Investments

The Danish National Research Foundation (DNRF) was established in 1991 with a start-up capital of 2 billion DKK. Since then, the foundation received a 3 billion DKK capital injection from the government in 2009 and an additional 3 billion DKK in 2015. In 2019, the foundation also received 177.4 million DKK, with the purpose of establishing a few special research centers, the so-called Pioneer Centers, in collaboration with private foundations.

Both the capital and the return will be used to finance excellent research at an international level. The current capital is expected to support activities until the end of 2036. The Center of Excellence funding instrument can run up to ten years (6 years + 4 years), which means that most of the capital will be disposed of in 2026, ten years before the foundation’s expected expiration in 2036.

Capital

The capital is invested across different asset classes and countries. When investing, the foundation strives to ensure safety, maintenance of the capital’s real value, as well as the best possible return. The current strategic asset allocation constitutes 62.5% to various bonds and 37.5% to global equities.

The foundation’s strategic asset allocation

The strategic portfolio consists of the following asset types:

• 37.5% Global Equities
• 32% Danish nominal bonds
• 11% Global inflation-linked bonds
• 10% Investment grade bonds
• 9.5% High-yield bonds

The foundation is subject to several placement rules, including a requirement to use external portfolio managers, per Executive Order No. 325 of March 29, 2016, for the financial management of Danish National Research Foundation funds. The foundation uses EU tenders when searching for new external portfolio managers.

Historical return

Risk management

The foundation uses Conditional Value at Risk (CVaR) when calculating the portfolio’s risk which is compared with the foundation’s net capital. In addition, the current portfolio’s return during different historical events that have played out in the real world is used as part of the risk management to illustrate the portfolio’s risk. The risk report to the board contains the portfolio’s CVaR, the return in the historical events and the DNRF’s bond portfolio’s option adjusted duration.

Responsible investment policy

The Danish National Research Foundation’s (DNRF) responsible investment policy and the goal of acting as a responsible investor are an integral part of the foundation’s overall investment principles and strategy. The DNRF acts as a responsible investor by investing in companies that live up to common internationally accepted principles and norms for treating environmental, social and governance (ESG) issues etc.

Purpose and scope

The primary purpose of DNRF’s Responsible investment policy is to outline the requirements and expectations for external portfolio managers, especially when selecting new portfolio managers through EU tenders. The Executive Order on the Financial Management of the Funds of the DNRF states that the DNRF shall use external portfolio managers for all its investments.

The external portfolio managers are also responsible for implementing the Responsible investment policy. The method of implementation of the Responsible investment policy may vary between the external portfolio managers, particularly in terms of the exclusion lists, screening methods and the use of ESG data providers. However, all external portfolio managers are required to adhere to the overarching principles and objectives and as a minimum live up to the two core principles of the Responsible Investment policy. Furthermore, all external portfolio managers should be signatories to the UN’s Principles for Responsible Investment. As signatories to the UN PRI, external portfolio managers are required to report annually on their responsible investment activities and are assessed on these, allowing DNRF to follow up on portfolio managers’ activities and ensure these are in line with the foundation’s own responsible investment objectives.

The core principles of the Responsible investment policy are:

1. To invest in companies that live up to commonly accepted international principles and norms for addressing environmental, social, and governance (ESG) issues, that are not involved in the production of controversial weapons or tobacco, and,
2. To invest in a manner consistent with the Paris Agreement’s goal to limit global warming to well below 2 degrees Celsius, with the aim of 1.5 degrees Celsius, compared to pre-industrial levels. This will be done by halving the emissions of global greenhouse gas emissions by 2030, and by 2050 that greenhouse gases have a neutral climate impact.

DNRF’s responsible investment policy allows investments in “transition” companies: companies which have documented efforts to decarbonize and adapt their business models to meet the goals of the Paris Agreement but are not at present fully aligned. By investing in transition companies, this policy supports the necessary transformation across hard-to-abate sectors, thereby contributing to the global transition to a low-carbon economy emphasized by the Paris Agreement.

The DNRF shall furthermore live up to Denmark’s official policy by complying with the law and adhering to all relevant conventions, treaties, etc., that the Danish state or the EU has agreed to or joined, as well as all relevant sanctions against individuals, companies, organizations and countries.

Responsible Investment Approach: Equities and Corporate Bonds

The following is relevant for the foundation’s investments in equities and corporate bonds. The guidelines are based on well-recognized principles, guidelines, conventions, treaties and international ESG standards.

