SECP opens door for ESG mutual funds with Pakistan’s first sustainable investment framework

Pakistan has taken another step towards expanding sustainable finance after the Securities and Exchange Commission of Pakistan (SECP) introduced the country's first Environmental, Social and Governance (ESG) Mutual Funds Framework, creating a regulatory pathway for Asset Management Companies (AMCs) to offer ESG-focused mutual funds.

The framework, unveiled by the regulator on Wednesday, lays down investment, governance and disclosure standards for ESG mutual funds in a move aimed at strengthening investor confidence, promoting responsible investing and preventing greenwashing.

As part of the new requirements, ESG mutual funds will have to invest at least 50 percent of their net assets in ESG-aligned investments. The framework also mandates governance measures, enhanced disclosure obligations and independent assurance mechanisms to improve transparency and safeguard market integrity.

The SECP said equity-based ESG mutual funds will primarily invest in companies included in the Pakistan Stock Exchange's Sustainability Index as well as firms complying with the commission's ESG Disclosure Guidelines. Debt-focused ESG funds, meanwhile, will channel investments into green, social and sustainability-linked debt instruments developed under Pakistan's Green Taxonomy and Sustainable Finance Framework.

According to the regulator, the framework is expected to encourage Pakistani companies to improve their environmental, social and governance standards, helping them attract sustainable investment while fostering more responsible corporate practices.

The commission said the initiative comes as global demand for sustainable investment products continues to rise. Worldwide, more than $16 trillion is currently managed under sustainable investment strategies as investors increasingly seek opportunities that balance financial performance with responsible business practices.

The SECP said the framework is particularly relevant for Pakistan because the country is among the world's most climate-vulnerable nations. By establishing a transparent regulatory regime for ESG-aligned collective investment schemes, the regulator believes Pakistan's capital market will be better positioned to tap into the expanding global pool of sustainable investment capital.

The launch is part of the SECP's broader sustainability reform programme. In recent years, the regulator has rolled out ESG Disclosure Guidelines for listed companies, adopted IFRS Sustainability Disclosure Standards (IFRS S1 and IFRS S2), introduced the ESG Sustain Platform and developed Pakistan's Green Taxonomy.

According to the SECP, these initiatives are strengthening the country's sustainable finance ecosystem and supporting efforts to attract long-term, responsible investment into Pakistan's capital markets.