Our Responsible Investment Journey 2021

9 216 56 1,548,213 10101001001010110101010010118% 01010010010001010101010010 0101010010010101101010100101 01010010010001011 2 Our Responsible Investment Journey 2021 Contents

Chapter 1 – Introduction 04 A paradigm shift for sustainability 06 A green reboot of the financial markets 08 Raising the bar with new sustainability target

Chapter 2 – Incorporating sustainability

10 Our blueprint for delivering investment value and sustainable progress 14 Taking sustainability in solutions investment products to the next level 16 Developing analytical tools to capture value 18 Rigorous sustainability assessment of external managers 20 Supporting the sustainable transition through index investments 22 Funnelling investments into the sustainable transition 24 Companies must adapt to climate trends 26 Companies expected to take social responsibility 28 Governance is a key issue when investing in developing countries

Chapter 3 – Active ownership

30 A challenging year and a turning point for sustainability 32 Company engagements in 2020 34 Corona crisis amplified focus on the green transition 36 Voting in 2020 38 Pushing companies to curb their climate impact 40 Voting guidelines need to reflect best practice

Chapter 4 – Screening and restrictions

42 Restricting investments with harmful business practices 44 Development of process to promote enhanced sustainability standards in investments 46 Tightened restrictions on activities that result in a significant negative impact on the climate 48 Introducing ‘Sustainability risk challenger’

Chapter 5 – Reporting and communication

50 Making sustainability more transparent 52 What are ESG and sustainable investment products? 4 Our Responsible Investment Journey 2021

A paradigm shift for sustainability

While sustainability has been high on SFDR product framework. By leveraging will not become green overnight, but we society’s agenda for many years, the our deep sustainability expertise and will continue to influence their climate outbreak of COVID-19 marked a new processes built up over the years and strategies and thus support the sustain- era, with sustainability taking a quan- further improving our sustainability able transition. By remaining engaged, tum leap forward as the cornerstone for structure in the past 12 months, we are we maximise our contribution towards creating resilient societies and healthy able to offer a wide range of high-qual- making societies more sustainable. lives. Meanwhile, the first part of the ity ESG investment products. Among Sustainable Finance Disclosure Regula- other initiatives, we have introduced Collaborating to propel sustainability tion (SFDR), a central plank of the EU’s a “Sustainability risk challenger” and forward Action Plan for financing sustainable enhanced our investment restrictions The sustainable agenda is rapidly growth, came into force in March 2021. framework and voting guidelines to help picking up speed, and with the rollout SFDR ensures greater transparency on promote the environmental and social of the EU Action Plan and its various the degree of sustainability incorporated characteristics of our products and regulations, we are fully focused on into financial products, and its objec- to capture issues related to principal constantly improving our sustainability tive is to ensure further transparency adverse sustainability impacts on efforts to stay ahead of the curve and on sustainability risk considerations society. Moreover, we have reinforced be one of the best Nordics banks for in the financial sector and investment our proprietary ESG analytical tool responsible investments. In the coming products. COVID-19 and SFDR have mDASH®, so it supports product-spe- year, we plan to, for example, signifi- been game changers for the financial cific sustainability characteristics. To cantly expand our product offering in industry, setting a clear course for our ensure our products comply with the ESG and sustainable investments, set ambitions for responsible investments extensive regulatory requirements and fully tailored and binding sustainability and our efforts to create value for our honour the spirit of SFDR, we have cho- targets for products, and develop a investors and society. sen a conservative approach to labelling framework for measuring our products’ our product according to their sustaina- contribution towards achieving the UN A catalyst for sustainable change bility-related characteristics. Sustainable Development Goals. Sustainability has been a guiding star At Danske Bank, we are truly directing our investments for many The green transition is a top priority excited about the possibilities that lie years and shaping our actions as a Climate change poses one of the big- ahead and look forward to collaborating responsible investor. We therefore gest financial risks and threats to the with our investors, peers, policymakers welcome the new EU regulation, as it well-being of global society. We have and other stakeholders in shaping an feeds into our ambition of fostering sus- subsequently tightened our investment investment industry that advances tainable change. To further advance our restrictions on thermal coal, tar sands sustainability and benefits society. By efforts, we have set sustainability tar- and peat-fired power generation by joining forces with our investors and gets that lay down a clear path for our lowering our revenue threshold from society, we can make it easier for inves- commitment to help investors invest in 30 to 5 per cent, which is a further step tors to make sustainable choices. products that promote sustainability or towards phasing out investments in have sustainability objectives. We have these fossil fuels by 2040 at the latest also set a target of having a net-zero and being a net-zero asset manager greenhouse gas emissions investment by 2050. However, propelling society portfolio by 2050 or sooner as part of towards a greener future is not only our support for the Paris Agreement. about restricting companies. More These targets underpin our ambition to importantly, it is about actively taking contribute to decarbonising the econ- part in the change by influencing com- omy and to enable capital to work for panies to shift from carbon-intensive sustainable change. activities to more energy-efficient and climate-friendly solutions. Climate was High-quality products with a robust therefore at the top of our engagement sustainability foundation agenda in 2020, when we through In order to align with the objectives of dialogue with company management SFDR, we have also adopted a new pushed for greener business models Responsible Investment Policy and and the acceptance of a greater share Erik Eliasson categorised our products according of responsibility for supporting the Head of Responsible Investments to the disclosure requirements of the decarbonisation of society. Companies Danske Bank Asset Management CHAPTER 1 Introduction

See our Responsible Investment Policy here. Our foundation for creating value for investors and society

Our new Responsible Investment Policy is based on five principles that support our ambition to create attractive return for our investors and contribute to positive and sustainable development.

Principle 1 We incorporate sustainability risks into investment analyses and investment decision- making processes.

Principle 2 We are active owners and incorporate environmental, social and governance criteria as well as sustainability issues into our ownership guidelines and practices.

Principle 3 We incorporate sustainability risk into advice on investment products, aim to identify our investment customers’ sustainability preferences and seek to provide them with products that meet their ethical and sustainability needs.

Principle 4 We report on our activities and progress towards implementing Responsible Investments and disclose the impacts of our investments.

Principle 5 We promote the development of Responsible Investments across our industry. 6 Our Responsible Investment Journey 2021

A green reboot of the financial markets

Funding the transition to a low-carbon economy and the ambition of creating a sustainable Europe requires a mobilisation of capital. This puts the financial sector front and centre and subjects it to new regulation, with the goal of funnelling more capital into the green transition.

The European Commission has com- credentials of investment funds, and a underlines how important it is that menced the implementation of its exten- new EU Taxonomy, which aims to define asset managers take responsibility and sive Action Plan intended to transform ‘green’ economic activities for the first help steer investment capital towards the financial markets in Europe. The time. The EU also plans to enhance the companies that make a real contribu- objective is clear: to redirect capital flow sustainability requirements of invest- tion to achieving carbon-neutrality. We into sustainable activities and so create ment advisory. at Danske Bank are committed to help- a green and sustainable Europe. This “We welcome the ambition to create ing our investors invest in the sustain- regulatory push is the most ambitious a uniform understanding and defini- able transition. By employing sustaina- in many years and aims to encourage tion of sustainability and to set clear bility targets, we have set a clear path investors to ramp up efforts to acceler- sustainability requirements for products for funnelling more capital into a green ate the low-carbon transition, accord- if they are to be marketed on the basis future,” concludes Marjo Grandell. ing to Marjo Grandell, Head of Liquid of their sustainability credentials. As Investments. investor demand for products with sus- “The EU Action Plan on sustainable tainability characteristics is expected to finance stems from the EU’s commit- grow substantially in the coming years, ment to channel private financial flows this incentivises the providers of invest- into investments that support the Paris ment products to step up their sustaina- Agreement’s target of a carbon-neutral bility efforts in order to remain relevant,” economy by 2050 and, more broadly, states Marjo Grandell. the United Nations Sustainable Devel- opment Goals. The Action Plan address Helping to close the funding-cap aspects such as climate change, pollu- The climate goals set for Europe are tion reduction and biodiversity protec- ambitious and call for prompt action tion,” explains Marjo Grandell. from all financial players to successfully In her view, the legislative pro- complete the energy transition of our gramme defines a much-needed economies, according to Marjo Gran- We at Danske Bank are common language and increases dell. However, moving the transition transparency and standards with regard forward requires funding. Indeed, the committed to helping our to sustainability. European Commission estimates the investors invest in the investment deficit to be EUR 260bn sustainable transition. By Incentivising a green path annually, i.e. EUR 260bn more needs to employing sustainability The Action Plan is part of a wider sus- be invested annually between now and tainable finance framework backed by a 2030 if we are to meet the 2030 goal targets, we have set a clear broad set of new and enhanced regula- of reducing CO2 emissions by at least path for funnelling more tions. These include a new Sustainable 40 per cent. capital into a green future. Finance Disclosure Regulation, which “The massive need for reallocating aims to better classify the sustainability investments to sustainable activities Marjo Grandell CHAPTER 1 Introduction

The EU Action Plan explained

The Action Plan is the EU’s roadmap for creating a sustainable economy. It comprises multiple actions and legislative tools designed to reorient Europe’s capital towards sustainable investments, ensure that sustainability risks are integrated into the financial system and that long-term implications are considered. The various regulatory initiatives will be implemented over the next couple of years.

GOAL Help achieve the Paris Agreement Contribute to the UN Sustainable Development Goals

OBJECTIVES Reorienting capital flow towards Mainstreaming sustainability Fostering transparency more sustainable investments in risk management and long-termism

KEY ACTIONS • Establish a taxonomy of • Better integrate sustainability • Strengthen corporate sustain- environmentally sustainable in ratings and market research ability disclosure activities • Clarify institutional investors’ • Improve sustainable corporate • Create standards and labels for and asset managers’ duties governance; reduce short green financial products • Incorporate sustainability in termism • Foster investment in sustain- prudential requirements able projects • Incorporate sustainability into investment advisory • Develop sustainability benchmarks

SELECTED REGULATIONS Taxonomy Regulation Low-Carbon MiFIDII Amendments Disclosure Regulation To be implemented in Benchmarks To be implemented in First part implemented 2022 and 2023 Implemented in 2020 2022 10 March 2021

The EU taxonomy is a clas- This introduces two This obliges investment sification system defining low-carbon benchmarks managers to take into minimum criteria that with predefined environmen- account their clients’ sus- economic activities should tal, social and governance tainability preferences when comply with in order to be disclosure requirements. assessing their investment considered environmentally These are the “Climate Tran- objectives and providing sustainable. The aim is to sition Benchmark” and the investment advice. prevent “greenwashing” and “Paris-Aligned Benchmark”, help investors understand which are intended to pro- whether an economic activ- vide an investor-friendly tool ity is sustainable. for comparative analysis of carbon footprints.

Sustainable Finance Disclosure Regulation in a nutshell The Sustainable Finance Disclosure Regulation SFDR achieves these objectives by imposing • Categorising products according to their (SFDR) introduces and defines transparency new disclosure requirements on sustainability sustainability characteristics as set out in requirements for financial product charac- in investments – it applies to both financial enti- the SFDR product framework. The two cat- teristics such that they can be compared on ties and products. Requirements include: egories are: article 8 products (promoting the basis of their degree of sustainability. Its environmental and/or social characteris- phased-in implementation started on 10 March • disclosing how sustainability risks are tics) and article 9 products (sustainable 2021 and has two main objectives: incorporated into decision-making investment as an objective). In addition, • disclosing whether the principal adverse disclosing how these products attain their • To make it easier for investors to invest in impacts on sustainability factors that sustainability characteristics on websites, products that support sustainable develop- investment decisions may cause are con- in pre-contractual agreements and in peri- ment sidered (these are the negative effects on odic reporting. • To prevent products from seeming more environmental, social or employee matters, sustainable than they actually are and thus as well as on respect for human rights, hinder “greenwashing” anti-corruption or anti-bribery that result from an investment decision) 8 Our Responsible Investment Journey 2021

Raising the bar with new sustainability targets

We have set targets for investments in ESG and sustainable investment products and have committed to supporting the goal of net-zero greenhouse gas emissions by 2050 or sooner. This will support our investors in investing in the green transition.

To support society’s sustainability goals commitment to help investors invest promoting environmental or social char- and the low-carbon transition, we are in products that promote sustainability acteristics to DKK 400bn by 2023, raising the bar by launching concrete or have sustainability objectives. These corresponding to around three quar- sustainability targets for our investment goals are set in accordance with the ters of the assets currently under our business. To advance our efforts as a new Sustainable Financing Disclosure management. In addition, the goal is to facilitator of sustainable change, we Regulation (SFDR) product framework. funnel at least DKK 150bn into sustain- have set specific sustainability tar- Our short-term goal is that investors able investment products by 2030. gets that plot a clear direction for our increase their investments in products “For our investors, sustainability CHAPTER 1 Introduction

Aspiring to help society reduce its negative impact In the long term, we are stepping up efforts to support society’s ambition of decarbonising the economy. Achieving the climate goals of the Paris Agree- ment requires corporates to shift their business model from polluting technologies and products to more energy-efficient and climate-friendly solutions. As investors, we can play a significant role in shaping tomorrow’s companies and Our investors increasingly We will continue our efforts influencing them to reduce their climate to strengthen and expand evaluate the companies and footprint. This is why we became a sig- products into which they put our ESG product shelf and natory of the Net Zero Asset Manager innovate new sustainable Initiative, which represents a group of their money according to how international asset managers commit- investment products. This the companies contribute to ted to supporting the goal of net-zero combating climate change will advance our ambition greenhouse gas emissions by 2050 of becoming a facilitator for or sooner, in line with the Paris Agree- and other societal challenges. sustainable change. ment’s target of limiting global warming Our new targets reflect this – to 1.5 degrees Celsius. we want to make measurable Marjo Grandell “As an investor and distributor of efforts and progress in our investment products, we have a vital role in driving the low-carbon transition, offering. thereby helping society achieve its cli- Christian Heiberg continues to gain in importance; a trend mate ambitions. By joining the Net Zero that is advancing by the hour. They Asset Manager Initiative, we will bolster increasingly evaluate the companies our climate efforts, and we will work and products into which they put their in collaboration with our investment money according to how the companies customers to set decarbonisation goals contribute to combating climate change for all assets under our management,” and other societal challenges. Our new concludes Thomas Otbo, Chief Invest- targets reflect this – we want to make ment Officer at Danske Bank Asset measurable efforts and progress in our Management. offering, while at the same time aligning We will set milestone targets for with the new SFDR regulation,” says carbon reduction in late 2021 to ensure DKK 400bn Christian Heiberg, Head of Danske Bank progress on our net-zero commitment. in investment products that Asset Management. promote environmental or social characteristics by 2023 Enabling investors to invest in the sustainable transition To achieve our new sustainability targets, we will expand our product offering to cater to investor sustainability preferences, so they can choose investment products aligned with their DKK 150bn ambitions and goals. in investment products that have “Setting measurable and ambitious sustainability objectives by 2030. targets for our responsible investment efforts is a central pillar for delivering on investor expectations going forward. We will continue our efforts to strengthen and expand our ESG product As an investor and distributor shelf and innovate new sustainable of investment products, we investment products, which we expect have a vital role in driving the to be able to offer in the near future. Investments aligned with This will advance our ambition of low-carbon transition, thereby becoming a facilitator for sustainable helping society achieve its net-zero emissions change,”states Marjo Grandell, Head climate ambitions. by 2050 or sooner. of Liquid Investments at Danske Bank Asset Management. Thomas Otbo 10 Our Responsible Investment Journey 2021

Our blueprint for delivering investment value and sustainable progress

Sustainability is becoming more important for companies and for the investment community due to stricter sustainability-related regulations and increased investor demands for sustainable products. This brings new risks and opportunities for companies, making it important for us to analyse and assess how companies navigate the sustainable transition in order to choose the best possible investments for our investors.