To adhere with core principle 1, portfolio managers should aim to align investments in accordance with the following internationally recognized agreements and frameworks:

• the United Nations Global Compact principles and/or OECD Guidelines for Multinational Enterprises; and
• the ILO Conventions on labor rights.

Further, DNRF’s portfolio managers must:

• not invest in companies that violate broadly accepted international weapons-related conventions (cluster munition, anti-personnel mines, biological weapons, and chemical weapons);
• not invest in producers or distributors of nuclear weapons in violation of the treaty on Non-Proliferation of Nuclear Weapons;
• not invest in companies that have 5% or more revenue from tobacco production.

To adhere with core principle 2, portfolio managers are required to:

• not invest in companies involved in the extraction of thermal coal, extraction from tar sand, or power generation from thermal coal, however allowing a:
  • maximum 5% of revenue from extraction of thermal coal or tar sand.
  • maximum 50% of revenue from power generation from thermal coal.

Following DNRF’s position on transition companies, if the company/bond issuer has a credible and serious plan for divesting from for example the oil, natural gas, thermal coal and/or tar sand business or for applying the goals of the Paris Agreement, the company may be included in the portfolio, even if the company does not comply with the limits above. In such cases, the portfolio manager’s assessment should be supported by any one of the following:

• An assessment from the Transition Pathway Initiative (TPI) of the company’s Management Quality of at least level 3,
• An assessment of the investee company’s business development plans (e.g. through a level of >20% green capex) consistent with the International Energy Agency’s Net Zero Emissions scenario,
• An assessment of the investee company’s decarbonization strategy from the Climate Action 100+ Net Zero Company Benchmark as “Partial”,
• An assessment of the investee company’s transition risk from a third-party data provider which suggests alignment with the goals of the Paris Agreement (e.g. MSCI’s Low Carbon Transition Score, ISS’s Carbon Risk Rating).

Documentation of the choice to invest in transition companies on this basis shall be provided to DNRF on a yearly basis to ensure transparency and consistency with core principle 2.

The DNRF’s portfolio managers of equities and credit bond portfolios screen the portfolios on a regular basis to identify companies that violate the above-mentioned principles and conventions. On this basis and based on engagement with the companies, the portfolio manager decides which companies should be excluded based on the agreed responsible investment policy. Therefore, the exclusion lists may vary from portfolio to portfolio.

Additional Considerations for Mutual Funds

The foundation can invest in mutual funds. However, it is not likely that a minority investor (such as the DNRF) in a mutual fund can determine the mutual fund’s policy for responsible investments. The consequence is that these portfolios/mandates may not have exactly the same policy for responsible investments as stated above.

When the foundation chooses a mutual fund, the portfolio manager’s/mutual fund’s policy for responsible investments is an important selection criterion in the overall assessment of the manager of the mutual fund. Mutual funds must at least comply with the principles of the DNRF’s policy for responsible investments.

The mutual funds may have even stricter exclusion criteria than those stated above when investing, e.g. lower revenue thresholds. Portfolio managers may also have additional exclusion criteria, whether as part of an asset management-wide policy or product-specific, for example on alcohol, gambling, and adult entertainment.

If the mutual fund cannot live up to the DNRF’s policy the DNRF shall initiate a dialogue with the mutual fund to investigate if the mutual fund can live up to DNRF’s responsible investment policy. If this is not possible the foundation shall initiate an EU-tender to find a mutual fund that can live up to DNRF’s responsible investment policy or sell the mutual fund.

Engagement

Engagement is a part of being a responsible investor. Therefore, the foundation’s external portfolio managers are at a minimum expected to have a publicly available engagement approach and voting policy. The DNRF’s goal is to have as high a share of exercising voting rights as possible, however it is important to highlight that the DNRF’s scope of engagement is limited by the foundation’s size, especially relative to other investors which will have larger influence over the external portfolio managers.

The portfolio managers shall monitor the shareholder meeting agendas on an ongoing basis and use the voting rights on most of the items. Further, external portfolio managers are requested and encouraged to:

• have a dialogue with/engage with the transition companies in the portfolio and companies that do not live up to the DNRF’s responsible investment policy (excluded companies); and
• exercise their voting rights on issues in a manner consistent with the DNRF’s Responsible Investment policy’s core principles.

The foundation’s portfolio managers engage with companies in which they have invested on an ongoing basis, for example, by having a dialog with companies about the relevant issues.

