Request for Comments on the Exposure Draft of the Memorandum Circular on the Rules on Sustainable and Responsible Investment Fund

January 19, 2022 CORPORATE GOVERNANCE AND FINANCE DEPARTMENT TO : Investment Companies Fund Managers Other Entities Dealing with an Investment Company SUBJECT : Request for Comments on the Exposure Draft of the Memorandum Circular on the Rules on Sustainable and Responsible Investment Fund NOTICE The Commission hereby requests comments and/or inputs on the attached draft Memorandum Circular on the Rules on Sustainable and Responsible Investment Fund. The written comments on the exposure draft must be submitted to the Corporate Governance and Finance Department (CGFD) via electronic mail at [emailprotected] on or before 02 February (Wednesday) . Please use the attached template in submitting the comments, proposed revisions, and estimated cost/s to comply with the Memorandum Circular. Issued on January 19, 2022. ATTACHMENT Comments on the Draft Memorandum Circular on the Rules on Sustainable and Responsible Investment Fund Name: ______________________________ Company: ___________________________ Provisions on the Draft Circular Comments Proposed Revision Estimated Cost to Comply with Memorandum Circular 1 Section 1. Applicability. Section 2. Minimum Requirements to Qualify as an SRI Fund. Section 3. Sustainability Principles/Considerations Section 4. ESG Strategies. Section 5. Disclosure Requirements Section 6. Marketing Materials and Website Disclosures. Section 7. Regular Assessment and Monitoring. Section 8. Reportorial Requirements. Section 9. Breach of ESG Investment Threshold or Inconsistency with ESG Focus. Section 10. Dedicated SRI Funds Webpage. Section 11. ESG Related Investments of Non-SRI Funds. Section 12. Administrative Sanctions. Section 13. Applicability of SRC, ICA and Other Rules. Section 14. Separability Clause. Section 15. Effectivity. SEC MEMORANDUM CIRCULAR NO. ___ Series of 2022 TO : INVESTMENT COMPANIES FUND MANAGERS OTHER ENTITIES DEALING WITH AN INVESTMENT COMPANY SUBJECT : RULES ON SUSTAINABLE AND RESPONSIBLE INVESTMENT FUND WHEREAS , the Commission recognizes the global trend and continuous growth of sustainable and responsible investing in the recent years; WHEREAS , the Commission is aware of the measures taken by various regulators to enhance the disclosures or transparency of sustainability-related products to improve comparability between funds which incorporate Environmental, Social, and Governance (ESG) into the investment process; WHEREAS , the Commission is also aware of the initiatives adopted by various regulators to protect investors from greenwashing and assist them in making better-informed investment decisions; WHEREAS , the Commission promotes sustainable business practices, investments in sustainability-related products, and expansion of its market; WHEREAS , Section 35 (a) of Republic Act No. 2629, or the Investment Company Act (ICA), and Section 72 of Republic Act No. 8799, or The Securities Regulation Code (SRC), vest upon the Commission the authority to make, issue, amend, and rescind rules and regulations and orders, which are necessary or appropriate to the exercise of the powers conferred upon it in the ICA and the SRC; WHEREAS , to provide guidance on the disclosures and reporting of investment companies classified as Sustainable and Responsible Investment (SRI) Funds and their Fund Managers, the Commission deems it necessary to issue the subject rules; IN VIEW OF THE FOREGOING , the following rules are promulgated: Section 1. Applicability. These rules shall apply to the following: a. A newly formed or existing investment company that seeks to qualify, or has qualified, as a Sustainable and Responsible Investment (SRI) Fund, including any sub-fund of an umbrella fund, which adopts sustainability considerations or Environmental, Social, and Governance (ESG) factors as its key investment focus; and b. A non-SRI Fund that incorporates or seeks to include sustainability or ESG factors or considerations in its investment objective/s and discloses such information in its Registration Statement. Section 2. Minimum Requirements to Qualify as an SRI Fund. A newly formed or existing investment company including any sub-fund of an umbrella fund seeking to qualify as an SRI Fund must comply with the following: a. It must adopt one or more sustainability principles or considerations or ESG factors as its key investment focus and appropriately reflect such focus in its investment objective/s and/or strategy/ies in its Registration Statement; b. The expected exposure or minimum asset allocation percentage that is consistent with the SRI Fund's ESG focus should account for at least 70% of its Net Asset Value (NAV); c. The name of the SRI Fund must accurately and fairly reflect the sustainability or ESG factors set out in its investment objective/s and/or strategy/ies, subject to the following conditions: i. An explanation must be submitted