International societies have embarked sustainable solutions and products are face, making sustainability a key strate- on a journey to make economies more megatrends that influence companies gic business priority. sustainable. Stricter regulation on and thereby our investors. This devel- We believe it is paramount to companies, the Paris Agreement, the opment is disrupting business models capture these sustainability risks and UN Sustainable Development Goals and altering the risks and opportunities opportunities fuelled by the sustainable and consumers’ increased demand for that businesses and the financial sector transition, as this supports our ambition CHAPTER 2 Incorporating sustainability

of protecting and growing our investors’ Addressing sustainability through ate if they meet international norms assets. Incorporating sustainability a materiality lens and standards for corporate social risks has been part of our investment Sustainability risks are systemati- responsibility, such as the UN Global teams’ investment processes for many cally incorporated into the investment Compact and the OECD Guidelines for years, and we continuously develop process of our entire product range. Multinational Enterprises (learn more and enhance our sustainability analysis Investment teams identify and assess on page 44). In addition to incorporating tools and infrastructures, so our invest- those sustainability factors that pose sustainability risks into the investment ment teams are able to assess risks risks and could have a negative impact analysis, investment teams use active and opportunities holistically and make on the return potential of investments, ownership, screening and restrictions the best possible investment decisions. i.e. factors that are financially material. to address and mitigate sustainability As part of that process, companies risks (learn more on pages 30 and and countries are analysed to evalu- 42).

Utilising data to make better investments

Having a robust process for incorpo- matters. These include a company’s Learn more about the data platform rating sustainability risks and quality labour and human rights practices, here. investment products requires ESG a company’s carbon footprint from data. We have therefore built a data their own operations, platform consisting of more than products and supply 8,000 high-quality sustainability chains, board diver- data points listing those sustaina- sity, anti-bribery, biodi- bility aspects that are relevant and versity and deforesta- critical for businesses and their tion policies, product financial performance. The data safety, gender pay platform currently comprises 11 gap, animal welfare different ESG data sources, which and waste manage- are used by our investment teams to ment processes. assess how companies are addressing and performing on sustainability

mDASH Identifying material sustainability aspects with mDASH®

which sustainability aspects are noise’ and identify material sus- important for individual compa- tainability aspects and assess how Central to making sound nies from a financial standpoint. individual companies address and investments is our invest- To ensure a systematic approach, manage those aspects. This enables ment teams’ focus on sustain- we have developed our proprietary our teams to make better-informed ability issues that are likely to analytical tool called mDASH (short investment decisions that can bene- affect a company’s business and for materiality dashboard). The tool fit our investors. ability to deliver attractive returns to organises and categorises data our investors. This is called financial from companies and external data Learn more about mDASH® on page materiality and is the focal point providers, so that our investment 16 and in our white paper here. when investment teams analyse teams can cut through ‘information 12 Our Responsible Investment Journey 2021

Sustainability analysis built on a platform and proprietary ESG analysis robust foundation tool mDASH® to identify and analyse Adding new features to our infrastruc- those sustainability factors that are ture ensures investment teams capture likely to be business-critical for specific relevant and material sustainability companies. In addition, our Responsible aspects. This reinforces the environ- Investment team, consisting of ESG mental and social characteristics specialists and analysts, supports our of our products and enables us to investment teams across the Nordics accommodate our investors’ current in deploying a systematic incorporation and future sustainability preferences of sustainability factors. Moreover, and values. For example, our invest- investment teams regularly undertake ment teams leverage our ESG data training programmes to raise their sustainability competencies, so they can constantly improve and strengthen their ability to incorporate sustainability Consumer preferences, into the selection of investments. Many company operations and of our investment teams have recently regulations are rapidly completed the European Federation of changing, spurred by increased Financial Analysts Societies ESG Analy- sis training programme. awareness of the impact of By building robust sustainability climate change and global processes, expanding ESG data and ambitions to push society in developing analytical tools, we continue to enable teams to systematically man- a more sustainable direction. age and mitigate the potential sustaina- These changes will most likely bility risks of investments – and unlock accelerate even more going investment opportunities spurred by, for forward, which is why we example, a company’s ability to leverage the low-carbon transition to grow their have a rigorous process for Companies that fully business and achieve a competitive identifying climate-related integrate sustainability into advantage. risks and opportunities. their businesses can to a Double materiality Cecilie Hoffmeyer, Senior Portfolio Manager greater extent use it as a It is in our DNA to take responsibility business enabler and be better and contribute to making societies more sustainable while creating positioned than competitors prosperous and healthy lives. We to create growth and are therefore mindful of not only how may cause. Applying this so-called development. investment performance is affected double materiality assessment across by sustainability factors, but also the our investment products – meaning the Joel Backesten, Portfolio Manager material principal adverse impact on financially material topics that influence society that our investment decisions enterprise value as well as topics mate-

CHAPTER 2 Incorporating sustainability

We consider principal adverse impacts on sustainability factors

We consider the principal adverse impacts that our investment decisions may have on the sustainability of society. In other words, investment decisions that have negative effects on sustainability aspects, such as environmental, social or employee matters, or human rights, anti-corruption or anti-bribery issues. Adverse impacts are currently measured via these indicators, which we seek to continuously expand:

• Greenhouse gas emissions • Carbon footprint • Greenhouse gas intensity • Exposure to companies active in the fossil fuel sector • Share of non-renewable energy • Violations of UN Global Compact principles or OECD Guidelines for Multinational Enterprises

We use a wide range of tools, frameworks and data to identify the principal adverse impacts on sustainability factors. These are also addressed through active ownership and we have, for example, incorporated the indicators into our voting guidelines. In addition, we may exclude companies due to principal adverse impacts, and we have, for instance, excluded certain companies that contribute significantly to climate change, damage biodiversity, violate human rights, have insufficient labour rights or are involved in corruption.

Learn more about our processes for identifying and addressing principal adverse impacts on sustainability factors in our full statement at danskebank.com.

rial to the economy, environment and corruption, bribery and other practices responsible investor, we engage with people – is as an integral element of our harmful to sustainability. companies with the goal of solving the investment business. We analyse and To address and reduce principal matter and thus mitigating a compa- assess how a company addresses and adverse impacts we, for example, ny’s negative impact on society. This tackles a series of sustainability issues, restrict companies involved in harmful underpins our ambition of mitigating our ranging from carbon emissions, fossil products or behaviour, including weak negative impact on society, fostering fuel exposure, waste levels to gender human rights or tax practices, car- change and helping our investors invest diversity and due diligence over human bon-intensive business models, water in the sustainable transition while deliv- rights and a company’s efforts to avoid pollution or corruption. Moreover, as a ering strong investment performance.

14 Our Responsible Investment Journey 2021

Taking sustainability in solutions investment products to the next level

Danske Bank Asset Management has a wide selection of so-called solutions investment products that cater to the different needs of investors. These are multi-asset products comprising actively and passively managed components, such as equity or bond funds, and range from retail-friendly investment solutions like Flexinvest or Horisont to Global Portfolio Solutions for investors with more sophisticated needs. We have asked Thomas Otbo, Chief Investment Officer at Danske Bank Asset Management and Head of Solutions, to elaborate on why and how sustainability and responsible investment practices are rooted in these solutions products.

What is important from a we can deliver to our investors. This sustainability perspective when it makes integrating sustainability into comes to our solutions investment our investment processes important, products? as it helps us make better-informed Our sustainability approach is founded investment decisions and provide our on materiality and having a robust investors with investment solutions process for integrating sustainability capable of delivering competitive, long- matters into all aspects of our solutions term performance. On the other hand, products. This requires a well-developed we also have a responsibility as an foundation of ESG data, tools and exper- asset manager to address the principal tise – all of which we have developed in adverse impacts that our investments recent years and which enables us to may cause. By having sustainability derive investment value from sustaina- considerations ingrained in our solu- As Chief Investment Officer, bility. As Chief Investment Officer, I am tions products we can promote sustain- focused on utilising our infrastructure able development and make a positive I am focused on utilising our to ensure that sustainability is consid- impact. infrastructure to ensure that ered throughout the entire investment sustainability is considered process of our solutions products, from How will the new EU regulation throughout the entire invest- asset allocation, selection of compo- change our solutions products? nents or investments, to portfolio con- Coming EU regulations integrating ment process of our solutions struction and risk management . In my sustainability aspects in investment products, from asset alloca- view, it is paramount that every step of advisory mandate that as part of tion, selection of components our process works to promote the same the advisory process we will have to or investments, to portfolio environmental or social characteristics match our investors’ sustainability or achieve the desired sustainability preferences with the ESG character- construction and risk manage- outcome while delivering strong invest- istics or sustainability objectives of ment. ment performance. our products. This will necessitate the development of products with explicit Thomas Otbo Why is sustainability important for ESG characteristics or objectives. We these products have started to design these products, On the one hand, sustainability aspects so we are ready to meet the needs of investors’ desire to invest sustainable is have, like conventional financial factors, investors with an appetite for specific set to amplify in the coming years, and an impact on the potential returns that sustainability themes. We believe that we are keen to develop a product shelf

Asset Portfolio Selection of Risk allocation construction components management

Selection of Active Promoting sustaina- Sustainability components ownership bility characteristics objectives CHAPTER 2 Incorporating sustainability

Do all underlying components have the same sustainability approach? Solutions products often contain multiple components or multiple layers of investment analysis and decision-making. This is because a solutions product commonly invests in portfolios or funds (components) that are managed by separate investment teams with separate investment processes and objectives. This also means that the investment analysis and investment decisions in a solutions product are made from a top- down perspective, where we assess the investment strategy and sustainability integration of the underlying components, which might differ. Over the coming year, we will include sustainability-related metrics or indicators in the portfolio construction process in order to have solutions products that clearly promote specific environmental or social characteristics or have tangible sustainability objectives. This includes, for instance, our proprietary mSCORE® or carbon risk rating indicators. We will also include pre-defined filters in the selection of underlying components to augment the selection process and ensure sustainability-related aspects are taken sufficiently into account in the decision-making process.

Does active ownership play a role in solutions products? that caters to the various sustainability opportunities and the negative and pos- Active ownership is an essential part of objectives of investors. itive impacts of these processes, which our products and is applied to manage should support our ambition of creat- investment risks, maximise returns and How will this be done in practice? ing attractive risk-adjusted returns for contribute to a positive impact on the Incorporating ESG and sustainability investors. Sustainability considerations environment and society in general. We aspects into solutions products involves often relate to long-term time horizons, subsequently ensure that challenging many different layers and processes so we focus on including sustainability sustainability issues are addressed that are much more complex compared aspects in the strategic asset alloca- through dialogue and voting in the to integrating sustainability consider- tion as opposed to the tactical asset underlying companies as a means of ations into a single actively managed allocation process. Consequently, we advancing sustainability standards. We equity product. We are therefore are currently working on a number of exercise active ownership in solutions factoring tailor-made sustainability initiatives aimed at further strengthen- products at different levels and ensure considerations into the entire investing the asset allocation process from a that our activities work towards the ment process – from the allocation of sustainability perspective. This includes same objective. As a result, relevant assets, construction of the portfolio and developing an analytical framework that active ownership efforts are in place management of risk to active ownership makes it possible to include sustaina- in the underlying components and are activities. bility factors in long-term capital market always logged, so we can monitor the assumptions across asset classes, and activities and their impact on improving Can you detail how sustainability developing a scenario analysis frame- sustainability performance. Moreover, considerations are integrated into work and tools to identify those sus- we have developed voting processes the asset allocation process? tainability risks and opportunities that and voting guidelines that ensure we The asset allocation process is a can impact strategic asset allocation use our power to influence as an inves- vital part of the investment process. targets and the investment universe. tor and vote on relevant and material Depending on the investment strategy, Furthermore, we are also defining a sustainability proposals at the general it determines how a product is exposed process that will improve our ability to meetings of companies in the underly- to, for example, asset classes, regions, capture sustainability characteristics or ing components. sectors, themes and factors. We objectives in our allocation of regional consider material sustainability risks, exposures and sectors. 16 Our Responsible Investment Journey 2021

Developing analytical tools to capture value

Our analytical tool, mDASH®, is an important key enabler for us to meet the requirements of the EU’s new sustainability regulation for financial products’ sustainability-related disclosures.

