For many years, credit has been an important part of PensionDanmark’s asset allocation – constituting almost 20% of assets under management. It uses credit as a great substitute for equity risk in investments with shorter time horizons. Sustainability is deeply embedded in PensionDanmark’s operations, guiding investment decisions and risk management to align its investment portfolio with its long-term ESG goals.

All PensionDanmark’s credit portfolios today contain one or more forms of ESG-labelled bonds. However, the extent and types of investments vary across the various credit sub-asset classes. A particular focus for the team in the past few years has been sustainability-linked bonds (SLBs). These are bonds designed to incentivise issuers to achieve specific ESG targets. Unlike traditional labelled bonds, where funds are earmarked for specific sustainability projects, SLBs are tied to broader sustainability goals, including targets beyond environmental issues and factors.

An example of the strategy in practice is PensionDanmark investment in the first SLB issued by Italian utility group, ENEL in 2019, a bond said to be among the first in the world of its kind where the coupon adjusts in cases where ENEL fails to live up to certain greenhouse gas reduction targets. This investment is in line with PensionDamark’s decision in 2019 to create a dedicated portfolio for SLBs.

PensionDanmark believes that SLBs are occasionally criticised for not being truly green but it remains more positive towards the concept as it considers that the added flexibility it offers is both useful and meaningful in several sectors, where climate policies are much broader based and less specific to individual projects. This applies similarly to instances where issuers can use SLBs to demonstrate that they have committed climate policies to the entirety of their business, rather than only stand-alone projects. Danish wind turbine manufacturer Vestas is a good example of this.