The Securities and Exchange Commission (SEC) is seeking public comments on its draft rules for companies that will create a Sustainable and Responsible Investment (SRI) Fund.
In a draft memorandum circular (MC), which is open for public comment until February 2, the SEC said the rules aim to prevent investors from rolling out greenwashing schemes.
Greenwashing is a form of communication and marketing strategy adopted by companies or other organizations, conveying a false impression or providing misleading information about how a company’s products are more environmentally sound. Its main aim is to deceive consumers into believing that a company’s products are environmentally friendly so they can charge more.
“The Commission promotes sustainable business practices, investments in sustainability-related products and expansion of its market,” the draft MC read.
The new rules will be applied to 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.
It will also cover non-SRI funds that incorporate or seek to include sustainability or ESG factors or considerations in its investment objective and disclose such information in its registration statement.
The SEC also listed some of the sustainable principles that may be used by the SRI fund, which include the 17 sustainable development goals of the United Nations, the 10 principles of the UN Global Compact, Common Principles for Climate Mitigation Finance Tracking, Green Bond Principles of the International Capital Market Association, Climate Bonds Taxonomy of the Climate Bonds Initiative, and other nationally or globally acceptable ESG or sustainability principles or criteria.
The commission listed some of the strategies to achieve its investment objectives relating to sustainability or ESG, which may include negative or exclusionary screening. This excludes companies, sectors, activities that deal with alcohol, tobacco, gambling, nuclear power or energy, military weapons, fossil fuels, or countries with repressive regimes from the investment universe.
Other strategies include Best in Class or Positive Screening, which prioritizes investing in companies with higher ESG scores or those that outperform its peers in terms of ESG performance; and 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.
To enhance the visibility of SRI Funds, the SEC said a list of qualified investment companies or sub-funds in case of an umbrella fund will be uploaded and updated regularly at the SEC website dedicated for investment companies and social media accounts of the agency.
“An SRI Fund that no longer qualifies under the requirements of these rules and any amendments thereto will be removed from the list.”
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