to the Commission 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; and ii. No investment company other than an SRI Fund shall use the term "ESG," "sustainability" or words of similar import in its name and/or its marketing materials unless otherwise permitted by the Commission. Guidance: The requirement above is in addition to the recommendation under Rule 4.2 (a) of the ICA-IRR that an investment company must indicate its classification in its name, i.e., Equity Fund, Bond or Fixed Income Fund, Balanced Fund, Money Market Fund, Index Fund, Feeder Fund, Fund-of-Funds, Co-Managed Fund, Multi-Asset/Asset Allocation Funds, etc. Moreover, no clearance over the application for primary registration or amendment of the Articles of Incorporation shall be issued unless the Commission is satisfied that the name of the SRI Fund complies with Section 2 (c) of these Rules. d. The Registration Statement of an existing investment company seeking to qualify as an SRI Fund or the Main Prospectus and Sub-Fund Supplement (in case of an umbrella fund), must be amended to reflect the requirements provided in these Rules; Guidance: The Commission shall not issue the Order on the Amended Registration Statement unless the existing investment company or a sub-fund (in the case of an umbrella fund) has demonstrated compliance with Section 2 (b) of these Rules by submitting a schedule of investments/portfolio duly certified by its custodian. e. When a feeder fund seeks to qualify as an SRI Fund, the target fund must be aligned with the ESG focus of the SRI Fund, and the total ESG investments of the target fund should account for at least 70% of its NAV; Guidance: There is no need to re-apply as an SRI Fund if the target fund is changed, provided that the new target fund complies with Section 2 (e) of these Rules. Additionally, the Commission must be notified of the new target fund within five (5) business days from the Board of Directors' approval of the change. The notification must explain the change in the target fund. Such information must also be provided on the SRI Fund's website to inform the investing public within the same period. Section 3. Sustainability Principles/Considerations. The following sustainability considerations, principles, or ESG factors may be considered by an SRI Fund: a. United Nations Sustainable Development Goals (SDGs) 2 pertaining to the seventeen (17) sustainable development goals adopted by the United Nations in 2015; b. United Nations Global Compact Principles 3 on the ten (10) principles relating to sustainability adopted by the UN Global Compact; c. Common Principles for Climate Mitigation Finance Tracking 4 regarding the tracking and reporting of climate change mitigation finance which was developed by the Joint Climate Finance Tracking Group of multilateral development banks (MDBs) and a group of representatives of the International Development Finance Club (IDFC) member banks; d. Green Bond Principles of the International Capital Market Association (ICMA) 5 which recommend transparency and disclosure and promote integrity in the development of the Green Bond market; e. Climate Bonds Taxonomy of the Climate Bonds Initiative 6 which identifies the assets, activities, and projects needed to deliver a low carbon economy; and f. Any other nationally or globally acceptable ESG or sustainability principles or criteria. Section 4. ESG Strategies. The SRI Fund may adopt one or more of the following strategies to achieve its investment objective/s relating to sustainability or ESG: a. Negative or Exclusionary Screening which excludes companies, sectors, activities ( e.g. , alcohol, tobacco, gambling, nuclear power or energy, military weapons, fossil fuels, etc.) or countries ( e.g. , repressive regimes) from the investment universe or portfolio of the SRI Fund based on a particular ESG factor/s, or are deemed to conflict with national or international agreements, such as Universal Declaration of Human Rights or Rio Declaration on Environment and Development; b. Best in Class/Positive Screening which prioritizes investing in companies with higher ESG scores or those that outperform its peers in terms of ESG performance; c. ESG Integration which incorporates ESG data in the investment selection process and analyzes the environmental, social, and governance qualities of a company together with the traditional financial analysis; d. Active Ownership which involves engagement with investee companies, voting at meetings regarding ESG matters, issues or influence in the investee's behavior, policies, and practices relative to ESG; e. Thematic Investment which involves the identification and selection of companies that aligns or falls under a particular theme related to sustainability; f. Impact Investing which is aimed at a particular social or environmental objective or benefit such as providing employment in an under-developed community or promoting access to low carbon energy; and g. Other ESG strategies