By Hamlin Lovell, NordicInvestor 

The Velux Foundation’s Anders Lyngaa Kristoffersen, Head of Impact Investments, explained the firm’s priorities to Nordic Investor. Before joining Velux in 2016 he worked in biomass conversion projects at Novozymes and between 2002 and 2005 he was working at the Danish national Environmental Assessment Institute involved in designing strategies to reduce Denmark’s greenhouse emissions.

The Velux Foundations have assets of circa USD 2.5 billion and invest approximately USD330 million into impact investments together with US-based Villum Kann Rasmussen Foundation and Swiss-based VELUX Stiftung.

Vertical and horizontal approaches

The investment philosophy combines attractive financial returns with sustainability and good stewardship.

Kristoffersen explains how Velux has a dual approach spanning public and private markets: “Vertically, in private markets we invest in green impact, which combats climate change and increases resource efficiency. Horizontally, in public markets, we invest in well managed businesses across sectors and geographies and we seek high ESG integration. We have tools to assess how far we are on horizontal ESG integration.”.

Incidentally, the Ukraine and Gaza conflicts have not affected the ESG strategy but are continuously monitored as the world becomes less predictable and less globalized.

Monitoring external managers’ ESG and exclusion policies

Most investments are indirect, so external managers are entrusted with responsibility for ESG integration. Velux itself does not maintain exclusion lists but does initiate discussions of individual companies with the external managers to deepen understanding of the portfolio. Historically, only one external manager has been replaced for reasons related to ESG. “They had invested in companies on the fringe of the mandate to try and increase short term returns and had higher exposure to companies that were not compliant with our policies. We do run into issues but normally solve them through dialogue with the manager,” says Kristoffersen.

Spectrum of ESG categories

The listed portfolio eschews exclusions. It invests across all industries including energy and industrials, and it is screened for carbon footprints. “Our Policy on Responsible Investments states that we seek to invest in companies aligned with the Paris treaty. We do not make exclusions because want to stay diversified to avoid bubbles in some sectors. Our goal is to invest in well-managed companies across the board and we use an external provider to screen for compliance with the UN Global Compact,” says Kristoffersen.

Rather than SFDR, Velux has devised its own spectrum system for categorizing investments. “It has clear overlaps with SFDR but does not always correspond,” says Kristoffersen.

Some 69% of the portfolio is classified as Responsible or Sustainable.

“Responsible investments integrate ESG to meet minimum requirements ensuring compliance with existing laws and regulations. Sustainable investments use ESG more proactively to surpass thresholds and distinguish themselves from peers, going well beyond the minimums,” explains Kristoffersen.

Approximately 7% of the total portfolio is also designed to have positive impact on climate change or resource efficiency; one percentage point of the seven is in a special mission category of higher risk, higher return investments with a green focus.

The remaining share of the portfolio is in cash or very short duration instruments which cannot be categorized and two percentage points of this is dubbed “classic”, which means it does not (yet) integrate ESG.

External adviser for voting and engagement with companies

Velux is aware that some external managers and funds may let asset owners vote proxies but is currently not able to vote. Instead, Velux has partnered with a well-known external adviser who leads engagement at company level. “This raises concerns at the appropriate level and the partner feeds back information on Paris alignment and reducing carbon emissions. We would rather focus on engaging with managers, who are our direct counterparts. To this end we can raise questions and ultimately ask for portfolio changes,” says Kristoffersen.

Green impact, decarbonization and proprietary reporting

Impact investing at The Velux Foundations is focused purely on the green side and the key metric is tonnes of carbon saved globally. The US and Europe are the main regions invested in but there is also some exposure to South East Asia and Latin America.

Velux has dedicated resources to impact reporting, developing its own methodologies. “We thoroughly go through our managers’ impact reports, vet the results and produce an impact report for the investment committee and our boards. This is a lot of work but it is all very important because we did not find any external methodologies that we were happy with. Currently we cannot source much standardized information though we have seen managers produce better quality data in recent years,” explains Kristoffersen.

Velux has over 200 underlying investments, which adds up to a huge amount of work to understand the business and potential impact – and there are no easy fixes.

Impact is half of the alternatives portfolio and even the non-impact investments are part of the greater green strategy. The ultimate goal is to move the entire portfolio towards Paris alignment.

Data gathering, challenges and standards

There is a balance between internal and external data gathering. For listed investments, MSCI and Hermes EOS provide data while the organisation rely on their own data collection for private investments.

Data challenges include coverage and quality. Fortunately, both are improving according to Kristoffersen. “The long run goal is standardization and harmonization of data but we are not there yet – there is a long way to go,” he finds.

The Velux foundation does not have to align its data and reporting with the Corporate Sustainability Reporting Directive (CSRD) as it is not covered by CSRD. The organisation’s philosophy is the overriding consideration. “Our sustainability efforts are not driven by regulatory requirements but rather by our own beliefs, what we believe in. We do believe that society needs to make a huge transformation to focus on reducing carbon and gradually become Paris aligned,” sums up Kristoffersen.

To this end carbon footprints target a 25% reduction by 2025 versus 2019 baseline. The goals for 2030 will be determined soon.

Solar case study

The fund invested in a Swiss based maker of machines and tools supplying Chinese solar manufacturers and had to work out how to assess the impact. “We needed to adjust the estimated impact for double counting since the solar developer claimed the same impact from machines as the developer of solar parks,” says Kristoffersen.

This article will feed into NordicInvestor’s special report on Sustainable Investing

This article will feed into NordicInvestor’s upcoming special report on Sustainable Investing