The Sustainable Finance Disclosure Sustainability Insights & Analytics at “mDASH® thus helps investment Regulation (SFDR) is all about increas- Danske Bank. teams describe the manner in which ing transparency on the sustainabili- In particular, mDASH® supports our sustainability risks are integrated ty-related aspects of financial products. efforts to comply with the new regula- into the investment decision-making It places a great deal of emphasis on tion in three specific areas: process by assessing the likely impact describing our processes for managing of sustainability risks on financial various sustainability characteristics in 1. Management of sustainability return and explaining the reasoning for our investment decision-making. risks whether sustainability risk is deemed “At Danske Bank, mDASH® is our The regulation requires sustainability to be material or not,” explains Antti proprietary sustainability research risks to be managed and disclosed at Malava. platform that enables investment teams product level. mDASH® explicitly iden- to form a holistic view of companies’ tifies those industry-specific sustaina- 2. Promotion of sustainability sustainability performance. mDASH® bility risks that are most likely to impact principles and practices is therefore a key tool for complying the financial or operational performance SFDR contains a disclosure require- with the requirements of the new SFDR of companies, and scores how each ment relevant to the promotion of envi- regulation in terms of our investment individual company manages those risk ronmental and social characteristics for decisions,” says Antti Malava, Head of exposures. article 8 products and demonstration of

All companies must have a viable business plan for embedding sustainability into their operations, otherwise they risk a lack of refinancing opportunities for their bonds. Simply put, a company’s sustainability strategy is a decisive component in my selection of companies that I believe are positioned for long-term growth and can deliver an attractive return.

Rikke Zink Secher, Senior Portfolio Manager CHAPTER 2 Incorporating sustainability

sustainable investment objectives for 3. Management and disclosure of article 9 products. adverse sustainability impacts “We have developed robust screen- SFDR requires management and ing processes that enable investment periodic disclosure of the adverse strategies to ensure low exposure sustainability impacts of our investment towards investments with a negative decisions. An important concept here is impact on the climate or society as a principal adverse impacts (PAI). whole and to ensure good governance “PAIs aim to capture the negative, in investee companies. This means material effects of our investments we address standards of corporate on sustainability factors. We are in governance and sustainability within the process of integrating PAIs into areas such as emissions, energy use, mDASH®, so investment teams can biodiversity, water, waste, social and identify principal adverse impacts in the mDASH® thus helps invest- employee matters, human rights as well investment decision-making process,” ment teams describe the as anti-corruption. mDASH® displays, says Antti Malava. for example, which restrictions apply to Article 9 products have sustainable manner in which sustainabil- specific companies and the reasoning investment as their objective. Meet- ity risks are integrated into behind those restrictions,” points out ing this requirement necessitates a the investment decision-mak- Antti Malava. framework that defines how economic Furthermore, our portfolio managers activities contribute to an environmental ing process by assessing the can identify company-specific sustain- or social objective. Furthermore, article likely impact of sustainability ability issues of interest and concern 9 products must ensure that such risks on financial return and that they might want to address in their sustainable investments do not signifi- explaining the reasoning for ongoing dialogue with investee compa- cantly harm any other environmental or nies. mDASH® embeds this information, social objectives in the framework and whether sustainability risk is including a portfolio manager evaluation meet minimum social safeguards. We deemed to be material or not. of how a company has addressed a are now developing a robust article 9 particular issue, and hence allows us to framework, and mDASH® will incor- Antti Malava track progress within areas of interest porate relevant data to describe and and concern. measure such sustainable investment objectives.

mDASH® in brief 010100010010100101011010100010011001• To support our ambition of truly integrating sustainability into our investment decision-making, we have developed our own analytical 00100101tool mDASH®. 0101000100101001010110 • mDASH® is a materiality dashboard that sources the best available raw 0001001100100100101ESG data from company disclosures and01010001001010011 a number of third-party data and ratings providers to form the basis for assessing what is material to the 0101101010001001100100100101companies we invest in. 0101

00010010100101011010100010011001001• We can also transform scope and data inputs into a material sustainability risk score for each company in our universe – this we term an mSCORE®, 001010101000100101001010110101000which we have developed as one output from mDASH®. • mDASH® helps us identify investment value in ESG data, make holistic 1001100100100101assessments and take ownership 010100010010100101 of our sustainability integration, thus 01101010001001100100100101supporting better-informed investment decision-making. 0101000 100101 10010100101011010100010011001 18 Our Responsible Investment Journey 2021

We were keen to develop a more structured approach to monitoring existing managers and selecting new investment managers, so we could attain a greater understanding of their sustainability-related processes, activities and resources.

Mads Steinmüller

Rigorous sustainability assessment of external managers

We collaborate with external investment managers around the world, and the EU’s new Sustainable Finance Disclosure Regulation has created a need to strengthen these partnerships. A new assessment framework has been developed that includes a review of how external managers promote environmental or social characteristics or have sustainable objectives for their funds.

Danske Bank’s ambition is to take a awareness about responsible invest- though the majority of the external man- leading position and become one of ments in the Nordics is high, and that agers we collaborate with have strong the best banks in the Nordics in terms investors are increasingly requesting sustainability processes, we decided of responsible investments. The EU’s exposure to sustainability themes and to classify the funds as article 6 as of recently adopted Sustainable Finance objectives. 10 March 2021 (non-sustainable). Disclosure Regulation (SFDR) has However, all external managers are very defined a new regulatory framework Assessing sustainability processes positive about the SFDR requirements for investment funds, which must now In spring 2020, the Responsible and we are currently working with many comply with a number of disclosure Investments team developed a new of them so we can market their funds principles in order to be marketed as an assessment framework for all external as ESG or Sustainable investment ESG fund or a sustainable fund. managers. As well as regular monitor- funds (article 8 or article 9 funds),” says This also applies to externally man- ing by the Manager Selection team, Mads Steinmüller. aged funds in the Danske Invest fund all external managers are sustainabil- Danske Bank’s ambition is that universe. These are funds not managed ity-assessed annually to monitor and all externally managed funds should by Danske Bank Asset Management evaluate their progress in working with become ESG or Sustainable funds. That but other managers like Fidelity, Aber- responsible investments. ambition is aligned with our long-term deen and NN Investment Partners. “We were keen to develop a more goal of having at least DKK 400bn External managers are often used for structured approach to monitoring invested in funds that promote environ- asset classes or geographies where existing managers and selecting new mental or social characteristic by 2023 they have specialist competences or investment managers, so we could and at least DKK 150bn in sustainable are closer to the investment universe attain a greater understanding of their investment products by 2030. than Danske Bank Asset Management. sustainability-related processes, activ- “Across the Nordic region, we ities and resources,” explains Mads service numerous investors, large and Steinmüller. small, retail and business, who have a The assessment is rooted in the Dan- All external managers are diverse set of values, preferences and ske Bank Responsible Investment strat- needs. We have to ensure we are able egy, which focuses on sustainability Inte- very positive about the SFDR to serve our investors’ diverse needs gration, Active Ownership and Report & requirements and we are with an attractive product range of Disclose. However, the assessment was currently working with many responsible investments, regardless of updated after the SFDR regulation came of them so we can market their whether they are investing in American into force and now includes a review of high yield bonds or Chinese equities,” how external managers promote environ- funds as ESG or Sustainable says Mads Steinmüller, who is Senior mental or social characteristics or have investment funds (article 8 or ESG Specialist and part of Danske sustainable objectives for their funds. article 9 funds. Bank’s Responsible Investment team. “We spoke to all external managers He adds that the general level of about SFDR in the autumn, and even Mads Steinmüller CHAPTER 2 Incorporating sustainability

Sustainability assessment of external managers

We assess how external managers integrate sustainability into investment decisions and continuously discuss how their processes can be improved.

Sustainability Integration Active Ownership Report & Disclose • ESG education, data & resources • Engagement approach • Strategy level reporting • Material ESG risk/opportunities • Themes and topics • Firm-wide level reporting in the investment analysis • Investor initiatives & collabora- • Environmental/social character- tions istics or sustainable investment objectives • Climate change risk mitigation 20 Our Responsible Investment Journey 2021

Supporting the sustainable transition through index investments

Two new climate benchmarks have been introduced as part of the EU Action Plan on Sustainable Finance. These serve as tools for investors to actively align their decarbonisation efforts in index investments with the climate targets of the Paris Agreement. We have already started to help investors use these benchmarks as a means to strengthen their climate profile while maintaining broad market exposure at a low cost.

Index investments are a central pillar market exposures while contributing to in the coming years, as many investors in the investment strategy of many the climate goals of the Paris Agree- are seeking to reinforce and extend their institutional investors in particular, ment? According to Jasper Riis, Head sustainability profile. and many of these investors have high of Quant & Overlay at Danske Bank, the ambitions when it comes to contributing two new climate benchmarks provide Advisory that moves sustainability to the low-carbon transition and making an effective means of combining cli- ambitions forward societies more sustainable. So how can mate ambitions with an attractive risk/ Our ability to successfully help inves- investors successfully combine invest- return profile. The EU’s “Paris-Aligned tors transition their index investments ing in low-cost indexes with attractive Benchmark” and the “Climate Transi- to the climate benchmarks is rooted in tion Benchmark” can be leveraged by our own high sustainability ambitions, investors to emphasise their climate insights, tools and know-how that we action and create climate-resilient index have built up in recent years. portfolios. “Our interests and sustainability “Using the two benchmarks is a ambitions are aligned with our investor forceful way to actively express your clients, and being a sparring partner climate ambitions in index investments, and engaging in strategic discussions which are passive by nature. Many are ingrained in our advisory. We have investors, especially large institutional capabilities and access to extensive investors, have committed to having ESG data and quantitative analytical a net-zero investment portfolio by tools that many of our investors do not, 2050, and this allows them to carry and we closely collaborate with them on investing in cost-effective index from the initial planning and assess- portfolios, have a diversified investment ment phase to concrete recommen- strategy with attractive return potential dations for the portfolio construction The quantitative overlay and at the same time deliver on their and execution phase. In essence, we ensures that investors are in sustainability targets and promises to leverage our deep sustainability exper- the vanguard of supporting their boards and customers,” explains tise to tailor and boost our investors’ Jasper. climate profiles in their index portfolios, society’s climate agenda. He adds that Danske Bank has exemplified by us being able to help In my view, using the already assisted an institutional early-movers, such as the institutional benchmarks clearly signals investor in implementing the “EU Par- investor wanting to be at the forefront of an investor’s commitment to is-aligned Benchmark” in their global the climate agenda,” says Jasper, who equity index portfolio, thus lowering adds: redirecting its investments their carbon emissions by 50 per cent “We want to be a leading bank in towards opportunities in the compared to the broad market index the Nordics on sustainability, and to energy transition. and significantly reducing their annual drive the transition to net-zero carbon carbon emission levels going forward. emission investments that is necessary Jasper Riis. Jasper believes this trend will amplify to fulfil the climate targets of the Paris CHAPTER 2 Incorporating sustainability

Agreement. To achieve this ambition, help our investors funnel capital to fund are in the vanguard of supporting we are building stellar investment advi- the sustainable transition. society’s climate agenda. In my view, sory services, enhancing and expanding using the benchmarks clearly signals our ESG data architecture and ana- Investments aligned with EU’s an investor’s commitment to redirecting lytical tools and are fully focused on sustainability targets its investments towards opportuni- engineering investment solutions that From Jasper’s perspective, using the ties in the energy transition, broadly EU’s climate benchmarks is a gateway encompassing products and services to aligning index portfolios with the related to renewable energy and energy EU Action Plan and its support of the efficiency,” explains Jasper Riis. Paris Agreement climate goals as well To make it possible for investors as complying with EU sustainability of all types to invest in the low-carbon In essence, we leverage our regulations. transition, Danske Bank is currently deep sustainability expertise to “By implementing these bench- exploring the possibility of using these marks, the index portfolio is aligned climate benchmarks in index prod- tailor and boost our investors’ with the Sustainable Finance Disclosure ucts. This will enable us to offer index climate profiles in their index Regulation, and we automatically adjust products that meet the sustainability portfolios the portfolio if regulators adjust the requirements set out for article 8 and benchmark requirements. The quanti- 9 products in the Sustainable Finance Jasper Riis. tative overlay ensures that investors Disclosure Regulation.

What are the EU’s climate benchmarks?

The two benchmarks provide a robust and consistent framework for investors to incorporate specific objectives related to greenhouse gas emission reductions and the transition to a low-carbon economy through the selection and weighting of underlying investments. The benchmarks are predicated on the Paris Agreement target of limiting global warming to ideally below 1.5°C by the end of the century, and the goal is to help further mobilise and move investor capital towards activities that contribute to fighting climate change.

EU Climate Transition EU Paris-Aligned Benchmark Benchmark

Minimum carbon intensity 30% 50% reduction compared to investable universe

Baseline exclusions Excludes companies involved in: • Controversial weapons • Violating social norms

Activity exclusions None Excludes companies with: • Coal revenue of more than 1% • Oil revenue of more than 10% • Natural gas revenue of more than 50% • High carbon-intensity electricity producers with more than 50% revenue from production emitting more than

100g CO2 e/kWh

Year-on-year self-decarbo- At least 7% on average per annum: in line with or beyond the decarbonisation nisation of the benchmark trajectory from the UN’s Intergovernmental Panel on Climate Change 1.5°C scenario.

Exposure constraints Minimum exposure to sectors highly exposed to climate change issues is at least equal to equity market benchmark value. 22 Our Responsible Investment Journey 2021

22100.

9 8 5

Funnelling investments into the sustainable transition

We offer a wide range of ESG investment products so our investors can invest in the sustainable transition while gaining attractive returns. To advance our efforts as a facilitator of sustainable change, we will continue to innovate and expand our ESG product shelf to meet the changing sustainability preferences of our investors.