practiced nationally or globally. Guidance: Multiple strategies may be adopted by a single SRI Fund to achieve its investment objective/s. In addition, any change/s in the SRI Fund's ESG strategies shall not require amendment of the Registration Statement. However, the Commission must be notified of such change within five (5) business days from the Board of Directors' approval of such change/s. The notification must include an explanation as to why the ESG strategies were changed. Such information must also be posted on the SRI Fund's website to notify the investing public within the same period. Section 5. Disclosure Requirements. The following information must be provided in the Prospectus or Sub-Fund Supplement (in case of an umbrella fund) and Product Highlight Sheet of an SRI Fund: a. Name of Fund which complies with Section 2 (c) of these Rules b. Notification to the public on the qualification as SRI Fund Statement on the cover page that the investment company or sub-fund (in case of an umbrella fund) has qualified as an SRI Fund under these Rules as well as a disclaimer that the Commission does not guarantee the ESG performance or effectiveness of the investment selection process, procedures, criteria, and strategies disclosed in the Prospectus to achieve the ESG focus of the SRI Fund; c. Key ESG investment(s) or focus List and description of the ESG investments (ESG focus) of the SRI Fund such as climate change, energy efficiency, human rights, board diversity, and other sustainability principles/considerations adopted; d. ESG criteria and investment selection process List and description of the process and objective criteria used in selecting the underlying investments, such as ratings, labels, or identified data sources, in relation to ESG strategies to attain the SRI Fund's ESG focus; e. Asset allocation i. Expected exposure or minimum asset allocation percentage that is consistent with the SRI Fund's ESG focus that should account for at least 70% of its NAV; and ii. Estimated proportion or percentage of the SRI Fund's NAV that will be devoted to non-ESG investments, if any; f. ESG strategy i. List and description of the ESG Strategy/ies adopted by the SRI Fund, including any exclusion or screening thresholds where applicable, and how each strategy will be continuously implemented in the investment process; and ii. Disclosure of the strategy that is most reflective of the SRI Fund's ESG strategies, if several are adopted; g. ESG focus and ESG strategy related risks i. List in the order of importance and a description of existing and emerging risks associated with the SRI Fund's ESG focus, including unique risks arising from the investment being sustainability-related, an explanation on how the risk may impact the investment of the investor, and the corresponding risk management measures and management procedure for each identified risk; ii. Provide an overall risk management framework for the assets managed by the Fund Manager; and iii. Description of the risks or limitations associated with the ESG strategies of the SRI Fund, such as subjective judgment in investment selection, reliance on third party sources, the concentration of investments, etc.; h. Policies and procedures for investments that becomes inconsistent with ESG focus i. Policies and processes when the SRI Fund's investment(s) become(s) inconsistent with its ESG focus; and ii. Divestment procedures for existing investments that were initially compliant but subsequently became ineligible (if any); i. Steps to ensure SRI Fund's overall impact is aligned with other ESG factors Measures to be taken to ensure that the SRI Fund's overall impact does not cause significant harm or inconsistency with any other sustainability factors set out in the SRI Fund's investment objective/s and/or strategy/ies; j. Assessment methodologies to measure and monitor attainment of ESG focus Description or identification of the assessment methodologies adopted to measure and monitor the attainment of the ESG focus throughout the lifecycle of the SRI fund; and k. Any other information Disclosure of other initiatives or activities 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. Section 6. Marketing Materials and Website Disclosures. The following requirements apply to all information regarding the SRI Fund that will be included in the marketing materials, advertisements, publications, and communications, including website content: a. It must present a fair, balanced, and consistent view of the SRI Fund; b. Sustainability aspects should be consistent with regulatory documents; and c. Should not include untrue statements of material facts, or false or misleading statements. Section 7. Regular Assessment and Monitoring. In relation to Section 8 (d) of these Rules, the SRI Fund, and its Fund Manager must regularly assess how the SRI Fund has attained its ESG focus. The Fund Manager must also continuously monitor and evaluate the underlying investments