A Boost To ESG Investing: SEC Introduces New Rules On Sustainable And Responsible Investment Funds

• Published date: 01 August 2023
• Subject Matter: Finance and Banking, Strategy, Investment Strategy, Fund Finance
• Law Firm: SyCip Salazar Hernandez & Gatmaitan
• Author: SyCip Salazar Hernandez & Gatmaitan

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...