SECP unveils first ESG Mutual Funds Framework

It will encourage companies to improve environmental, social and governance practices

ISLAMABAD:

Pakistan has taken a major step towards sustainable finance as the Securities and Exchange Commission of Pakistan (SECP) has issued the country's first ESG Mutual Funds Framework.

The framework enables asset management companies to launch environmental, social and governance (ESG)-focused mutual funds, bringing Pakistan's capital market in line with global sustainable investment practices, according to a statement issued by the SECP on Wednesday.

Globally, such investment has grown rapidly, with more than $16 trillion in assets managed under sustainable investment strategies. As investors increasingly seek investments that combine financial returns with responsible business practices, regulators around the world are introducing frameworks to support ESG investing.

For Pakistan, the initiative is particularly important as the country remains among the world's most climate-vulnerable nations. The new framework establishes a transparent regulatory regime for ESG-aligned collective investment schemes and opens Pakistan's financial market to the growing global sustainable investment ecosystem.

Under the framework, equity-based ESG mutual funds will primarily invest in companies included in the Pakistan Stock Exchange's Sustainability Index and those aligned with the SECP's ESG Disclosure Guidelines.

Debt-based ESG mutual funds will invest in green, social and sustainability-linked debt instruments in line with Pakistan's Green Taxonomy and Sustainable Finance Framework.

"The framework is expected to encourage Pakistani companies to improve their environmental, social and governance practices, enhancing their access to sustainable investment capital while promoting responsible corporate behaviour," said the SECP.

To protect investors and maintain market integrity, the framework requires ESG mutual funds to allocate at least 50% of their net assets to ESG-aligned investments. It also introduces governance, disclosure and independent assurance requirements to prevent greenwashing and enhance transparency and accountability.