THE BANGKO SENTRAL ng Pilipinas (BSP) is looking to issue new rules covering the creation and management of sustainability or environmental, social and governance (ESG)-themed unit investment trust funds (UITFs).

A draft circular amending the Manuals of Regulations for Banks and for Non-Bank Financial Institutions showed the BSP is looking to issue new guidelines on integrating sustainability agenda in the administration of UITFs by trust entities (TEs).

“These guidelines provide the Bangko Sentral’s expectations for the integration of sustainability and ESG principles, including material E&S (environmental and social) risks, in the fund management and investment activities for sustainability or ESG-themed UITFs,” the central bank said.

Stakeholders have until June 23 to submit their feedback on the draft guidelines to the BSP.

Once the circular is approved, the BSP will give concerned financial institutions a one-year transitory period to comply with the new requirements.

The draft rules define a sustainability or ESG-themed UITF as one that includes ESG components as its key investment focus or strategy. It will be included in the kinds of UITFs that require prior approval from the BSP.

“A UITF is deemed to be focused on sustainability or ESG if at least two-thirds of the fund’s net asset value is invested in assets that address the ESG factors and these factors significantly influence the selection of the investment assets of the fund,” the BSP said.

Under the draft rules, trust entities offering sustainable UITFs should incorporate the material risks in its plan rules and investment processes.

Trustees are now required to disclose any unique risks that may arise from a fund’s focus on sustainability or ESG factors.

These include “concentration in certain types of investments; any limitation in the data, information or methodologies, including the use of assumptions or approximations, if any in producing sustainability-related data and the related impact; lack of universal ESG standards or taxonomy; reliance on third-party providers for sustainability ratings; or the risks involved in tracking the selected index or benchmark (including how it may impact the ability of the fund to meet its objective).”

TEs should establish objective criteria to monitor the fund’s compliance with its stated ESG goals. The trustee should also provide a clear description of the UITF’s sustainability goals, strategies, and investment priorities.

TEs must adopt measures to ensure that investments made are in companies that comply with sustainability-related standards, laws and regulations, and do not engage in greenwashing.

“In order to ensure that all investments do not compromise the sustainability or ESG objectives of the fund, a TE is expected to disclose in the plan rules how the remainder of the portfolio shall be invested,” the BSP said.

“A UITF that merely incorporates or integrates ESG considerations into its investment process in order to seek financial returns would not be regarded as having ESG or sustainability focus,” it added.

Meanwhile, TEs will also need to submit disclosure requirements to ensure clients understand the nature of the risks related to sustainability UITFs to reduce information inconsistencies and help them make informed decisions about how sustainability issues can impact their investments.

The trust entity will also submit the results of an annual assessment of the attainment of the UITFs’ sustainability-related objectives in its annual report.

“The trustee shall provide a clear explanation on how the fund achieved its sustainability or ESG objective/s in a clear, fair and non-misleading manner, as well as how the objective/s and/or strategy/ies have contributed to the fund’s return,” the BSP said.

The trustee should also adopt control mechanisms to prevent greenwashing relative to its fund disclosures.

“The Bangko Sentral is cognizant of the potential contribution of TEs to the sustainable development of the country through the investments of the funds they manage in sustainability or ESG-oriented themes or sectors that promote these principles,” the BSP said.

“The Bangko Sentral likewise recognizes the growing demand from investors to achieve long-term value and to ensure alignment of their investment activities with sustainability and/or ESG-related objectives. Finally, the Bangko Sentral recognizes that allowing TEs to offer sustainability or ESG-themed UITFs provide the investing public with diversification opportunities,” it added. — K.B. Ta-asan