The Securities and Exchange Commission (SEC) announced that it has adopted taxonomy guidelines on sustainable finance as part of efforts to promote environmentally and socially sustainable economic activities.

The Commission issued on Feb. 23 its SEC Memorandum Circular No. 5, Series of 2024, providing for the Guidelines on the Philippine Sustainable Finance Taxonomy.

The framework was formulated under the auspices of the Financial Sector Forum, composed of the Bangko Sentral ng Pilipinas, the SEC, the Insurance Commission, and the Philippine Deposit Insurance Corporation.

The Philippine Sustainable Finance Taxonomy Guidelines (SFTG) provide a framework for the determination of the environmental and social sustainability of economic activities and guidance for stakeholders in making well-informed investment and financing choices.

The SFTG offers a simplified approach for the assessment of micro, small and medium enterprises’ (MSMEs) activity for financing, to ensure that MSMEs are not unduly excluded from participating in sustainable finance.

“With the Philippine Sustainable Finance Taxonomy Guidelines in place, we hope to channel and amplify more capital toward economic projects that further sustainability goals such as lowering greenhouse gas emissions and bolstering climate resilience, while fostering transparency by reducing the likelihood of greenwashing,” SEC Chairperson Emilio B. Aquino said.

Issuers of securities shall refer to the Philippine SFTG when making investment decisions or designing sustainable financial products and services, among others.

They must also comply with the relevant memorandum circulars issued by the SEC when issuing green, social, sustainability, and sustainability-linked bonds.

To determine if an economic activity qualifies as environmentally or socially sustainable, and whether its financing can be categorized as aligned with the SFTG, issuers should refer to the enumeration of “Excluded Activity” under the SFTG, and determine whether or not the activity complies with Philippine laws.

Issuers should then select the Environmental Objective (EO) of the activity, such as its relevance and strategic alignment; investors or financial institution’s priority; and government and industry guidance.

Focusing on an EO should not significantly harm other EOs. Should there be harm, the issuer should verify that the same has been remediated or will be remediated within the required defined period.

Regulated entities should refer to the general guiding questions for the Do No Significant Harm (DNSH) to focus assessment on the potential or actual harm to another EO.

After the assessment process, economic activities may be classified as Green, or those with substantial contribution to an EO; Amber, or those with substantial contribution to an EO but causes harm to another, but which can be remediated within five years, or there is a reliable claim that remediation will take less than 10 years; or Red, or activities that do not serve any EO or meet the essential criteria.

An activity that falls under the Red classification does not meet the higher sustainability ambition of the SFTG or pass the DNSH or minimum social safeguards tests.

The classification, however, does not imply that the activity is unsustainable; such an activity may still be eligible for "unlabeled" financing.