SEC sets sustainable, responsible investing rules

THE Securities and Exchange Commission (SEC) has rolled out rules that will serve as a guide for investment companies in boosting sustainable and responsible investing.

“The commission is aware of the measures taken by various regulators to enhance the transparency of and disclosures related to sustainability-related products to improve comparability between funds which incorporate environmental, social, and governance into the investment process,” said the SEC.

In a memorandum circular posted on Tuesday, the SEC said that the rules will be applicable to newly formed and existing investment companies that are qualified for the Sustainable and Responsible Investment (SRI) Fund.

The rules also apply to non-SRI investment companies that incorporate sustainability factors in their investment objective and disclose these in their registration statement.

To be qualified as an SRI Fund, a company must adopt one or more sustainability principles as its key investment focus and reflect it in its registration statement’s investment objective.

The company’s minimum asset allocation percentage that is consistent with the SRI Fund’s objective should account for at least two-thirds of its net asset value.

Investment companies that will seek to qualify as an SRI Fund must submit to the SEC how the name of the fund is proportionate to the sustainability features of the SRI Fund as a whole.

Non-SRI Fund investment companies will not be allowed to use the terms environmental, social, and governance (ESG) and sustainability in their name or their marketing materials unless permitted by the regulator.

The SEC cited the following as sustainability considerations or principles that may be considered by an SRI Fund: 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, and Climate Bonds Taxonomy of the Climate Bonds Initiative.

SRI Funds may adopt negative or exclusionary screening, positive screening, ESG integration, active ownership, thematic investment, impact investment, and other sustainable investment strategies that the regulator sees as helping companies achieve their objectives.

Meanwhile, marketing materials or website disclosures of the SRI Fund must have a fair, balanced, and consistent description of the ESG aspects consistent with regulatory documents filed with the SEC.

“[The marketing materials] should not include untrue statements of material facts, or false or misleading statements,” said SEC.

An SRI Fund will also have reportorial requirements, which should include confirmation of compliance with SRI rules, description of the SRI Fund, description of the basis of assessment, and comparison of periodic assessment.

These annual and quarterly requirements must be made publicly available on the dedicated website by the SRI Fund.

In the circular, investment companies that will violate the rules can be subjected to up to P40,000 plus a penalty of P800 per day for the third offense of using unauthorized SRI or ESG terms in their marketing materials.

A similar penalty will be imposed for investment companies that fail to report a breach of recited ESG investment threshold or inconsistency with sustainable investment objectives.

Meanwhile, a company’s second failure to rectify or a delay in rectifying a breach will cost its fund manager a P100,000 penalty plus a P600 per day penalty for a continuing violation. A third offense will cost P200,000 plus a P1,200 per day fine.

“The commission may, after due notice and hearing, suspend or revoke the registration statement of an SRI Fund and the Investment Company Adviser License of the Fund Manager in case of a fourth or succeeding offense for the same violation,” the regulator said. — Justine Irish D. Tabile