All our investment products adhere to Innovating to support investors’ and of products with sustainability charac- our responsible investment policy and society’s sustainability ambitions teristics, so innovating new ESG and incorporate sustainability risks, exercise We currently offer 89 funds and sub- sustainability products is a high priority. active ownership and apply our invest- funds that promote environmental or We are keen to take a leading position ment restrictions. The EU’s Sustainable social characteristics (article 8), and we and become the preferred investment Finance Disclosure Regulation (SFDR) expect to be able to offer sustainable partner when it comes to investment has clearly defined the requirements investment products (article 9) in the solutions that support the sustainable that products must meet in order to near future. We have chosen a conserv- transition and create return. We firmly be marketed as an ESG or sustainable ative approach to labelling our products believe that being an agent of change investment product – corresponding as article 8 or article 9, as we want to and a facilitator of sustainable develop- to article 8 and 9 under SFDR. (You ensure that we live up to the extensive ment will benefit our investors and ena- can learn more about our labelling and regulatory requirements and thus hon- ble them to take action on sustainability communication on these products on our the spirit of SFDR. However, we are and support society’s ambitions. page 52). ambitious about expanding our offering CHAPTER 2 Incorporating sustainability

How can investment products promote environmental or social characteristics?

Depending on the ESG investment product’s asset class, investment strategy or geographical focus, products can use different tools and approaches to promote environmental and/or social characteristics and ensure good governance practices. Here are examples of how investment teams managing ESG investment products utilise the selection process, active ownership and restrictions to align with the products’ specific sustainability characteristics.

Through investment selection Products can promote various environmental and/or social characteristics when they select investments. They can do this by investing in companies that have:

• low CO2 emissions, or companies in the process of reducing their carbon footprint • a high degree of diversity in their board • products that ensure biodiversity, clean drinking water or the recycling of materials • a high ESG rating • good labour conditions

By influencing companies The product can focus on influencing and improving corporate conduct and thus further promote environmental and/or social characteristics. Investment teams can do this by engaging in direct dialogue with the company management, voting at company AGMs or by forming alliances with other investors. Products might focus on, for example, improving a company’s efforts to: • combat corruption and bribery • minimise its carbon footprint and negative impact on the environment • comply with the principles of the UN Global Compact and respect human and labour rights • create a more reasonable remuneration structure for executive management • promote greater gender diversity among its leadership

By refraining from specific investments Products restrict a pre-defined list of companies to ensure a low exposure to investments which have a negative impact on the climate or society as a whole and to ensure good governance in investee companies. These restrictions support the promotion of environmental and social characteristics along with good governance, more specifically addressing enhanced sustainability standards, reduction of involvement in non-ethical or controversial activities and sectors, and a reduction in activities that have a significant negative impact on the climate. For certain products, restrictions are expanded to cover other types of non-ethical or controversial exposures, such as alcohol, fossil fuels or military equipment. You can read more about the restriction criteria on page 43). 24 Our Responsible Investment Journey 2021

CASE – PROMOTING ENVIRONMENTAL OR SOCIAL CHARACTERISTICS AND ENSURING GOOD GOVERNANCE Companies must adapt to climate trends

ESG scores among Danish companies tend to be considered as quite high, but some companies face challenges in the sustainability race. Our Danish Equities team use their close relationship with Danish management teams to leverage more sustainability.

As with all other investment teams typically based on a standard analysis become more sustainable. Environmen- at Danske Bank Asset Management, done from afar, while our analysis is tal issues have dominated their discus- Jacob Schmidt Johansen and Jesper performed in close proximity to the sions with the companies in 2020. Neergaard Poll from the Danish Equities companies. Nevertheless, if the market One currently ongoing dialogue team use our proprietary mDASH has concerns, it is important to address Jacob Schmidt Johansen mentions tool when conducting their sustaina- any misconceptions, as they can affect is with the Danish shipping company, bility analyses. mDASH provides all the share price negatively. We make Maersk. Shipping accounts for a large investments with an ESG score and the companies aware of how they are share of CO2 emissions, but Maersk gives Jacob Schmidt Johansen and perceived,” says Jesper Neergaard Poll. has set a target of zero CO2 emissions Jesper Neergaard Poll an insight into by 2050. to how a company can be perceived Environmental issues in “2050 may seem far away, but a from a sustainability perspective by transportation container ship has a lifespan of 20 to the financial markets. However, as the The Danish equities fund, ‘Danske 25 years, which means the entire fleet team has a very close relationship with Invest Danmark’, is classified as an has to be replaced with new ships that many Danish companies and has been ESG investment fund (article 8 under emit less or use new fuel types. Maersk following them for many years, mDASH SFDR), meaning that the fund promotes has to buy these ships somewhere, so rarely provides them with completely environmental and social characteristics they are very dependent on their suppli- new information. and ensures good governance practices. ers. It’s a pretty ambitious target,” says “We know our companies very well Jacob Schmidt Johansen and Jesper Jacob Schmidt Johansen. and are on first-name terms with man- Neergaard Poll spend quite a lot of time He adds that several Danish trans- agement teams. The data in mDASH is actively influencing the companies to portation companies face challenges CHAPTER 2 Incorporating sustainability

Key environmental discussion points

To ensure Maersk and Rockwool continue to adjust their businesses to a low- carbon economy and maintain financial performance, the Danish Equities team is focusing their dialogue on:

Maersk Rockwool

• New ships and fuel types • Production CO2 footprint • Potential emissions regulations • Demand for sustainable • Maersk’s global market-leading insulation products position • Fire resistance of products

if they do not comply with the need for transportation, future customers will Danish companies compared to other sustainable solutions. not use you as a carrier. A retail clothing investment universes. In his view, Dan- “We believe that if you are not company that produces sustainable ish corporate culture has an advantage able to offer environmentally friendly clothes in China would also want a sus- in the sustainability race. tainable logistics solution,” adds Jesper “In my opinion, Danish companies Neergaard Poll. have an advantage when adapting to Another example of an environmen- a new world with a strong focus on tal issue is the dialogue they have with ESG. The ‘E’ has become increasingly Rockwool, a company that produces important in the last 5 years, the ‘S’ insulation products for the construction is ingrained in our cultural DNA, and industry. The product itself is sus- I believe the focus on ‘G’ started with tainable, as it reduces emissions by the Nørby report in 2002, when the improving the insulation in buildings; it term ‘corporate governance’ suddenly is a natural product, and it is fireproof. appeared on the agenda of most Danish However, the production process companies,” explains Jacob Schmidt uses enormous amounts of energy, as Johansen. stones are melted into stone wool. The report Jacob Schmidt Johansen “Rockwool is currently investing is referring to was an initiative under- heavily to make their production more taken by the Danish government in We believe that if you are not sustainable. These investments will order to make recommendations for able to offer environmentally not provide an immediate return, but good corporate governance. The com- friendly transportation, future we believe they are in the interests of mittee consisted of four Danish CEOs shareholders, as they strengthen Rock- and the report looked into remuneration customers will not use you wool’s long-term position,” says Jesper plans and independent boards, among as a carrier. A retail clothing Neergaard Poll. other things. The recommendations company that produces were based on Danish and EU company High ESG score among Danish law and on the OECD’s Principles of sustainable clothes in companies Corporate Governance and were subse- China would also want a Although a few companies have seri- quently incorporated into many Danish sustainable logistics solution. ous sustainability challenges, Jacob companies. Schmidt Johansen generally sees Jesper Neergaard Poll ESG scores as being quite high among 26 Our Responsible Investment Journey 2021

CASE – PROMOTING ENVIRONMENTAL OR SOCIAL CHARACTERISTICS AND ENSURING GOOD GOVERNANCE Companies expected to take social responsibility

Sustainability discussions with European companies are part of everyday life for the International Equities team at Danske Bank Asset Management. However, the corona pandemic has changed the European sustainability agenda, with companies and investors turning their attention to social issues.

Along with a team of 10 investment terms. Most of the companies in his Environmental and governance issues professionals, chief portfolio manager investment universe were affected have been on the sustainability agenda Kasper Brix-Andersen manages the by the uncertainty of the COVID-19 for many years, pushing social issues Danske Invest Europe fund. To promote outbreak and its economic aftermath. into the background, but COVID-19 environmental and social characteris- In the financial markets, one of the con- prompted a discussion on how to ensure tics and ensure good governance, the sequences of this unexpected turn of the health of your employees and how fund’s portfolio managers use dialogue, events was that social issues became to keep factories open and secure jobs. etc., with companies to challenge their a hot topic. The ‘S’ suddenly emerged into the light,” sustainability performance and encour- “The pandemic came as a huge says Kasper Brix-Andersen. age them to raise the bar. exogenous shock – almost like a natural Kasper Brix-Andersen considers disaster – that severely tested the Adidas in media storm 2020 a watershed in sustainability resilience of European companies. One of the dialogues about social CHAPTER 2 Incorporating sustainability

issues they had was with German social characteristics. sporting goods manufacturer Adidas. “Adidas is actively working on In March 2020, when most of Europe making positive contributions to the went into a lockdown, Adidas held back UN Sustainable Development Goals via rent payments on their shops. The deci- their products, and they are gener- sion sparked outrage in Germany and ally doing a good job – but it’s not all several German government ministers positive. Topics like the environmental were quoted in the media, saying they impact of the supply chain, manage- were appalled. ment of chemicals in products, raw “We had a lot of calls with compa- material sourcing and efficiency are at nies during the first months of the pan- the top of our agenda when we look at demic, including several with Adidas. Adidas,” says Kasper Brix-Andersen. These were very uncertain times and Environmental and it is fair to say that some companies Supporting a company’s governance issues have been needed a few iterations before they sustainability journey found their way,” Kasper Brix-Andersen Another example of an ESG dialogue, on the sustainability agenda points out. starting a few years back, is with for many years, pushing social A media storm broke out in Ger- Hexagon, a mid-sized Swedish indus- issues into the background, many and Adidas changed its tune. In trial software company. According to but COVID-19 prompted a April and May, Kasper Brix-Andersen our internal proprietary ESG analysis spoke to Adidas again and the company tool, mDASH®, Hexagon had a poor discussion on how to ensure assured him they had changed strategy, ESG score, but Kasper Brix-Andersen the health of your employees so Kasper kept the stock. and his team were not fully convinced and how to keep factories Kasper Brix-Andersen says that the this was a fair analysis and they were open and secure jobs. The ‘S’ Adidas case really highlights the fund’s expecting the company to improve. In focus on promoting environmental and Kasper’s experience, some companies suddenly emerged into the do not invest the time and capital to col- light. lect and report sufficient ESG data for the data providers. This often results in Kasper Brix-Andersen an ESG score that does not reflect the true profile of the company. This is why the International Equities team always perform their own analysis in addition to the mDASH® output. effort in collecting and consolidating Kasper and his co-manager, Tobias data from their numerous subsidiaries Siemenge, met with Hexagon and told around the world to improve their ESG them how their sustainability profile data quality and ESG reporting, which appeared when looking purely at the we were convinced would ultimately ESG data. improve their sustainability ranking,” “We told the management team says Kasper Brix-Andersen. that we knew they were doing fine, Although they seemed taken aback but if investors who do not know the and not very receptive at the meeting, company as well as we do looked at the company has come a long way them only through an ESG lens, the since the team initially invested in company seemed unimpressive. We summer 2019. Kasper Brix-Andersen recommended that they invest time and thinks that other investors must have given them the same feedback. Last year the company hired a Head of Sustainability and this year Hexagon announced emission targets for the first time. According to Kasper Brix-Ander- We told the management team sen, this kind of ‘sustainability journey’ in a company is not unusual, and they that we knew they were doing have become used to giving sustain- fine, but if investors who do ability profile feedback to existing and not know the company as potential investment cases. “We engage and discuss sustain- well as we do looked at them ability topics with all our companies, only through an ESG lens, the including how to improve their journey company seemed unimpressive. and contribute to a more sustainable future,” Kasper Brix-Andersen con- Kasper Brix-Andersen cludes. 28 Our Responsible Investment Journey 2021

CASE – PROMOTING ENVIRONMENTAL OR SOCIAL CHARACTERISTICS AND ENSURING GOOD GOVERNANCE Governance is a key issue when investing in developing countries

Addressing sustainability issues in developing countries that sometimes struggle with various fundamental challenges is not an easy task – especially when you invest in government bonds. Nevertheless, sustainability is an important part of the investment process for the Emerging Markets Debt Hard Currency team.

