Guidelines on the Philippine Sustainable Finance Taxonomy under SEC Memorandum No. 05, series of 2024

The Securities and Exchange Commission (“SEC”) issued Memorandum Circular (“MC”) No. 05, series of 2024, on 23 February 2024 providing the Philippine Sustainable Finance Taxonomy Guidelines (“SFTG”). The primary goal of the SFTG is to channel and amplify capital towards economic endeavors that further sustainability goals (e.g., lowering greenhouse gas emissions and bolstering climate resilience). It will function as a framework for determining the environmental and social sustainability of economic activities, providing stakeholders with guidance to make well-informed investment and financing choices.

Issuers shall refer to the Philippine SFTG when making investment decisions or designing sustainable financial products and services, among others. In issuing green, social, sustainability, sustainability-linked bonds, and other similar issuances, issuers shall comply with the Memorandum Circulars on bond standards or guidelines issued by the SEC. In addition, considerations for the environmental objectives could provide additional guidance in determining eligible green projects (e.g., in determining substantial contribution).

The following steps outline the process for determining if an economic activity qualifies as environmentally or socially sustainable, and whether its financing can be categorized as aligned with the SFTG:

1. Determine that the activity to be financed is not included in the enumeration of “Excluded Activity” under the SFTG and is compliant with Philippine laws. Unless otherwise specified, an Excluded Activity is not aligned with the SFTG. However, there are certain instances provided in the SFTG wherein excluded activities may be considered as enablers of climate change mitigation or adaptation objectives, and in turn, may be eligible for financing under the Amber classification. Meanwhile, if the activity is illegal under Philippine laws or is in breach of environmental laws and regulations, the same is considered outside of the scope of the SFTG.
2. Select the relevant Environmental Objective (“EO”) of the activity. In assessing the primary objective of the activity, the following factors may be considered: (I) activity relevance and strategic alignment; (II) investors/financial institutions’ priority; and (III) government and industry guidance. Currently, there are 2 existing EOs: (I) climate change mitigation and (II) climate change adaptation.
3. Assess whether the activity significantly harms the other EO. An activity contributing to one EO should not cause significant harm to another EO. Regulated Entities shall 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. 
4. If there is harm, verify that the same has been remediated or will be remediated within the required defined period. If an activity does cause significant harm to another EO, it may still be SFTG-aligned, provided Remedial Measures to Transition (“RMT”) are taken. Any RMT should be fulfilled within a 5-year time frame without independent verification from the assessment date. If the remediation is longer than 5 years but not exceeding 10 years, this must be supported by an independent external verification lending credibility to the longer RMT timeframe.

The SFTG provides a set of guiding questions and decision trees to support the regulated entities’ assessment. In addition, entities undertaking the economic activity should comply, at a minimum, with the Philippine social safeguard requirements. After the assessment process, economic activities may be classified as Green, Amber, or Red, following the definitions under the SFTG. An activity that falls under the Red classification does not imply that the activity is unsustainable. Rather, the subject activity does not meet the higher sustainability ambition of the SFTG or pass the DNSH or minimum social safeguards tests. The activity classified as Red may still be eligible for “unlabeled” financing. 

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

The details of the Philippine SFTG are provided as Annex 1 of SEC MC No. 05, series of 2024.