, and policies and procedures on breach of ESG investment thresholds.

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The memorandum circular also covers marketing and website disclosures, regular assessment and monitoring, reportorial requirements, periodic assessments, uploading of reports and additional information in annual or quarterly reports, among other things.

You may find more details on Memorandum Circular 11, Series of 2022 on the SEC website:

There has never been a greater focus on financing or investments that provide environmental and sustainability benefits. Sustainability has become an important part of public and private sector initiatives. With the release of the rules on SRI funds, the commission continues to pursue its mandate of introducing opportunities and support for innovative, particularly, sustainability-linked products for the domestic capital market.

Kelvin Lester K. Lee is a commissioner of the Securities and Exchange Commission (SEC). The views and opinions stated herein are his own. You may email your comments and questions to [email protected]

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