The team behind the fund invests in Since the inception of the fund World Bank governance indicators government bonds in emerging markets in 2013, the portfolio managers, During the past seven years, the – countries like Mexico, Ivory Coast, along with research analysts Thomas investment strategy has grown from Mongolia and Jamaica. When asked if Haugaard and Sorin Pirau, have been $2bn in AuM in 2013 to around $6bn it makes sense to talk about sustaina- working with various parameters that at present, and while communication bility in developing countries, portfolio bear a strong resemblance to sustaina- around sustainability has intensified in managers Bent Lystbæk and Jacob bility. Back then, the term sustainability recent years, sustainability has been a Ellinge Nielsen are quite clear. was not as topical as it is now in their structured and fully integrated part of “Sustainability is extremely impor- investment universe, but governance the investment process throughout this tant when we assess credit risk. Good was and still is of utmost importance to time. governance is an essential starting their investment approach. Three of the six World Bank gov- point to achieving sustainable economic “When we started developing our ernance indicators form a core element growth, as it is highly correlated with analytical tools in 2013-14, we quickly of their credit risk assessment. The specific market-friendly policy frame- discovered that the broader concept of three indicators are rule of law, regu- works, private property rights and a governance is crucial for credit risk, as latory quality and political stability and competent legal system. At the same it correlates positively with economic absence of violence. time, sustainability is increasingly rele- policy quality. Furthermore, we were “What characterises different gov- vant because it is becoming an impor- convinced that from a risk-management ernance indicators is that they are often tant factor in influencing market access perspective a country’s institutions highly correlated, so a proper statistical to capital from the developed world,” and policies were important in anchor- treatment of these indicators is neces- says portfolio manager Bent Lystbæk ing credit risk,” says analyst Thomas sary when integrating them into a credit from the Emerging Markets Debt team. Haugaard. risk assessment,” says Bent Lystbæk. CHAPTER 2 Incorporating sustainability

In the Emerging Markets Debt team’s analysis, the second-most important variable is regulatory quality. This is the World Bank’s perception of a government’s ability to formulate and implement sound policies and regulations that permit and promote private sector development – a development that is crucial for long-term sustainable

Sustainability is extremely important when we assess credit risk. Good governance is an essential Where does the investment team invest? starting point to achieving sustainable economic The Emerging Markets Debt investment universe spans more than 70 emerging market countries and is the most country-diverse asset class growth, as it is highly globally. More than 400 bonds are included in the fund. They are classified correlated with specific as either pure sovereigns (government bonds), quasi-sovereigns (companies market-friendly policy that are 100% owned by the state), majority-owned companies (where the government owns the majority of the company) or pure corporates (where frameworks, private the state does not have a controlling stake in the company). The focus of property rights and a the strategy is sovereign risk, so depending on current market conditions competent legal system. the fund is usually around 90% invested in either sovereigns or quasi- sovereigns. Bent Lystbæk

economic growth. The most important variable is the traditional credit risk indicator: a country’s debt- to-GDP ratio. “We have always focused on having empirical evidence throughout the What are the World Bank investment process. The main compo- governance indicators? nent of our bottom-up country credit-risk analysis is built on an economet- The Worldwide Governance Indicators project reported aggregate and ric analysis, which means we are very individual governance indicators for over 200 countries and territories over conscious about what kind of ESG data the period 1996–2019 for six dimensions of governance. These indicators we use,” explains Bent Lystbæk. combine the views of a large number of enterprise, citizen and expert survey One of the biggest challenges is respondents in industrial and developing countries. They are based on more that ESG data is often published with than 30 individual data sources produced by a variety of survey institutes, a significant time lag. The World Bank think tanks, non-governmental organisations, international organisations governance indicators, for instance, are and private sector firms. The six indicators are: updated with a 12-18-month delay. “Most of the data we receive is • Voice and Accountability rather old, and we cannot make sound • Political Stability and Absence of Violence investment decisions if we only look at • Government Effectiveness historical numbers. Instead, we have • Regulatory Quality to conduct our own analysis to form • Rule of Law a more forward-looking view on the • Control of Corruption drivers of credit risk, especially when it comes to governance indicators,” says Source: World Bank Thomas Haugaard. 30 Our Responsible Investment Journey 2021

A challenging year and a turning point for sustainability

Pushing companies to adapt to a changing world and transition to more sustainable business practices is a natural part of our approach to active ownership. In the past year, we have focused on the social aspects and climate efforts of companies as well as expanding our ability to influence the sustainability strategies of more companies through our voting activities.

The outbreak of COVID-19 was a sustainability revolves not only around Along with other climate initiatives portentous event that changed the the climate agenda but concerns a adopted by policymakers around the sustainability agenda for people, com- wide range of issues that are important world, it is now more important than panies and the investment world. The for companies to address, so they can ever to discuss the readiness of com- unprecedented pandemic underlined take a holistic approach to creating a panies for the green transition and how that creating prosperous and resilient sustainable business that delivers long- they can adapt their businesses to a societies rests upon decisive sustaina- term value for its investors and adds world that is rapidly moving in a sustain- bility actions from all parts of society, as value to society. able direction (learn more on page 34). the interconnectivity of the global com- In our view, it is vital that companies In the wake of COVID-19, the social munity means that all business sectors continue to improve their sustainabil- dimensions and corporate citizenship across geographies and levels of wealth ity performance, while being mindful aspects of companies have surfaced are affected. of how their operations and practices as weighty business-critical issues and As a global investor, we have a influence society and could potentially taken up a larger portion of our com- responsibility to push for better sustain- cause adverse sustainability impacts. pany dialogues in 2020 compared to ability practices among companies. We The sustainability path for the various 2019. The crisis has heavily underlined embrace that task in the firm belief that sectors, geographies and specific society’s expectation that companies increased sustainability leads to better companies is nuanced, but let there be should not only be profit-driven – they and more robust companies, which no doubt – we are committed to being also have a broader social responsibility in turn helps us protect and grow our an active and responsible investor and should contribute to mitigating the investors’ assets while propelling soci- who supports and influences compa- consequences of the corona crisis. How ety in a more responsible and sustaina- nies, and we are in it for the long haul. companies handle health and safety ble direction. We believe this is the most effective has been an important aspect of our roadmap for bringing about lasting sus- dialogues, with our focus being on com- Sustainability is a business priority tainable change. panies not prioritising earnings higher In 2020, we engaged with more than than employee health, for example. 500 companies around the world on Spotlight on social issues On the contrary, we have advocated more than 100 ESG topics, ranging The EU agreeing a green recovery plan that companies should demonstrate from employee health and safety, busi- to repair the damage caused by the social responsibility and help mitigate ness ethics and the circular economy coronavirus and lay the foundation for the economic and health-related fallout to energy efficiency, product quality a more sustainable Europe meant the of the crisis. Many companies are more and digitalisation. This illustrates how crisis accelerated the green transition. tentative in their approach to social CHAPTER 3 Active ownership

We exercise active ownership in three ways

Our investment teams engage in direct management processes, create safe and dialogue with the companies in which healthy working conditions for employees, they invest with the aim of influencing or fight corruption. At the same time, the companies’ behaviour, strategies and investment teams focus on supporting performance in relation to business-crit- companies’ long-term value creation. ical sustainability aspects and principal The dialogue also provides our invest- adverse impacts. Investment teams use ment teams with greater insight into their in-depth knowledge of the companies companies – insights that the teams then to, for example, influence them to reduce use to make better-informed investment

their CO2 emissions, increase diversity on decisions that can benefit the potential the board of directors, strengthen waste return for our investors.

We use our voting rights at companies’ rights, CO2 emissions, energy efficiency, annual general meetings to voice our gender diversity, biodiversity, human rights opinion on key business issues. It is an and anti-corruption. Through voting, we important part of our efforts to support and seek to support a company’s long-term influence companies to address busi- growth potential, mitigate its sustainability ness-critical aspects. We vote on a wide risks and minimise companies’ adverse array of topics, including remuneration pol- impacts on society. icies, capital structure and shareholders’

We are a member of several investor stakeholders to exert active ownership organisations and investor initiatives, and engage in joint dialogue with compa- and we collaborate with a range of other nies to contribute to positive change. By relevant stakeholders. By doing this, we working together, we and the investment aim to contribute to the development of industry gain a stronger voice, and this responsible investments and to promote enables us to put additional pressure on transparency and sustainability standards companies to address and improve on in companies and in the financial markets. sustainability-related issues and have We work with other investors and responsible business practices.

aspects, new ways of working and sup- wInfluencing more companies voting rights as a shareholder at more porting the well-being of local communi- through voting than 5,200 company meetings in ties. We do not expect the importance To maximise our ability to influence 2020, which is a significant increase of social issues to fade during the com- companies through voting at annual on 2019. We have also expanded our ing years, and we will continue to sup- general meetings, we strengthened voting guidelines, so we have a clear port and push companies to improve on our voting infrastructure in 2020 and position on topics related to principal social matters, including diversity and are now voting more extensively. As adverse sustainability impacts, carbon inclusion, community out-reach, health well creating our voting guidelines, we emissions, biodiversity, water issues, and safety practices and human rights are now voting on passively managed employee safety, anti-corruption, etc. issues. assets. As a result of our more robust You can read more about our enhanced voting structure, we exercised our voting guidelines on page 40. 32 Our Responsible Investment Journey 2021

Company engagements in 2020

The corona pandemic underlined society’s expectation that companies should take a broader social responsibility and, in this case, contribute to mitigating the consequences of the corona crisis. This prompted us to focus on discussing how companies ensured the health and safety of employees as part of protecting the business and contributing to stopping the spread of the virus. In addition, it was vital to discuss the resilience of a company’s business models in order to assess whether they could get through the crisis. Another important aspect of our company dialogues in 2020 was to analyse and discuss the potential behavioural changes prompted by the crisis, including a shift in demand for e-commerce, payment services or IT solutions that could significantly impact the growth potential of many companies.

Companies Country ESG engagement Interactions domiciles topics 525 42 103 845

Most frequently discussed topics across ESG themes

E S G

Rank Topic Count Rank Topic Count Rank Topic Count

Employee Health & 1 GHG Emissions 128 1 88 1 Dividends 68 Safety

2 Energy Efficiency 72 2 Access & Affordability 56 2 Capital Structure 66

Business Model 3 Energy Transformation 71 3 53 3 M&A 57 Resilience

4 Circular Economy 63 4 Customer Welfare 46 4 ESG Integration 56

Supply Chain 5 Green Financing 56 5 42 5 Restructuring 32 Management

Sustainable Product Quality & Sustainability Inte- 6 42 6 37 6 31 Products Safety gration & Reporting

Product Design & 7 Digitalisation 36 7 37 7 Business Ethics 24 Lifecycle Management CHAPTER 3 Active ownership

Ownership Structure

Employee Health & Safety ESG integration Dividends Energy Efficiency

We discuss Dividends sustainability matters with companies all over GHG the world. Here are Emissions our most frequently Capital discussed ESG topics Structure Capital with companies by GHG Energy Emissions Structure country. GHG Efficiency Dividends Emissions GHG Emissions GHG Emissions Circular Employee Economy Health & Safety

GHG Emissions Capital Employee Structure Health Energy Management Of The & Safety Transformation Legal & Regulatory Environment

Split between engagement themes Share of participants of our company meetings

Governance 31% Environmental 41% 35

0 CEO IR CFO Other Executive Corporate Treasury Board of Social 28% Vice Sustain- directors President ability

Learn more about our engagement activities in our Active Ownership Report at danskebank.com. 34 Our Responsible Investment Journey 2021

Corona crisis amplified focus on the green transition

A series of political initiatives helped add additional momentum to the green transition during the corona pandemic. The climate agenda was also the theme our investment teams most often discussed with companies in 2020 and, more specifically, how they can capitalise on green growth opportunities and contribute to driving the green transition.

While global society, companies and shift, says Jacob Schmidt Johansen, while, has rejoined the Paris Agreement the financial markets were very nega- senior portfolio manager with the team and will ramp up green investments tively affected by the corona pandemic, that invests in Danish companies. going forward. These initiatives will the crisis also intensified focus on “The EU’s so-called European help drive investment and demand in a the green transition. Danske Bank’s Green Deal, which is the roadmap for green direction and provide commercial new active ownership report for 2020 the green transition of the EU coun- support for those companies that have shows that the climate agenda was the tries’ economies, has helped further the solutions and products needed to topic most often discussed with the speed up the shift towards a more implement a green transition,” explains companies we invest in on behalf of our climate-friendly society. At the same Jacob Schmidt Johansen. investors. time, the EU has also enhanced its CO2 Although the green transition has reduction target to 55% by 2030 and Future growth in a surging been an important topic of discussion passed relief packages with an undenia- green market for several years, a series of political bly green focus to help restore econo- Danish companies with solid ESG initiatives has added momentum to the mies after COVID-19. The US, mean- ratings generally performed well in CHAPTER 3 Active ownership

2020, says Jacob Schmidt Johansen. He points out that green companies like how companies can develop hydro- Vestas, Ørsted and Rockwool had a par- gen technologies that are profitable. ticularly strong tailwind and he expects Maersk, for example, has an ambition the green wave will create increased of being CO2-neutral by 2050, which demand for their climate solutions in means their fleet will have to be green the coming years. energy-propelled by as early as 2030 “We have several Danish compa- if they are to achieve their goal. This nies who are world leaders in their field, requires Maersk to work alongside which gives them significant advan- both the suppliers of marine engines tages that can boost top and bottom and energy companies, so they can, for lines. The question now is how they can example, transform green hydrogen into best grasp these global opportunities, methanol or ammonia, and use that to and we have been discussing that with We have several Danish fuel their ships.” the management of a great many com- companies who are world Going forward, Jacob Schmidt panies,” says Jacob Schmidt Johansen. leaders in their field, which Johansen will increasingly be leveraging Many traditional oil companies, for dialogue to discuss how companies example, have developed an appetite for gives them significant can make profitable green investments moving into the renewable energy mar- advantages that can boost and so remain relevant in a society ket and are willing to pay a high price top and bottom lines. The where the green transition will only gain for projects. That presents a company question now is how they momentum. like Ørsted with a number of strategic considerations, which Jacob Schmidt can best grasp these global Johansen has been debating with them. opportunities, and we have “Growth should not come at any been discussing that with the price, and it must make sense financially. Ørsted has been highly success- management of a great many Supporting the Paris Agreement ful at developing the offshore wind companies. By actively engaging with companies on climate power industry in many countries and issues, we seek to influence companies to these projects have been a driving force Jacob Schmidt Johansen curb their climate footprint. The ultimate goal for the company’s growth. However, the is to facilitate change and foster improvement, many new players in the offshore wind and support companies in future-proofing their business in a world that is on a green path. We turbine market have lowered the price their investments no longer being prof- believe this is the most effective way to make a of electricity, which has put pressure itable. We are therefore in an ongoing difference and help society achieve the climate on Ørsted’s earnings and could result in dialogue with Ørsted about their consid- goals set out in the Paris Agreement. erations regarding the growth markets of the future. Among other things, we discuss how they could use their experience to develop offshore wind infrastructure in new markets, which could Paris Agreement target help create profitable growth.” On the one hand, there is a New renewable energy technologies need for energy companies Holding the increase Green electricity does not cover the in the global average to develop an alternative energy needs of, for example, shipping temperature well below to fossil fuels. On the other, or heavy industries, which need other the transport sector, which renewable energy technologies to be able to reduce their climate footprint. 2˚C consumes the energy, has “On the one hand, there is a need to help develop technologies for energy companies to develop an that can use the new, green alternative to fossil fuels. On the other, Pursue efforts to limit the fuel types. There is a mutual the transport sector, which consumes temperature increase to the energy, has to help develop technol- dependency between the two ogies that can use the new, green fuel sectors, and we are discussing types. There is a mutual dependency 1.5˚C the green energy mix of the between the two sectors, and we are future with a number of discussing the green energy mix of the future with a number of players across players across both sectors, both sectors, such as Maersk, DSV, such as Maersk, DSV, DFDS DFDS and Ørsted,” says Jacob Schmidt and Ørsted. Johansen, who adds: “Green hydrogen plays a key role in Jacob Schmidt Johansen this discussion, and we are focused on 36 Our Responsible Investment Journey 2021

Voting in 2020

As a result of our strengthened voting infrastructure and the development of our voting guidelines, we exercised our voting rights at 5,289 annual meetings in 2020, which is a significant increase compared to 2019, when we voted at 406 meetings. This resulted in increased voting activity on environmental and social proposals, and we voted ‘for’ these proposals at the general meetings of 124 companies in 2020. Proposals included better disclosure of political contributions, lobbying activities, climate change impact, GHG emissions and human rights policies.

