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Danske Bank A/S : Sustainable Investment Houseview and SDG Model

Sustainable Investment Houseview and SDG Model

Introduction

What is a sustainable investment to us?

  1. sustainable investment is a concept definedby the EU Sustainable Finance Regulation (EU) 2019/2088 as an investment that contributes to either an environmental or social objective while not doing significant harm to other sustainable investment objectives and abiding to principles on good governance.

An environmentally sustainable investment can in this respect be identified by applying the criteria of the EU Taxonomy. The EU Taxonomy is a classification system laid down in Regulation (EU) 2020/852, establishing a list of environmentally sustainable economic activities. The EU Taxonomy is centered around six environmental objectives: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution preventionand control, and protection and restoration of biodiversityand ecosystems.

The EU Taxonomy does not lay down a list of socially sustainable economic activities. Also, sustainable investments withan environmental objective might not be aligned with EU Taxonomy. Currently, the identification of EU Taxonomy aligned investments is heavilyimpacted by dataconstraints and lack of company reporting, meaning that the majority of the investments that we target as environmentally sustainable investments are not disclosed and reportedas taxonomyaligned.

Therefore, we have for actively managed strategies in Danske Bank developed a model the “SDG Model” based on the UN Sustainable Development Goals (UN SDGs) to identify direct investments meeting the sustainable investment criteria of positive contribution, no significant harm and good governance. The model is supplemented by overlays at strategy level (such as engagement based criteria) and subject to specific considerations relating to asset classes.

We also consider investments in green labelled, social labelled and sustainability-linkedbonds (“sustainability

labelled bonds“) sustainable investments.

UN SDGs

The UN Sustainable Development Goals (the “UN SDGs“) are the globally agreed framework for achieving a better and more sustainable future for all. The SDGs consist of 17 interlinked goals, made actionable by underpinning 169

targets, designed to be a “blueprint to achieve a better and more sustainable future for all”.

The SDGs were set up in 2015 by United Nations General Assemblyand are intendedto be achieved by the year 2030. The SDGs are an increasingly accepted standard for companies to help clarify, prioritize and maximize the value their products and services have on society. The SDGs work as a lens for any market, asset class and geography and can be set as a benchmark for any company/issuer thanks to the universality of their underlying principles.

The framework created through the SDGs can therefore be used to assess investment opportunities with potential to contribute to a sustainable development.

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SDG Model

Pass or Fail Criteria

Danske Bank’s SDG Model has been developed in order to assess companies and other issuers’ (issuers) net (both positive and negative) contributionto the environmental and social objectives of the UN SDGs and through such assessments identify investments in equity and/or fixed income asset classes that are sustainable investments.

In order for an investment to qualifyas a sustainable investment under the SDG model it needs to meet the pass or fail criteria of:

  1. Sufficient positive contribution toone or more of the environmental and/or social objectives of the UN SDG
  2. “Do No Significant Harm”
  3. Good Governance

Contribution to environmental or social SDG objectives

The SDG Model takes account of contribution the following objectives:

Environmental: SDG 6 – Clean Water and Sanitation, SDG 7 – Affordable and Clean Energy, SDG 9 – Industry, Innovation and Infrastructure, SDG 11- Sustainable Cities and Communities, SDG 12 – Responsible Consumption and Production, SDG 13 – Climate Action, SDG 14 – Life Below Water, SDG 15 – Life on Land, and/or SDG 17 – Partnerships for the Goals.

Social: SDG 1 – No Poverty, SDG 2 – Zero Hunger, SDG 3 – Good Health and Well-being, SDG 4 – Quality Education, SDG 5 – Gender Equality, SDG 8 – Decent Work and Economic Growth, SDG 10 – Reduced Inequalities and/or SDG 17 – Partnerships for the Goals.

Only investments with sufficientlyhigh overall contribution, as measured through the SDG Model’s SDG Impact Indicators described herein, are eligible as sustainable investments per the model. Investments can have contributions todifferent SDGs and the magnitude of the contribution can vary.

