Responsible investments

Abstract icon In connection with the management of the foreign exchange reserve, Danmarks Nationalbank directly or indirectly supports the financing of states, other public entities, supranational institutions and private companies through its financial portfolios. The investments follow Danmarks Nationalbank’s guidelines for responsible investment. One of the objectives of the guidelines is to ensure that Danmarks Nationalbank promotes sustainability via its financial portfolios.

Danmarks Nationalbank's guidelines for responsible investment are based on the general principle that Danmarks Nationalbank complies with legislation as well as sanctions and conventions to which Denmark has acceded. In practice, this is implemented through, for example, screening for breaches of the Ten Principles of the UN Global Compact for corporate social responsibility and violations of weapons conventions. This applies to all assets in Danmarks Nationalbank's financial portfolios. Within these guidelines, it is ensured that Danmarks Nationalbank's financial portfolios enable the fulfilment of Danmarks Nationalbank's mandate at any given time. Within this framework, the objective is that the financial portfolios must, in as far as possible, meet the climate goals of the Paris Agreement, which is a legally binding climate agreement for the 193 UN Member States. Danmarks Nationalbank's financial portfolios comprise its foreign exchange reserve and its holding of Danish mortgage bonds.

Composition of the foreign exchange reserve
The purpose of the foreign exchange reserve is to ensure that Danmarks Nationalbank will be able to intervene in the foreign exchange markets at short notice to support the fixed exchange rate policy and financial stability. Therefore, Danmarks Nationalbank's assets are predominantly placed in short money market products and liquid, high-rated government bonds. In addition to ensuring a sufficiently liquid foreign exchange reserve, Danmarks Nationalbank has the secondary objective of achieving the highest possible return at a moderate risk. Consequently,  the foreign exchange reserve is also invested in, for example, equities and corporate bonds, which contributes to increasing expected earnings and diversifying risk. Read more here.

The foreign exchange reserve is invested as responsibly as possible, with due consideration for the purpose of the foreign exchange reserve
The overall principle of Danmarks Nationalbank's guidelines for responsible investment is that no equities or bonds are purchased in companies or countries that are systematically and substantially involved in activities from which Denmark dissociates itself via international guidelines, declarations, conventions etc.

We screen for:

If the screening shows that Danmarks Nationalbank is investing in a company or country that is in conflict with the above, the investment is liquidated.

Within these guidelines, it is ensured that Danmarks Nationalbank's financial portfolios enable the fulfilment of Danmarks Nationalbank's mandate at any given time. Within this framework, it is an objective that the financial portfolios comply with the Paris Agreement. The agreement is a legally binding international treaty from 2015 to which Denmark is a signatory. The Paris Agreement has as a long-term goal to limit the global temperature increase to below 1.5-2°C compared to pre-industrial levels. Even though compliance with the Paris Agreement is a political task, Danmarks Nationalbank supports the Agreement.

Climate considerations in Danmarks Nationalbank's portfolios in practice
It is not clear how alignment of a financial portfolio with the Paris Agreement should be determined. This is  work in progress because interpretation, methods, analysis tools, financial products etc. are under development. Danmarks Nationalbank is monitoring this development closely, including through our participation in the Network for Greening the Financial System, which is an international collaboration between central banks and supervisory authorities.

Investment in equities and corporate bonds give Danmarks Nationalbank the greatest exposure to climate and ESG risks (ESG stands for 'Environmental, Social and Governance'). It is therefore a natural place to start the implementation of the objective that Danmarks Nationalbank's portfolios should align with the climate goals of the Paris Agreement. The share of the total foreign exchange reserve that is invested in equities and corporate bonds amounts to approx. 3 per cent.

Danmarks Nationalbank invests in equities and corporate bonds via passively listed investment funds, so-called Exchange Traded Funds (ETFs). An ETF is a package solution in which the composition of assets follows an underlying index. Danmarks Nationalbank has no influence on the individual companies in the ETF – only on the choice of the actual ETF. ETFs are easy to implement and are also a relatively cost-effective solution for Danmarks Nationalbank.

Danmarks Nationalbank's exposure to equities and corporate bonds has generally been via ESG-screened ETFs. In 2022, Danmarks Nationalbank therefore chose to switch to ETFs that comply with the EU's minimum requirements for Paris Aligned Benchmarks (PABs) (see fact box). It is not possible to determine with certainty whether the risk or the expected return on the foreign exchange reserve will be affected by the switch. By being among the first investors in PAB ETFs, Danmarks Nationalbank contributes to building up the market for PAB ETFs and making them interesting to a broader investor base. At the same time, Danmarks Nationalbank is aware of the alternative approaches to meeting the objective of aligning with the Paris Agreement used in the market and is monitoring the ongoing development in this area.

Fact box on EU Paris Aligned Benchmarks
In 2020, the European Commission introduced minimum requirements for an index to achieve the label 'EU Paris Aligned Benchmark' (PAB). The purpose of the minimum requirements is to increase transparency and set calculation standards for climate action metrics. The minimum requirements are numerous and detailed, but the main requirements are reviewed in the following.

  • Exclusion criteria: Companies are excluded if they are involved in the following activities: Controversial weapons, tobacco, breaches of the UN Global Compact or OECD guidelines, lignite and anthracite (1 per cent), oil (10 per cent), gas (50 per cent) and power generation emitting more than 100 g of CO2e (carbon dioxide equivalents) per kWh (50 per cent). The figures in brackets indicate the maximum share of the company's revenue that may be derived from the activity in question.
  • Limitation of CO2e intensity: For an EU PAB, the weighted average of companies' CO2e intensity must be reduced by 50 per cent relative to the general market and then by 7 per cent annually. CO2e intensity denotes a company's total greenhouse gas emissions in tonnes of CO2 equivalents (CO2e) divided by the value of the company. Both direct emissions (scope 1) and indirect emissions from the company's purchases of energy (scope 2) are included. Other indirect emissions (scope 3) must be included for all sectors by the end of 2024. 

The minimum requirements mean that a number of companies in the fossil energy sector are excluded. In addition, exposure to the largest CO2e emitters in the manufacturing industry is restricted in order to meet the goal of limiting CO2e intensity. This potentially risks  increasing the concentration in companies that already have a high weight in the parent index, see chart 1. Investors need to bear this in mind in their choice of ETF. Danmarks Nationalbank has engaged in a dialogue with a number of major index providers and ETF managers about their implementation of the minimum requirements. Danmarks Nationalbank finds that the indices chosen by Danmarks Nationalbank ensure a well-diversified equity exposure, see chart 2.

Alternatives to exclusion
The use of the EU's Paris Aligned Benchmarks is one approach to investing in accordance with the Paris Agreement. Active ownership is an alternative to exclusion. This means that investors actively try to influence the development in the companies by making demands for a green transition. There is no consensus in the market or academic literature on whether exclusion or active ownership is the best approach. There is probably a need for both types of approaches.

Investing via ETFs means that the legal ownership and (for equities) the voting rights rest with the ETF manager. Danmarks Nationalbank therefore places demands on the ETF managers' policy for responsible investments, including that they must comply with the international UN-supported 'Principles for Responsible Investment' (PRI). The PRI include requirements for active ownership.

The EU's Paris Aligned Benchmarks are a widely accepted international standard for investments, and the minimum requirements provide a good basis for passive investors being able to achieve well-diversified equity exposure, while avoiding the largest CO2e emitters. Danmarks Nationalbank supports this approach with its investments.