The Securities and Exchange Commission ("SEC") issued Memorandum Circular No. 11, Series of 2022 or the Rules on Sustainable and Responsible Investment Funds (the "Circular"), which took effect on January 3, 2023. The Circular laid out the rules governing Sustainable and Responsible Investment ("SRI") Funds as a recognition to the global trend and continuous growth of SRIs in the recent years. The rules are applicable to newly formed or existing investment companies that seek to qualify or have qualified as SRI Funds, as well as to non-SRI companies that incorporate or seek to include sustainability or environmental, social, and governance ("ESG") factors in its investment objectives and disclose such in their Registration Statements.
I. SRI Regulations
To qualify as an SRI Fund, the investment company must adopt one or more sustainability principles or ESG factors as its key investment focus and reflect the same in its investment objective or strategy in its Registration Statements. The expected exposure or minimum asset allocation percentage that is consistent with the SRI Fund's sustainable investment objective should be at least two-thirds (2/3) of its net asset value ("NAV") at all times.
Moreover, the SRI Fund's name must accurately and fairly reflect the sustainability or ESG factors set out in its investment objective or strategy. The SRI Fund seeking registration must submit an explanation as to how the proposed name is proportionate to the ESG features of the SRI Fund as a whole and will neither mislead investors as to the role of ESG in its overall investment objective and strategy nor over-emphasize or overstate the SRI Fund's ESG features. Only SRI Funds may use the term "ESG," "sustainability" or words of similar import in its name and/or its marketing materials, unless otherwise permitted by the SEC.
Sustainability principles, considerations or ESG factors that may be considered by an SRI Fund include: (a) the United Nations Sustainable Development Goals, (b) United Nations Global Compact Principles, (c) Common Principles for Climate Mitigation Finance Tracking, (d) Green Bond Principles of the International Capital Market Association, (e) Climate Bonds Taxonomy of the Climate Bonds Initiative, and (f) any other nationally or globally acceptable ESG or sustainability principles or criteria. Strategies that may be adopted by an SRI Fund to achieve its investment objective relating to sustainability or ESG, such as Negative or Exclusionary Screening, Best in Class/Positive Screening, ESG Integration, Active Ownership, Thematic Investment, or Impact Investing.
With regard to disclosure, an SRI Fund is mandated to disclose information such as key ESG investments or focus, ESG criteria and investment selection process, asset allocation, reference benchmark and indices, sustainable investment strategy and related risks, stewardship policies, and policies on breach of the ESG investment threshold or inconsistency with the sustainable investment objective. As for reportorial requirements, an SRI Fund must submit annual and quarterly reports on its compliance with SRI rules, as well as assessments on how it has attained its sustainable investment objectives. Failure to comply with reportorial requirements or making untrue or misleading statements of a material fact, or omission to state any material fact required to be stated will subject the investment company and/or its Fund Manager to penalties prescribed by the SEC.
As part of its goal to promote sustainable business practices and investments in sustainability-related products and to enhance the visibility of SRI Funds, a list of qualified investment companies will be uploaded and updated regularly on the SEC website. This, notwithstanding, the SEC is not precluded from removing from the list any SRI fund that no longer qualifies under the requirements of the rules.
II. Regulations Applicable to Non-SRI Entities
A non-SRI investment company that intends to include sustainability or ESG factors or considerations in its investment objective and disclose such information in its Registration Statements and other marketing materials, need not qualify as an SRI Fund but will be subject to additional requirements in relation to its Registration Statement and annual and quarterly reports.
The non-SRI investment company must include in its Registration Statements the information on its ESG or sustainability investment objective and the percentage of the NAV that will be invested in ESG investments. The Registration Statements must contain the description of the process and criteria in selecting the investments to attain the ESG or sustainable investment objective, sustainability strategies and their continuous implementation, existing and emerging risks associated with these investments and mitigation strategies, and assessment methodologies adopted to measure and monitor the company's ESG or sustainability-related objectives. The Registration Statements must also contain the policies and processes when the company's other investments become inconsistent with its ESG or sustainability-related investment objectives.
As regards the non-SRI investment company's annual or quarterly reports, these reports must describe (1) how the non-SRI fund (or the company) has attained its ESG or sustainable investment objectives, which includes the ESG or sustainability investments' percentage in the NAV and (2) basis of the assessment performed relative to how the non-SRI Investment Company has attained its ESG or sustainability related investment objectives during the reporting period. The reports must also include a comparison of the current and previous assessment period.
A non-SRI investment company that has ESG or sustainability investments may not use the words "ESG," "sustainability", or words of similar imports in its name and marketing materials. Additionally, the company will not be included in the list of SRI funds on the SEC's website.
You may download the SyCipLaw ESG Bulletin January to June 2023 issue here or via this link.
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