Meetings Country domiciles Proposals 5,289 65 56,784

How we voted on proposals from company management and shareholders

All voted proposals Management proposals Shareholder proposals

For For For Against/Withhold Against/Withhold Against/Withhold Abstain Abstain Abstain

90% 9% 91% 8% 68% 30% 1% 1%

For 51,171 For 50,103 For 1,068

Against/Withhold 5,012 Against/Withhold 4,531 Against/Withhold 481

Abstain 482 Abstain 454 Abstain 28

Total 56,784 Total 55,207 Total 1,577 CHAPTER 3 Active ownership

Most common proposals where we voted against management recommendations

Elect Director 1,460

Advisory Vote to Ratify Named Executive 300 Ofﬁcers'Compensation Approve Issuance of Equity or Equity-Linked Securities without Preemptive Rights 286

Approve Remuneration Policy 193

Elect Director (Cumulative Voting or More Nominees Than Board Seats) 144

Authorize Reissuance of Repurchased Shares 138

Approve Restricted Stock Plan 110

Other Business 98

Approve Issuance of Shares for a Private Placement 96

Approve/Amend Loan Guarantee to Subsidiary 94

0 200 400 600 800 1000 1200 1400

List of environmental and social proposals we most frequently voted in favour of

40 40 35

25 26

22 20

17 15

13 10

7 5 5 5 3 3 0 Report on GHG Human Community – Report on Miscellaneous Report on Political Political Approve Sustainability Emissions Rights Environment Equal Proposal – Climate Lobbying Contributions Corporate Risk Impact Employ- Environmental Change Disclosure Disclosure Social Assessment ment &Social Responsibility Opportunity Report

Learn more about our voting activities in our Active Ownership Report at danskebank.com. 38 Our Responsible Investment Journey 2021

Pushing companies to curb their climate impact

We collaborate with other investors to bolster our active ownership and put additional pressure on companies. As an example, we have joined forces with almost 600 global investors who are part of the Climate Action 100+ initiative to push companies to reduce their climate footprint. The coalition has been instrumental in the investment industry’s ability to push companies on their decarbonisation strategies.

In addition to our investment teams’ Mantas Skardzius, who is a Senior ESG ers to drop new regulations aimed at direct engagement with companies, Research Analyst and part of Danske curbing carbon emissions and support- we are members of several investor Bank’s Responsible Investment team. ing the transition to a cleaner society. initiatives where we together with Ensuring greater transparency gives other investors influence companies Putting climate on the corporate us insight into which companies are to advance their sustainability perfor- agenda opposing worldwide efforts to rein in mance. We are part of the investor-led initiative climate change, so we can focus our “Through collaboration and initi- Climate Action 100+ as part of our engagement with these companies and atives, we encourage companies to focus on supporting the green transition influence them to withdraw from these increase transparency and disclosure and achieving the climate goals of the harmful lobbying activities,” explains of their climate impact and to move Paris Agreement. A key aspect of the Mantas Skardzius. towards more sustainable business Climate Action 100+ alliance is to use He adds that Danske Bank is practices. Collaborating with others our voting rights at companies’ annual currently engaging directly with the supports and strengthens our ability to general meetings to influence compa- US construction equipment manufac- influence companies, as it increases the nies on climate matters. In 2020, we turer Caterpillar together with 9 other power of our voice as an investor,” says voted in favour of companies having members of Climate Action 100+ and to increase disclosure of their climate other large shareholders. One objective and energy-related lobbying activities, of the engagement is to have Caterpil- including lobbying conducted by their lar commit to setting carbon-emission trade associations. Furthermore, we reduction targets aimed at achieving voted in favour of proposals urging com- carbon-neutrality by 2050. From our perspective it is panies to align their lobbying activities important that companies with the climate targets of the Paris Changing the rationale of climate are transparent about their Agreement. action climate-lobbying activities We did this at the annual general The initiative has been a game changer meetings of companies such as Chev- for the investment community’s ability and that they do not ron, Delta Airlines, Rio Tinto, Santos to move the needle on companies’ influence lawmakers to drop Limited, United Airlines, American climate action, according to Mantas new regulations aimed at Airlines, Caterpillar, Duke Energy, Exx- Skardzius. Since its inception in 2017, onMobil, Ford, General Motors, NextEra the initiative has played a central role curbing carbon emissions and Energy and The Southern Company. in pushing large companies, such as supporting the transition to a “From our perspective it is impor- General Motor, Unilever, Total, Eni and cleaner society. tant that companies are transparent Nippon Steel, to set tangible carbon about their climate-lobbying activities reduction targets and transition to more Mantas Skardzius and that they do not influence lawmak- sustainable business models. CHAPTER 3 Active ownership

“The initiative represents investors still need to advance their commitments with over USD 54 trillion under man- and implement credible transition plans. agement, and by combining our power Signatories of Climate Action 100+ ini- as shareholders we have the attention tiatives are therefore stepping up their of some of the largest companies on ambitions for the 2021 voting season all continents and across industries. and have, for example, filed 37 pro- Climate Action 100+ has definitely posals at North American companies changed the conversation about the seeking disclosure of climate-related necessity of curbing carbon emissions. risks, alignment of business plans with It is no longer a ‘nice to do’, it is a busi- the goals of the Paris Agreement, and ness imperative. Cutting emissions and transparency around corporate lobbying avoiding the worst impacts of climate practices that influence climate and change is the only real path to protect- energy regulations. ing long-term investment value and “Steering companies towards return. At the same time, the neces- cleaner energy sources and curbing While Swedish property sary transition to net-zero emissions their carbon emissions is not accom- companies may be at the will create significant new investment plished overnight. Companies are opportunities that can create future increasingly setting net zero by 2050 forefront in terms of energy jobs, wealth and growth for investors, commitments, but many more lack the efficiency, they still have a businesses and communities. The initi- short- and medium-term GHG reduction lot of work to do in terms ative has been instrumental in injecting targets required for them to be on track. that logic into companies,” says Mantas Very few of the world’s highest car- of an integrated approach Skardzius. bon-emitting corporations have defined to mitigating adverse the strategies and capital investment climate effects. They need Far from finished plans necessary to decarbonise their to supplement the climate Even though many companies have businesses. The coalition of investors is taken steps to mitigate the climate constantly pressuring companies and strategies with sustainability impact of their operations, companies holds them accountable for their cli- assessments at supplier level mate practices to move the low-carbon and life-cycle analyses of transition forward. We strongly believe buildings. that collaborating with the world’s largest investors will drive real-world Emelie Holmström, change and help secure stable and Senior Portfolio Manager climate-resilient economies in the long term,” concludes Mantas.

What is Climate Action 100+? The coalition of investors is constantly pressuring As a member of Climate Action 100+, we collaborate with almost 600 companies and holds them investors around the globe to influence and ensure that the world’s largest corporate greenhouse gas emitters take necessary actions on climate accountable for their climate change, help drive the clean energy transition and participate in achieving practices to move the low- the goals of the Paris Agreement. carbon transition forward. We strongly believe that The overarching purpose is to engage with companies to: • Curb emissions collaborating with the world’s • Improve governance on climate-related issues largest investors will drive • Strengthen climate-related financial disclosures real-world change and help secure stable and climate- The initiative targets 100 of the systemically important corporate emitters, accounting for two-thirds of annual global industrial emissions, as well as resilient economies in the long more than 60 other companies with significant opportunity to drive the term. clean energy transition.

Mantas Skardzius 40 Our Responsible Investment Journey 2021

Voting guidelines need to reflect best practice

It is important that our voting guidelines are updated on a regular basis, as they are an essential tool for investment teams with respect to exercising active ownership and thus enabling us to influence companies included in index products. The new EU regulation has spurred us to further enhance our efforts to address principal adverse impacts and influence company behaviour.

Having systematic and comprehensive increasingly focused on long-term value our investors’ assets and actively influ- voting guidelines is a key component in creation that benefits both investors ence and shape companies to adopt driving change and influencing com- and society in general. Moreover, voting more sustainable business practises. panies, according to Giedrė Šavinienė, guidelines are becoming increasingly Voting at annual general meetings is senior ESG Analyst and part of our important from a regulatory perspec- an important tool that feeds into this Responsible Investments team. She tive, and we consider them one of the purpose, while encouraging companies is responsible for our voting activities enablers that ensures our various to be responsible, to support sustain- and guidelines. We have asked her to investment products comply with the able development and manage their explain the most important updates to sustainability requirements included in sustainability risks is fully embedded in the voting guidelines and elaborate on the EU’s Sustainable Finance Disclo- our responsible investment philosophy. the future of voting. sure Regulation (SFDR). I believe that using our voting rights will push companies along on the sustain- Why have the voting guidelines been What are the most significant ability agenda, which in turn adds value updated? improvements to the voting for society. Our voting guidelines are an important guidelines? component of our voting infrastructure. SFDR obliges investors to disclose What do you expect will be the As the guidelines direct the voting whether they consider the principal most important voting topics going activities of our investment teams, it is adverse impacts of investment deci- forward? essential to review, update and improve sions on sustainability factors. We have Society faced unprecedented chal- the guidelines, so they reflect best mar- now incorporated indicators related to lenges in 2020 amid the COVID-19 ket practices and support our ambition these impacts into our voting guide- pandemic, which caused economic to protect our investors and actively lines to ensure we always address chaos and underscored how sustain- contribute to companies becoming and vote on principal adverse impact ability is a prerequisite for societal issues. More specifically, we have and corporate resilience. The 2021 significantly expanded the guidelines voting season will have to address concerning environmental (greenhouse similar difficulties and uncertainties, gas emissions, energy, biodiversity, and shareholders are now even more water and waste) and social issues focused on corporate governance and (employee matters, respect for human its importance in ensuring a robust rights, anti-corruption and anti-brib- and long-term business operation. ery). The voting guidelines adhere to Governance issues will thus obviously internationally recognised corporate be a key topic at general meetings, but governance standards and voluntary COVID-19 has generally accentuated principles, such as the UN Global the business urgency of many other Compact and the OECD Guidelines for aspects of sustainability. As a conse- Multinational Enterprises. Coupled with quence of the pandemic, I expect topics consideration of local regulations and such as climate change practices, risk As a major investor, we stewardship guidelines, we have a solid management, IT readiness, diversity foundation for being an active investor and inclusion, employee safety, and have a responsibility to use who addresses sustainability risks and linking executive remuneration to sus- our position to safeguard the potential negative impact on society tainability performance, to garner more our investors’ assets and caused by the companies we invest in. attention going forward. The pandemic has changed the mindset of the global actively influence and shape Why is using our voice as an community and it is more acutely aware companies to adopt more investor at annual general meetings that the wellbeing of society, people and sustainable business practises. important? business is tightly bound together, so As a major investor, we have a respon- this will be more obviously reflected at Giedrė Šavinienė sibility to use our position to safeguard annual general meetings in the future. CHAPTER 3 Active ownership

What are Danske Bank’s voting guidelines?

Our voting guidelines set out a number of principles well as topics related to consumer and product safety, that guide how we vote on proposals. The overall princi- environment and energy, labour standards and human ple guiding our votes is how the proposal may grow or rights, gender pay gap, workplace and board diversity, and protect the assets of our investors in either the short or corporate political issues. The guidelines ensure that we long term. The guidelines address a vast range of topics, address topics related to principal adverse sustainability including financial aspects, remuneration policies, the impacts on society. composition of boards of directors, capital structures, as

Our guidelines include for instance:

Board of directors The board should have a combination of competences (knowledge and experience) appropriate to the company’s operations and phase of development. Diversity among the board of directors supports the company’s business operations and long-term development. Examples of diversity parameters include age, gender, background and international experience.

Climate aspects Companies should report on their contribution to climate change and their greenhouse gas emissions, CO2 including future targets, carbon intensity and an estimation of the company’s carbon footprint. Compa- nies should set and publish targets for greenhouse gas emissions aligned with the goals of the Paris Climate Agreement.

Social aspects Companies are expected to act in line with international conventions, such as the UN Global Compact and the ILO Conventions on social and labour issues, including human rights, minimum wages, industrial relations, employment policy, social dialogue, social security and other issues.

Anti-corruption Companies are expected to have an adequate and well-disclosed policy framework and procedures € that are consistent with the United Nations Convention against Corruption.

See our voting guidelines here.

42 Our Responsible Investment Journey 2021

Restricting investments with harmful business practices Addressing sustainability risks, considering adverse impacts on society and promoting sustainability-related characteristics are an integral part of our responsible investment processes. Robust screening and restriction processes are key drivers to creating value for our investors and society in general.