Responsible Investment Approach: Government bonds

When investing in government bonds, the foundation only invests in government bonds issued by countries that act in accordance with internationally recognized principles of good governance and human rights and where the country or the key individuals in the country are not subject to UN or EU financial sanctions.

Reporting

To monitor progress towards the goal of achieving climate neutrality by 2050, DNRF will report annually on CO2e emissions from the portfolio. The purpose of reporting on portfolio carbon footprint, is for the foundation to track its progress over time and validate its focus on investing in line with the goals of the Paris Agreement. Initially, the report will focus on the CO2 emissions from the equity portfolio, the figures for the emerging markets are not yet included. Efforts are being made to have the figures displayed for a larger part of the portfolio, however there are currently numerous limitations to data accuracy, especially for scope 3 emissions estimates, and given the varying methodologies used by the different external portfolio managers.

The climate footprint of the equity portfolio

The equity portfolio’s climate footprint is calculated using two key figures: CO2 footprint and carbon intensity, which are shown below.

The emission figures are presented in the tables below. The reported figures include scope 1 and 2 emissions. It is worth noting that the key figures for the emission are associated with uncertainty and must, therefore, be interpreted with caution. Work is underway to obtain reliable figures for Scope 3 emissions.

Scope 1 emissions: Include direct greenhouse gas emissions originating directly from an organization’s or company’s own sources or activities. This can encompass emissions from factories, facilities, vehicles, and other direct combustion of fossil fuels.

Scope 2 emissions: Encompass greenhouse gas emissions arising from the external production of energy consumed by the organization. These emissions come e.g. from the external production of electricity, steam, heat, or cooling used by the company. For instance, these emissions could stem from coal-, gas-, or oil-fired power plants that produce electricity utilized by the company.

Carbon footprint.
The carbon footprint is calculated using the method where the companies’ CO2e emission is set in relation to the company’s value, the so-called EVIC (Enterprise Value Including Cash).

CO2e stands for “carbon dioxide equivalents” and is a unit used to measure and compare the impact of different greenhouse gases on climate change. As different greenhouse gases have varying effects on the greenhouse effect, they are converted into a unit representing the amount of carbon dioxide (CO2) that would have the same global warming effect.

Weighted average carbon intensity.
The carbon intensity is calculated by setting the companies’ CO2e emission in relation to their revenue. To derive an overall figure for the carbon intensity of the portfolio, the individual companies’ carbon intensity is weighted according to their respective weight in both the portfolio and the benchmark (see the table below). The carbon intensity method can be used to compare portfolios and see the development over time.

Investment committee  

In 2018 the board decided to establish an investment committee. The committee’s job is to give the board recommendations about the investment strategy, risk management, portfolio managers, responsible investment policy, and long-term forecast for the foundation’s expected disbursements.

The members of the investment committee are:

• CIO Per Skovsted (Chair)
• Professor Peter Løchte Jørgensen
• Senior Director Tine Choi Danielsen

Per Skovsted (born in 1958) has a Master of Science (M.Sc.) in Business Administration from the Copenhagen Business School. Skovsted is a member of the board of Investeringsforeningen Nordea Invest, Stryhns Familieselskab A/S, True Content Entertainment A/S, VKR Holding A/S, Wide Invest ApS and Spinnewco ApS. Per is also a member of the investment committee for Helsefonden

Skovsted joined the investment comittee on July 1, 2020 and is the chair of the investment comittee.

Peter Løchte Jørgensen (born in 1967) has a master of science (M.Sc.) in Mathematics-Economics and a Ph.D. in Finance. He is a professor of finance at the Institute of Economics at Aarhus University. Jørgensen is member of the board of Asset Advisor Fondsmæglerselskab A/S, Investeringsforeningen TOBA Investments, Konsul Tømmerhandler af Horsens and Harald Blegvad Jørgensens familielegat. He is also the chair of the Carlsberg Foundation’s investment committee.

Jørgensen has been a member of the Danish National Research Foundation’s investment committee since the committee was established in April 2018.

Tine Choi Danielsen (born 1973) holds an master of science (M.Sc.) in Economics from Aarhus University. She is Head of Investment Strategy & Analysis at PFA Pension, where she has been employed since 2019. Before Tine joined PFA, she worked for several major Nordic banks, most recently as Chief Strategist at Danske Bank Wealth Management.

Tine Choi Danielsen joined the investment comittee in december 2022.