to ensure that the SRI Fund continues to meet the stated ESG focus and other requirements provided in these Rules. The Independent Oversight Entity (IOE) shall oversee the transactions and performance of functions by the Fund Manager to ensure compliance with the disclosures made in the Prospectus of an SRI Fund and the requirements provided in these Rules and any amendments thereto. Section 8. Reportorial Requirements. The following information must be provided in the annual or quarterly reports, as the case may be, of an SRI Fund: a. Confirmation of Compliance with SRI Rules A statement that the SRI Fund has complied with the Rules on Sustainable and Responsible Investment Funds, including any amendments thereto, within the reporting period; b. Description on how the SRI Fund has attained its ESG focus during the reporting period, including but not limited to: i. Description and list of each of the underlying investments that are consistent with the SRI Fund's ESG Focus, including their actual percentage of the Fund's NAV; Guidance: The SRI Fund must also submit a schedule of investments providing for the allocation per ESG Focus. ii. Brief description of actual non-ESG investments and their percentage of the SRI Fund's NAV; iii. Description and list of ESG Strategies employed and the actual proportion of the investments that were eliminated or selected as a result of the SRI Fund's ESG-related screening; iv. Description of the strategy that is most reflective of the SRI Fund's ESG strategies, if multiple strategies are used; v. Description of divested investments made during the reporting period and their percentage of SRI Fund's NAV, where applicable; and vi. Actions or initiatives taken by the fund to attain the SRI Fund's ESG Focus. c. Description of the basis of assessment Description of the basis of the assessment performed relative to how SRI Fund has attained its ESG focus during the reporting period; d. Comparison of periodic assessment Comparison of the current and previous assessment period in tabular format, where the SRI Fund has submitted a prior report on its assessment; Guidance: Failure to disclose any of the abovementioned information in the Annual or Quarterly report shall render the report incomplete and subject the SRI Fund to the applicable penalty under SEC Memorandum Circular No. 6, s. 2005 (Consolidated Scale of Fines) or any amendments thereto. Section 9. Breach of ESG Investment Threshold or Inconsistency with ESG Focus. The Fund Manager shall inform the Commission within five (5) business days after it becomes aware of any of the following: i. A breach of the ESG investment threshold where the SRI Fund's investments in ESG accounts for less than 70% of the NAV of the SRI Fund, including a description of the actions taken to rectify the breach; or ii. Inconsistency of an underlying investment/s with the SRI Fund's stated ESG focus, including any divestments made or any other action taken to rectify the inconsistency. The Fund Manager shall rectify such breach or inconsistency as soon as practicable but shall not be more than thirty (30) business days from the date of discovery. The Fund Manager must also notify the Commission within five (5) business days from rectifying the breach or inconsistency. Section 10. Dedicated SRI Funds webpage. To enhance the visibility of SRI Funds, a list of qualified investment companies or sub-funds (in case of an umbrella fund) will be uploaded and updated regularly on the SEC website/microsite dedicated for investment companies and/or social media accounts of the Commission. An SRI Fund that no longer qualifies under the requirements of these Rules and any amendments thereto will be removed from the list accordingly. Section 11. ESG Related Investments of Non-SRI Funds. An investment company that intends to include sustainability or ESG factors or considerations in its investment objective/s and discloses such information in its Registration Statement and other marketing materials, without qualifying as an SRI Fund under these Rules, shall be subject to the following: a. Additional Disclosures in Registration Statement i. Information on ESG related investments including the percentage of the non-SRI Fund's NAV that is expected to be allocated to ESG investments; ii. Description of the process and criteria used in selecting the underlying investments to attain the ESG related investment objective/s of the non-SRI Fund; iii. Description of the ESG Strategy/ies adopted by the non-SRI Fund and how each strategy will be continuously implemented in the investment process; iv. Description of existing and emerging risks associated with the non-SRI Fund's ESG investments and ESG Strategies, including the corresponding risk management measures and management procedure for each identified risk; v. Policies and processes when the non-SRI Fund's investment(s) become(s) inconsistent with its ESG investment objective/s as well as divestment procedures