Danmarks Nationalbank's foreign exchange reserve is primarily invested in short-term money market products (e.g. deposits in foreign central banks), foreign government bonds and equities and corporate bonds. Through its investments, Danmarks Nationalbank helps finance governments, other public entities, supranational institutions and private companies.
One of the primary purposes of the foreign exchange reserve is to intervene in the foreign exchange markets, i.e. buying and selling foreign currency against Danish kroner in the pursuance of the fixed exchange rate policy. This implies that the assets in the foreign exchange reserve must be liquid, i.e. it must be possible to sell or borrow against those assets at short notice. In addition to liquidity, Danmarks Nationalbank's objective is to achieve the best possible return for the defined risk level. The investments are made within Danmarks Nationalbank's guidelines for responsible investments.
Guidelines for responsible investments
Danmarks Nationalbank's guidelines for responsible investments ensure that the bank complies with legislation, sanctions and conventions to which Denmark is a party. This means, for example, 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.
Danmarks Nationalbank's investments are therefore screened for:
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Conflicts with Danmarks Nationalbank's sanctions policy, which includes the Ministry of Foreign Affairs of Denmark's list of applicable sanctions that Denmark is obliged to enforce.
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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.
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Conventionally prohibited weapons (including anti-personnel mines, cluster munitions, biological and chemical weapons) and violations of the UN Treaty on the Non-Proliferation of Nuclear Weapons.
If a screening shows that Danmarks Nationalbank invests in a company, country or trades with a counterparty that conflicts with the above, the investment is terminated, unless doing so poses a risk that the foreign exchange reserve cannot fulfil its primary purpose of supporting the fixed exchange rate policy and financial stability.
Climate considerations in practice
Danmarks Nationalbank closely follows the development of sustainable and responsible investment approaches. This is happening through our participation in the Network for Greening the Financial System (NGFS), which is an international collaboration between central banks and supervisory authorities, and as an observer in the Eurosystem Sustainable and Responsible Investment Task Force (SURI-TF).
Danmarks Nationalbank invests in equities and corporate bonds via passively listed investment funds, so-called Exchange Traded Funds (ETFs), which are not subject to the primary purpose of the foreign exchange reserve. For central banks, NGFS assesses that equities and corporate bonds are the asset classes where it is most relevant to implement investment strategies focused on climate neutrality. This is because equities and corporate bonds are the asset classes most closely linked to actual greenhouse gas emissions, as they represent ownership in specific companies.
Within the overall guidelines for responsible investments, it has been Danmarks Nationalbank's goal since 2021 that equities and corporate bonds must follow the EU's minimum requirements for climate benchmarks via ETFs, which are based on the commitments in the Paris Agreement, to which Denmark is a signatory. This implies the following:
1. Part of the companies in an overall market index (including large parts of the fossil fuel sector) are excluded. The exclusion criteria applicable to the EU's minimum requirements for climate benchmarks create an increased concentration among the remaining companies and thus a smaller risk spread relative to an overall market index.
2. There is a requirement that the carbon intensity of each ETF must be reduced over time in line with the Paris Agreement climate goals.
Danmarks Nationalbank is monitoring alternative approaches to incorporating climate considerations in investments and continuously assesses developments in the field.