Responsible investment of foreign exchange reserve

It is Danmarks Nationalbank’s ambition to invest the foreign exchange reserve responsibly, and not just from a financial point of view. This means, for example, that Danmarks Nationalbank’s financial investments must in so far as possible live up to the Paris Agreement on limiting the increase in global temperatures. The most important concern when investing the foreign exchange reserve is to ensure sufficient liquidity to support Denmark’s fixed exchange rate policy and financial stability.

Danmarks Nationalbank has a foreign exchange reserve of approx. kr. [500] billion, which is placed in short-term money market products (including deposits with foreign central banks), foreign government bonds and in shares and corporate bonds. Via these investments, Danmarks Nationalbank is helping to support – directly or indirectly – the financing of states, other public entities, supranational institutions and private companies.

When investing the foreign exchange reserve, responsibility is an important but not the only priority. We need to compare the desire for responsible investment with the primary purpose of the foreign exchange reserve and the risks associated with different types of investment:

The foreign exchange reserve is primarily intended for intervening in the foreign exchange markets, i.e. for buying and selling foreign currency against kroner in order to maintain a stable exchange rate with the kroner. This means that the assets in which the foreign exchange reserve is invested must be liquid, i.e. it must be possible to sell or borrow against the assets at short notice. In addition to ensuring a sufficiently liquid foreign exchange reserve, Danmarks Nationalbank has the secondary objective of realising the highest possible returns at a suitable risk.

Guidelines for responsible investments

Our guidelines for responsible investment are based on the general principle that Danmarks Nationalbank complies with the legislation, sanctions and conventions to which Denmark has acceded. This means, for example, that no shares 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.

Danmarks Nationalbank’s investments are therefore screened for:

  • Potential conflicts with the Ministry of Foreign Affairs of Denmark’s list of applicable sanctions, which Denmark is obliged to enforce.

  • Breaches of the Ten Principles of the UN Global Compact for corporate social responsibility. The principles are based on internationally recognised conventions on human rights, labour rights, environmental protection and anti-corruption.

  • Weapons prohibited by conventions (cluster bombs, landmines and chemical and biological weapons) as well as violations of the UN Treaty on the Non-Proliferation of Nuclear Weapons.

If the screening shows that Danmarks Nationalbank is investing in a company or country that is in conflict with the above, the investment is terminated, unless the termination prevents Danmarks Nationalbank from meeting its obligation to ensure stable prices, financial stability and secure and efficient payments.

Climate considerations in practice

Within the broad guidelines for responsible investment, one of the objectives is that the financial portfolios live up to the Paris Agreement. However, it is not yet clear how a financial portfolio can be said to comply with the Paris Agreement. Interpretation, methods, analysis tools, financial products etc. are under development, and Danmarks Nationalbank is following progress closely.This is happening through our participation in the Network for Greening the Financial System, which is an international collaboration between central banks and supervisory authorities.

Investments in shares and corporate bonds give Danmarks Nationalbank the greatest exposure to climate and ESG risks (ESG stands for ‘Environmental, Social and Governance’). Ensuring that Danmarks Nationalbank’s portfolios have to meet the climate goals of the Paris Agreement is therefore an obvious place to start. The share of ​the total foreign exchange reserve that is invested in shares and corporate bonds amounts to approx. 2 per cent.

Danmarks Nationalbank invests in shares and corporate bonds through 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. In 2022, Danmarks Nationalbank chose to switch its investments to ETFs that meet the EU’s minimum requirements for Paris Aligned Benchmarks (PABs). 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 restructuring.

By being among the first investors in PAB ETFs, Danmarks Nationalbank is helping to build up the market for PAB ETFs and increase their appeal to a broader circle of investors. At the same time, Danmarks Nationalbank is aware of the alternative approaches to meeting the objective of complying with the Paris Agreement used in the market and is monitoring the ongoing development in this area.