for existing investments that were initially compliant but subsequently became ineligible (if any); and vi. Description or identification of the assessment methodologies adopted to measure and monitor the attainment of the ESG related investment objective/s of the non-SRI Fund. b. Additional information in Annual or Quarterly Reports i. Description on how the non-SRI Fund has attained its ESG investment objective/s during the reporting period which should provide, among others, for the information on each of the underlying investments that are consistent with the non-SRI Fund's ESG objectives, including their actual percentage of the Fund's NAV; ii. Description of the basis of the assessment performed relative to how the non-SRI Fund has attained its ESG investment objective/s during the reporting period; and iii. Comparison of the current and previous assessment period in tabular format, where the non-SRI Fund has submitted a previous report on its assessment. Guidance: Notwithstanding the additional disclosures required herein, a non-SRI Fund shall not be entitled to the benefits accorded to a qualified SRI Fund, such as the use of the terms "ESG," "sustainability," or words of similar import in its name and/or marketing materials, as provided in Section 2 (c) (ii), and shall not be included in the list of qualified SRI Funds webpage as provided in Section 10 of these Rules or any amendments thereto. Section 12. Administrative Sanctions. Violation of any of these Rules shall subject the investment company and/or its Fund Manager to the following penalties: SRI MC Description Person Liable First Offense Second Offense Third Offense Sec. 2 (c) Unauthorized use of SRI, ESG, or any other similar or associated terms in the name and/or marketing materials of an investment company, or making false statements as to its qualification as an SRI Fund or over-emphasizing sustainability or ESG features in any communication or advertising materials Fund Manager Reprimand P20,000 plus P400 per day of continuing violation P40,000 plus P800 per day of continuing violation Sec. 9 Failure to report or delay in reporting a breach of recited ESG investment threshold or inconsistency with ESG Focus of the SRI Fund within five (5) business days from discovery Fund Manager Reprimand P20,000 plus P400 per day of continuing violation P40,000 plus P800 per day of continuing violation Sec. 9 (i) (ii) Failure to rectify or delay in rectifying a breach of recited ESG investment threshold or inconsistency with ESG focus of the SRI Fund within thirty (30) business days from discovery Fund Manager Reprimand and automatic delisting of SRI managed fund in the list of the Commission posted in the website and/or social media accounts P100,000 plus P600 per day of continuing violation P200,000 plus P1,200 per day of continuing violation The Commission may, after due notice and hearing, suspend/revoke the registration statement of an SRI Fund and the license of the Fund Manager for the commission 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 Commission, such as for making an untrue statement of a material fact, or omission to state any material fact required to be stated or necessary to make statements not misleading, in any report or document filed by an SRI Fund with the Commission, pursuant to the Revised Corporation Code, Securities Regulation Code, Investment Company Act, SEC Memorandum Circular No. 21, s. 2019 (Rules on Independent Oversight Entity), SEC Memorandum Circular No. 6, s. 2005 (Consolidated Scale of Fines), any amendments thereto and all the rules and regulations that the Commission may subsequently issue in the exercise of its mandates. Section 13. Applicability of SRC, ICA and Other Rules. The provisions of the Securities Regulation Code, Investment Company Act, their respective implementing rules and regulations, and any other rules implemented by the Commission insofar as they are not inconsistent herewith shall apply suppletorily hereto. Section 14. Separability Clause. If for any reason, any provision of these Rules or any portion thereof or application of such provision or portion thereof to any person, group or circumstance is declared invalid or unconstitutional, the remainder of these Rules shall not be affected by such decision. Section 15. Effectivity. These Rules shall take effect immediately after publication in two (2) newspapers of general circulation in the Philippines. Pasay City, Philippines, _____ 2022. For the Commission: EMILIO B. AQUINO Chairperson Footnotes 1. Please indicate the specific expense or item and the estimated amount, e.g. , Cost of printing Prospectus P500.00. 2. https://sdgs.un.org/goals. 3. https://www.unglobalcompact.org/what-is-gc/mission/principles. 4. https://www.eib.org/attachments/documents/mdb_idfc_mitigation_common_principles_en.pdf. 5. https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/green-bond-principles-gbp/. 6. https://www.climatebonds.net/standard/taxonomy.