In our view, contributing to the tran- Screening gives our investment use restrictions to ensure they have sition of society towards increased teams a deeper knowledge of how com- a low exposure to investments which sustainability while protecting the panies work with sustainability, while have a negative impact on the climate assets of our investors are two sides also enabling the teams to mitigate or society as a whole and ensure good of the same coin. We therefore screen sustainability risks. Moreover, screening governance in our investee companies. our investments on an ongoing bases can help identify positive investment Investment restrictions are thus utilised to identify sustainability risks and to opportunities that would benefit our to ensure that investment products address the negative impact on society investors. Screening is also employed have a minimum level of sustaina- that our investment decisions may to ensure that our ESG investment bility-related materiality to meet the have (referred to as principal adverse products promote relevant environmen- demands of clients in terms of sustain- impacts). tal or social characteristics. In addition, ability preferences and to comply with we have introduced a “Sustainability SFDR product requirements. risk challenger”, a role that spars with investment teams on a wide range of Investment restrictions promote: sustainability-related issues (learn more • Enhanced sustainability standards: on page 49). Restrictions impose minimum standards and safeguards on environmen- Screening according to frameworks tal and social matters. By promoting for corporate responsibility enhanced sustainability standards, Based on information from a number a product does not invest in certain of ESG data providers, investments are companies that a) are involved in screened with reference to current regu- activities, or behave in ways, that lations, industry best practice, interna- might result in significant principal tional norms and voluntary frameworks adverse impacts on sustainability for corporate responsibility. Among factors, b) show weak sustainability other things, screening is based on practices, c) do not have minimum the principles set out in the UN Global social safeguards, or d) fail the ‘do no Compact and the OECD Guidelines for significant harm’ test. It is absolutely vital that Multinational Enterprises. Moreover, • Reduced involvement in non-ethi- companies have strong ethical screening helps us identify companies cal or controversial activities and that contribute to principal adverse sectors: This is an ethical overlay values, adhere to responsible impacts, such as climate change, harm- to the environmental and/or social business conduct and are ful environmental or weak human rights characteristics promoted by a prod- vigilant about their impact practices, inadequate labour standards uct. It means that a product does on the sustainability of or insufficient anti-corruption measures. not invest in companies involved in Learn more about our screening tobacco or controversial weapons. society. Companies must be process here. For certain products, exclusions are committed to advancing their expanded to cover other types of ethical business practices, Promoting sustainability non-ethical or controversial expo- respecting human rights and characteristics sures, such as alcohol, fossil fuels For all investment products, we restrict or military equipment. putting emphasis on corporate investment in specific companies as a • A reduction in activities that have a citizenship. Disregarding its method to mitigate the sustainability significant negative impact on the societal responsibility is simply risks that can affect the value of an climate: Restrictions promote envi- investment and to reduce the adverse ronmental factors by refraining from not a viable solution for impacts on society that our investment investing in companies involved in companies. decisions may have. Moreover, our ESG thermal coal, tar sands or peat-fired investment products (article 8 under power-generation, or companies Riitta Louhento, Senior Portfolio Manager SFDR) and future sustainable invest- that do not have credible transition ment products (article 9 under SFDR) plans or issue sustainable bonds. CHAPTER 4 Screening and restrictions

Our investment restrictions

Our investment restrictions apply to the entire investment universe See full list of restricted and are also utilised as a tool to promote the sustainability-related companies characteristics of an ESG investment product. here.

Reduction in activities that result in a significant negative impact on the climate

Companies deriving more than 5% our commitment to phasing out of their revenue from thermal coal investments in companies involved mining, thermal coal energy (or a in the three fossil fuel types by combination of these), extraction 2030 in the EU and OECD and by of oil from tar sands or peat-fired 2040 in the rest of the world, in power generation are restricted. line with the requirements of the These restrictions are part of Paris Agreement.

Reduction of involvement in non-ethical or controversial activities and sectors

We impose investment restrictions Companies deriving more than on companies directly or indirectly 5% of their revenue from growing, involved in controversial weapons, processing or producing tobacco i.e. weapons that are prohibited products are also restricted. This by international law or considered includes products that are wholly controversial because of the or partly based on leaf tobacco arbitrary damage they cause. Such and so-called next-generation weapons include cluster munitions, tobacco products such as electronic anti-personnel mines, biological cigarettes and snus. weapons, chemical weapons and nuclear weapons.

Enhanced sustainability standards

We restrict certain companies involved harm’ test. This includes companies with in a) activities, or behaving in ways, harmful climate practices, involvement in that might result in significant principal deforestation or having a negative impact adverse impacts on sustainability factors, on biodiversity, that violate human rights, or that b) show weak sustainability prac- have inadequate labour standards or tices, or c) do not have minimum social forced labour, or are involved in corruption safeguards, or d) fail the ‘do no significant or the arms trade. 44 Our Responsible Investment Journey 2021

Development of process to promote enhanced sustainability standards in investments

We have enhanced our framework for restricting companies causing significant negative adverse impacts on sustainability factors and with weak sustainability practices. This reinforces our ability to address sustainability risks and consider adverse sustainability impacts.

Our ambition to meet investor demands restrict companies with weak sustain- including companies with significant and new sustainability regulation ability standards and practices. This contributions to climate change or prompted us to develop a process that allows us to restrict companies that we water contamination, negative impact enhances our ability to identify and assess as causing adverse impacts on on biodiversity, involvement in arms & sustainability factors, such as environ- defence, violation of human rights, weak mental, social and employee matters, tax practices or involvement in corrup- respect for human rights, anti-cor- tion. ruption and anti-bribery matters. By imposing these investment restrictions, Reducing sustainability risks and we can promote enhanced sustainabil- negative impact on society ity standards. These restrictions serve as a tool to “It is important for us to take own- reduce sustainability risks and thus pro- ership of the assessment of compa- tect the value of our investors’ assets. nies in relation to their sustainability They also underpin our ambition to standards and to utilise restrictions as contribute to a more sustainable society part of promoting enhanced sustain- and reduce the negative footprint left ability standards among companies by our investments. For example, a around the world. We have therefore company’s ability to deliver return to its With our in-depth screening established a research framework that investors may be affected if its opera- leverages input from multiple ESG data tions have significant adverse impacts process, we are able to identify vendors, academia, our investment on the environment and the company companies exhibiting harmful teams, our investors, etc., and enables lacks proper governance and mitigation behaviour or practices and us to identify and restrict companies strategies for such impacts. Another with weak sustainability standards. example is companies with business to analyse and assess their Moreover, we now screen and update models that depend on poor and unsafe severity. This rigorous process our investment restrictions quarterly working conditions. If we assess that a provides us with a holistic instead of annually, which enables us company is exposed to such activities view of specific companies’ to capture the latest developments and or practices, we may decide to restrict take appropriate action,” explains Alex- it. sustainability practices and a ander Lindwall, Senior ESG Analyst. “With our in-depth screening pro- sound foundation upon which He explains that, as a consequence cess, we are able to identify companies to restrict companies. of the process and framework, Danske exhibiting harmful behaviour or prac- Bank restricts companies with signifi- Alexander Lindwall cant adverse sustainability impacts, CHAPTER 4 Screening and restrictions

tices and to analyse and assess their “Imposing restrictions of course lim- He points out that Danske Bank’s severity. This rigorous process provides its our opportunities for active owner- restriction framework for companies us with a holistic view of specific com- ship and influencing companies, so we causing negative societal impacts is a panies’ sustainability practices and a need to be very mindful every time we work in process and will be continuously sound foundation upon which to restrict consider restricting a company from our developed and refined over time. companies,” says Alexander, who adds: investment universe.”

Our enhanced process

Previously, our decision to apply restric- rate responsibility, such as the Task Force lobal Co G m tions due to weak sustainability standards on Climate-related Financial Disclosures, ’s p a N was based on input from one ESG data the UN Global Compact principles and the c U t provider and our investment restrictions OECD Guidelines for Multinational Enter- were updated once a year. The enhanced prises. Furthermore, the process includes framework utilises multiple inputs and we input and research from multiple ESG data now screen our investment universe and sources, Danske Bank’s investment teams, update our list of investment restrictions on Danske Bank’s Sustainability Position State- a quarterly basis. The process is guided by ments, our investors across the Nordics, industry best practice as per international Nordic investment institutions, NGOs, aca- norms and voluntary frameworks for corpo- demia and other relevant stakeholders.

Restriction case Excluding companies involved in deforestation

We are aware of and concerned companies that could potentially Deforestation in Brazil is linked to about increasing deforestation in be directly or indirectly involved in agricultural expansion, whereas the Amazon, which contributes deforestation and focus on how deforestation in Malaysia, Indone-

to increasing CO2 emissions and they act in relation to preventing sia and Borneo is more explicitly harming diversity. We therefore and stopping deforestation. Based related to palm oil plantations. We view deforestation very seriously on our analyses, we have restricted have restricted companies directly and closely track developments. We 18 companies involved in deforesta- involved in deforestation through expect that the companies we invest tion. These companies are primarily their own operations as well as in do not contribute to deforesta- linked to the clearing of tropical companies involved in deforestation tion but rather protect forests. That rainforests in Brazil (Amazon) and through their supply chains. is why we monitor and research in Malaysia, Indonesia and Borneo. 46 Our Responsible Investment Journey 2021

Tightened restrictions on activities that result in a significant negative impact on the climate

In support of the Paris Agreement, we will not invest in companies deriving more than 5 per cent of their revenue from thermal coal, tar sands or peat going forward. These enhanced restrictions are part of phasing out investments in these fuel types by 2040 and achieving net-zero greenhouse gas emission investments by 2050 at the latest.

As part of our commitment to Hence, we have implemented restrictions are part of our commitment supporting the green transition and to stricter investment restriction criteria to phasing out investments in protecting and growing our investors’ on thermal coal and tar sands by companies involved in the three fossil assets, we have decided to tighten lowering our threshold from 30 to 5 per fuel types by 2030 in the EU and OECD our current investment restrictions on cent of revenue. In addition, we will not and by 2040 in the rest of the world, in thermal coal and tar sands and have invest in companies deriving more than line with the requirements of the Paris introduced a new restriction on peat- 5 per cent of their revenue from peat- Agreement. fired power generation. Strengthening fired power generation. Furthermore, we “The energy sector is undergoing our climate approach helps us to reduce will refrain from investing in companies rapid change, so it is vital we enhance the potentially significant negative expanding thermal coal mining, coal- our approach in order to ensure that impact on the climate caused by our fired power generation or peat-fired our investors’ assets are positioned for investments. power generation. These enhanced the green energy transition. The tighter

The energy sector is undergoing rapid change, so it is vital we enhance our approach in order to ensure that our investors’ assets are positioned for the green energy transition. The tighter restrictions will essentially strengthen our ability to mitigate risks and unlock opportunities associated with the low-carbon transition.

René Ebbesen CHAPTER 4 Screening and restrictions

Supporting the green transition transition and in shaping tomorrow’s through active ownership companies. By using the Transition A key element in achieving the climate Pathway Initiative framework, we can goals set out in the Paris Agreement objectively assess whether companies is that companies reduce their climate have credible transition plans and so footprint – and as a responsible target our engagement with those investor, Danske Bank Asset companies that are in a transition Management wants to encourage and phase and use our power to support support companies transitioning from their journey. This enables us to a carbon-intensive business model. actively foster change and encourage Therefore, we can exempt companies companies to, for example, increase from being restricted if they are able the production and use of renewable to demonstrate their commitment to energy sources, embrace the business phasing out thermal coal, tar sands and opportunities sparked by the transition peat activities in accordance with the and help achieve the climate goals of Paris Agreement. the Paris Agreement,” concludes René “As an investor, we have a vital Ebbesen. role to play in driving the low-carbon

As an investor, we have a vital role to play in driving the low-carbon transition and in shaping tomorrow’s companies. By using the Transition Pathway Initiative Assessing companies’ transition plans framework, we can objectively against a robust framework assess whether companies have credible transition plans and We want to encourage and support companies transitioning from a carbon- intensive business model to greener energy sources. Therefore, we can so target our engagement with exempt companies from being restricted if they are committed to phasing those companies that are in a out thermal coal activities in alignment with the Paris Agreement and transition phase and use our can demonstrate level 3 compliance to the Transition Pathway Initiative power to support their journey. Management Quality Measures. Using this framework allows us to make an objective assessment of companies’ transition plans and determine the René Ebbesen credibility of the plans. The assessment framework measures the quality of companies’ management of their greenhouse gas emissions and of risks and opportunities related to the low-carbon transition.

Level 3 requirements for companies include that they:

restrictions will essentially strengthen Set quantitative targets for reducing our ability to mitigate risks and unlock GHG emissions opportunities associated with the low-carbon transition. This supports our ambition to invest our investors’ Report on scope 3 GHG emissions assets in accordance with their values, while delivering attractive returns and supporting society in decarbonising the Disclose membership and involvement in trade economy,” says René Ebbesen, Chief associations engaged on climate matters Portfolio Manager at Danske Bank Asset Management. He adds that the tighter fossil Support domestic and international efforts to fuel restrictions are another step mitigate climate change towards achieving Danske Bank’s goal of having net-zero greenhouse gas emission investment portfolios by Have a process to manage climate-related 2050 or sooner, and thus support our risks ambition of contributing to society’s decarbonising targets. 48 Our Responsible Investment Journey 2021

What are the tasks of a sustainability risk challenger?

The sustainability risk challenger assesses to what • Helping to mitigate sustainability risks in order to degree the investment teams actively consider sustain- protect investors ability matters, address sustainability indicators, take • Including an evaluation of an investment strategy’s principle adverse impacts into account and how all this market risk and excess return from a sustainability affects the portfolio. More specifically, the sustainability perspective to ensure that sustainability is not used risk challenger is tasked with: as justification for poor investment performance

• Challenging investment teams on how they meet a product’s specific sustainability characteristics • Monitoring sustainability factors and challenging investment teams on their investment decisions with reference to sustainability aspects • Assessing the principal adverse impacts that investment decisions might have on societies CHAPTER 4 Screening and restrictions

Introducing ‘Sustainability risk challenger’

We have reinforced our investment risk function by adding a new role focused on sustainability. This provides us with an even more robust foundation for addressing sustainability risks and principal adverse impacts, as well as offering high-quality ESG and sustainable investment products.

A robust process for assessing the our investment decisions. Moreover, the sustainability risks of our investment role focuses on evaluating sustainability products and investee companies is risk and performance to ensure paramount in terms of protecting our investment teams address relevant investors. It is also a prerequisite for sustainability aspects in the investment having a product shelf of first-rate process. ESG and sustainable offerings. To “The sustainability risk challenger further strengthen the investment role is a significant enhancement of risk assessment process, we have our ability to assess and mitigate introduced a new role of ‘Sustainability sustainability risks that could potentially risk challenger’, which is an addition to have an effect on our investors’ returns the current risk challenger role. and to support investment teams in delivering on the sustainability The sustainability risk Support for our sustainability focus promises and characteristics of specific challenger role is a significant The new function helps monitor to investment products. By challenging enhancement of our ability what degree investment teams meet investment teams on sustainability to assess and mitigate regulatory requirements for ESG and risks and being a sparring partner for sustainable investment products investment teams, the new role will sustainability risks that could (known as article 8 and 9 products support investment teams in deploying potentially have an effect on as stated in the Sustainable Finance a structured risk assessment process our investors’ returns and to Disclosure Regulation), as well as and thereby create substantial value support investment teams in considering and addressing potential for our investors. Moreover, it ensures principal adverse impacts caused by we are well prepared to comply with delivering on the sustainability future EU regulation and are able to promises and characteristics of have attractive and relevant products specific investment products. with sustainable characteristics,” says Christian Vestergaard Paulsen, Head of Christian Vestergaard Paulsen Portfolio Risk Advisory.

The new role is also essential Ensuring high-quality sustainability processes to ensuring that we constantly The introduction of the new with the SFDR product requirements. consider the potential impact sustainability risk challenger role is an The new role will assess, for example, we have on society through important step in our ability to meet the to what extent sustainability risks are requirements of the EU’s Sustainable incorporated into investment analyses our investments. Our objective Finance Disclosure Regulation (SFDR). and investment decision-making is to minimise our negative “The creation of the sustainability processes, how active ownership effect on human lives and risk challenger role is part of our is utilised, as well as to what extent the environment and support ongoing work to enhance our environmental or social characteristics infrastructure, enabling us to monitor, are promoted and whether sustainable positive development – and address and mitigate sustainability investment objectives are met. In short, the role will be instrumental in risks and adverse impacts based on the role will support our ambition of achieving this ambition. robust processes. This means we will having strong ESG and sustainability be better able to determine whether a products that cater to the growing Christian Vestergaard Paulsen product’s sustainability profile is in line number of investors with sustainability preferences,” says Christian. 50 Our Responsible Investment Journey 2021

Making sustainability more transparent

We have categorised our investment products according to the new EU Sustainable Finance Disclosure Regulation. At the same time, we are providing improved information about the sustainability features of investment products, making it easier for investors to choose investment products according to their sustainability preferences and to support society’s goal of redirecting investments into sustainable activities.

Responsible investing has devel- increase sustainability transparency, we Product innovation and repositioning oped rapidly in recent years, and the have discontinued our previous product Our sustainability ambitions and increased focus on sustainability from framework based on the ‘ESG Inside’ targets set the course for our product investors, capital market participants, strategy and adopted the SFDR product innovation and the goal of accelerating regulators and society in general is categorisation framework. As a result, investments that support the green and adding a surge of momentum to this we have categorised our products sustainable transition of society (learn agenda. In particular, the EU’s Sustain- according to the product requirements about our targets on page 8). Based able Finance Disclosure Regulation for article 8 products and article 9 on this, we will enhance and expand (SFDR) has been a turning point, with products, which are marketed as “ESG our product offering by, for example, its aim of improving transparency on investment products” and “Sustainable repositioning certain products currently sustainability risks integration and the investment products”, respectively. To labelled as ESG investment products sustainability profile of investment ensure our products comply with the as sustainable investment products, products. This includes standardising extensive regulatory requirements and position most externally managed prod- how the financial sector can catego- honour the spirit of SFDR, we have cho- ucts as ESG investment products and rise products as being sustainable and sen a conservative approach to labelling upgrade certain index products to ESG setting specific rules for what sustain- our products according to their sustain- investment products or sustainable ability-related information needs to be ability characteristics. investment products. disclosed for products and how. Our entire product shelf underwent Our overarching ambition is to offer We welcome the SFDR’s ambition a thorough assessment process to a wide range of ESG and sustainable of harmonising sustainability disclo- identify products covered by SFDR investment products that fit the needs sures, preventing ‘greenwashing’ of articles 8 and 9. This has resulted in 89 of our investors and can accelerate the investment products and ensuring products being labelled as “ESG invest- journey towards a sustainable economy. investors have the information they ment products”, meaning they promote We will achieve our mission by continu- need to make investment choices in environmental or social characteristics ing to focus on building robust sustain- line with their sustainability goals. We under article 8. In addition, we have ability processes, expanding ESG data believe that the regulation will make it updated the pre-contractual disclosure, and developing analytical tools. This easier for our investors to navigate the prospectuses, product labels and sus- is our roadmap to building high-quality wide range of investment products with tainability-related reports of our prod- ESG and sustainable investment prod- sustainability features. ucts to reflect their categorisation under ucts that will have a real and lasting SFDR, while we have also updated mar- impact and deliver attractive invest- A rigorous assessment process keting material and websites to reflect ment performance. As part of our ambition to enable sus- the SFDR requirements and our newly tainable development, funnel invest- adopted Responsible Investment policy. ments to sustainable activities and CHAPTER 5 Reporting and communication

Awarded the LuxFLAG ESG sustainability label

In 2020, 82 of our funds and sub-funds underlines that our investment funds meet were awarded the renowned LuxFLAG strict and rigorous criteria for incorporating ESG certification, making us one of the sustainability matters throughout the entire fund managers with the highest numbers investment process. Some 82 funds and of funds bearing this sustainability label in sub-funds being awarded this sustainability Europe. Being awarded the LuxFLAG ESG label demonstrates the breadth and depth of certification marks an important step for our entire product range and adds credence our work with responsible investment, as to our progress and journey to incorporate it reinforces and validates the strength of sustainability-related aspects into invest- our responsible investment approach, and ment products.

How we work with the climate agenda

The financial industry plays an holders. It details how Danske Bank how they can accelerate the green important role in transforming Asset Management and our invest- transition. It also illustrates how we companies and societies in a green ment teams actively work with the influence the oil industry, shipping direction. At the same time, the climate agenda in order to protect and the transport sector and sup- climate agenda and the transition and grow the value of our investors’ port their journey towards becoming to a low-carbon society are impor- assets, while supporting the green more climate friendly. In addition, it tant topics for investors, as climate transition by influencing companies explains how we use voting at gen- issues are increasingly having an to reduce their carbon emissions eral meetings to push companies to impact on investments and opportu- and making societies more climate report on their actions to mitigate nities for return. resilient and sustainable. supply chain impact on greenhouse In 2020, we launched a new The publication includes exam- gas emissions, or to increase the publication called ‘Climate – Our ples of how we assess the climate use of sustainable and recyclable Investment Approach’ to increase work being done by the paper indus- packaging, etc. transparency towards our invest- try, the energy and financial sectors, ment customers and other stake- the copper and the car industry, and Read the publication here.

We analyse and identify business- We collaborate with other critical climate issues and consider investors and stakholders – to them as factors in the investment impact companies’ climate process alaong with financial performance. factors.

We engage directly with companies We exclude certain companies - and influence them to manage that are involved in activities, their climate issues and reduce practices or products that their contribution to climate materially contribute to climate change. change. 52 Our Responsible Investment Journey 2021

What are ESG and sustainable investment products?

The Sustainable Finance Disclosure Regulation (SFDR) framework sets out a classification system for investment products that places strict sustainability requirements on products if they are to be marketed on the basis of sustainability claims. SFDR mandates market participants to categorise their products according to their sustainability features. Products must prove and be able to demonstrate that their investment processes, sustainability characteristics, risk management and product disclosure are fully aligned. We have named products meeting article 8 requirements “ESG investment products” and products meeting article 9 requirements as “Sustainable investment products.

ESG investment products These are products that promote environmental or more sustainable or they can refrain from investing social characteristics and ensure good governance. in companies that have a large and harmful impact They promote those traits by, for example, investing on the climate. You can read more about how these in companies focused on climate and employee products work to promote environmental and social issues, diversity or anti-corruption. They can also aspects on page 23. actively work to influence companies to become

Sustainable investment products These products have sustainable investments as sumption, increase biodiversity, reduce pollution or an objective. The products invest in, for example, ensure greater social equality. At the same time, activities that aim to solve some of the earth’s chal- these investments do no significant harm to other lenges and contribute to a more sustainable society. sustainability objectives. We do not yet offer these The fund’s investee companies perhaps have a low products but are planning to offer sustainable invest- carbon footprint, or the fund invests in activities to ment products in the near future. secure clean drinking water, reduce energy con-

All other products Products that do not integrate any kind of sustain- Responsible Investment Policy (as all our products ability into the investment process are considered do). This entails, among other things, that the prod- non-sustainable according to SFDR. However, these uct incorporates sustainability risks, exercises active products are required to disclose how sustainability ownership and refrains from investing in specific risks are incorporated into the investment process. companies and sectors. (Learn more about our Our products within this category adhere to our policy on page 5). CHAPTER 5 Reporting and communication

Improved sustainability information for all products

Presenting the distinct sustainability perspectives of our we have conducted surveys and dialogues with a signif- various products is an important step in our quest to be icant number of our investors to gain a deeper insight transparent and support our ambition of providing inves- into their information requirements and the level of detail tors with detailed information tailored to their specific desired. Based on this input, we have developed one-page needs, while at the same time giving a holistic overview reports detailing, for example, a product’s investment of the sustainability features of a particular product. To restrictions, carbon footprint or sustainability risk profile. ensure we meet the information needs of our investors,

Sustainability report for all products

Investment restrictions All our products adhere to our Responsible Investment Policy. Among other things, this means that the funds do not invest in certain companies that are involved in controversial weapons, tobacco or coal, for example. We also offer funds that include additional restrictions and that do not invest in areas such as alcohol, gambling, pornography, fossil fuels or military equipment. All funds have an investment restriction one-page report detailing the specific restriction criteria for investing in particular sectors, activities and products.

Sustainability reports for ESG investment products

Sustainability approach This one-pager provides investors with an introduction to how the fund integrates sustainability into investment decisions, considers sustainability risks, utilises active ownership, and lists which investment restrictions are applied. Furthermore, the report clearly states which product category under the Sustainable Finance Disclosure Regulation the fund adheres to and explains the sustainability characteristics of an article 8 product.

Carbon footprint CO 2 It is of great importance for investors to know how their investments are performing on climate issues, as the climate is high on their agenda and society in general. Therefore, we publish a carbon footprint one-pager detailing, for example, how much carbon portfolio companies in the product emit per USD 1 million invested or in relation to the company’s revenue. The report also outlines how the fund supports the climate goals of the Paris Agreement by exercising active ownership, for example. The carbon footprint of the fund is compared to a relevant benchmark, so investors can assess and better understand the climate performance of the specific fund.

Risk rating How a fund’s portfolio companies are exposed to various material sustainability risks and their ability to capitalise on sustainability is especially important for institutional investors. Our fund-specific risk report expounds on the risk assessment conducted by Sustainalytics detailing the extent to which the product’s portfolio companies address material sustainability risks that may affect their business. By leveraging third party data, investors are provided with a nuanced and impartial assessment of a fund’s risk profile and this adds credibility to the risk assessment.

How sustainability characteristics are promoted The Sustainability-related Website Disclosure is part of the mandatory disclosure requirements under SFDR. It provides a deep insight into how the product incorporates sustainability risks and promotes environmental or social characteristics and good corporate governance throughout the entire investment process. This include: • how the product selects investments and practises active ownership and screening to promote environmental or social characteristics • which activities and/or products the product does not invest in • how the fund is monitored to ensure that it is promoting environmental and/or social characteristics • which ESG data is used to promote sustainability characteristics

Find the sustainability one-pager here. Tel. +45 45 13 96 00 96 13 Tel. 45 +45 61 28 12 62 no.: reg. Company DK-1091 Copenhagen, Denmark 2-12 Kanal Holmens Management Asset Danske Bank permission. without part in or whole in reproduced be not may and copyright by protected is publication This reserved. rights All A/S. Bank ©Danske Copyright investments. their on losses incur may investors and performances future of indicative not are performances Past historical. are publication this in presented Performances unlawful. be would use or distribution such where country or jurisdiction any in person any by use or to distribution for orAny opinions information contained in this publication are not intended States. United the of laws the under organised entity other or partnership corporation, any or States, United the of resident or national any including amended), as 1933, of Act Securities U.S the Sunder Regulation in defined (as person U.S. any to or States United the in indirectly or directly distributed or States’) ‘United (the possessions or territories its America, of States United the into transmitted or taken be may it of copy any nor publication This but which have verified. not been independently reliable be to believes Bank Danske sources from obtained information party third any of completeness and/or accuracy the for responsibility no accepts Bank Danske it. on reliance from arising loss any for accepted is liability no and completeness or accuracy its to as made is guarantee no misleading, not and true, fair, is publication this of contents the that ensure to taken been has care reasonable Whilst parties. third by distributed instruments includes this instrument, financial any sell or purchase to offer any of solicitation or offer an not is publication This risks. market ordinary to due fluctuations and change to subject be may and indicative are publication this in quoted expenses and costs, Prices, publication. this of distribution the in interests financial have may Bank Danske and customers investors. retail professional and potential, current hasThe publication for selected, been prepared investment. apotential of appropriateness and suitability the to relevant matters other or financial tax, legal, the to as advisor your with consult must You advice. financial or tax, legal, investment, as upon relied be to not is it and only purposes informational for prepared been has publication This (Finanstilsynet). Authority by the Supervisory Danish Financial Danske Bank is under supervision 12 62 28 (“Danske Bank”). VAT.no. K, 61 2-12, København 1092 Kanal Holmens A/S, Bank Danske of —adivision Management Asset by prepared been has publication This

2021.05 · Danske Bank A/S · CVR-nr. 61 12 62 28 - København