Acknowledging that the EU Taxonomy objectives all fall within the scope of the environmental objectives of the UN SDGs, issuers that have a substantial alignment (Taxonomy-aligned revenue equal to or higher than 50%) of activities with the EU Taxonomy also qualify in full as sustainable investments per the SDG Model.

Do No Significant Harm

The SDG Model captures “Do No Significant Harm” by considering whether an investment has a) net positive average product contribution; b) product contribution for each SDG above certainthresholds and; c) no elevated risk of harm on any SDGs via its operations.

Furthermore, the SDG Model leverages generalexclusions defined in the Danske Bank Exclusion Instruction, with additional bans further set-out in this document.

Considerations relating toOECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights are managed through the exclusion based on the Danske Bank Enhanced SustainabilityStandards Screening.

Good Governance

Good governance considerations are mainly conductedthroughthe Enhanced SustainabilityStandards Screening.

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Methodologies

Assessment of Positive Contribution – SDG Impact Indicators

The SDG Model leverages on a quantitative model component and a qualitative model component to assess an issuer’s positive contribution to the SDGs – each building on SDG Impact Indicators as set out in this document.

Quantitative Model Component

The quantitative model component derives an aggregate score (mSDG score) of an issuer’s contribution to the SDGs on basis of underlying SDG Impact Indicators sourcedthrough information from external vendors that measure the performance against each of the SDGs. Issuers can be assigned an mSDG score from -3 to 5, where positive scores on 2 or above indicate a positive contribution to the SDGs per the model. Only issuers with an mSDG score of -> 2 can on basis of an mSDG scoring be seen to contribute positive positively to the SDGs per the SDG Model.

Specifically, the methodology underlying the mSDG scoring-system quantifies the contribution to the SDGs by SDG Impact Indicators measuring:

  • the contribution of issuers’ products are services (product/service contribution) to each SDG; and
  • the alignment of operations & business models of issuers (operational contribution) to each SDG.

Product/service contribution:

Product/service contribution is measured as the contribution of issuers’ revenue against eachSDG on basis of assessments sourced from two ESG data providers (MSCI and Util). The product/service contribution in that respect effectively assesses each business activity of an issuer, weightedby share of revenue, against societal targets underpinning the SDGs to determine the direction and magnitude of product contribution.

Issuers are assignedto a category as outlinedin the table below, which implies that the scoring of an issuer per the model is elevated in reference to whether the contribution is linked to one or several SDGs.

Product

Product Category

Criteria 1

Criteria 2

Criteria 3

Score

4

Significant

> 50% revenue alignment

> 0% net revenue

> No SDG where there is a

contribution

of at least one SDG

average alignment

significant negative impact

across all SDGs

(-50%)

3

Significant

> 25% revenue alignment

> 0% net revenue

>No SDG where there is a

industry

relative to industry

average alignment

significant negative impact

contribution

average of at least one

relative to industry

(-50%)

SDG

average across all

SDGs

2

Moderate

> 0% net revenue average

> -50% alignment of

contribution

alignment across all SDGs

each SDGs

1

Small positive

> 0% net revenue

> -50% alignment of

contribution

average alignment relative

each SDGs

to industry average

across all SDGs

-1

Likely obstruction

If none above met

The specific data set from MSCI used as input to this part of the model is MSCI’s SDG Product Alignment data set. This data set assesses the net impact of an issuer’s products and services on achieving targets associated with each of the 17 SDGs. Net impact implies that some of an issuer’s products and services may be well aligned with

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the sustainable development objectives, while other products may have an adverse impact and show misalignment with the goals.

Examples of economic activities that are assessedas having a positive SDG contribution are: renewable power generation, zero emission vehicles, insulation solutions, smart grid solutions, recycling solutions, conventional pollution control solutions, environmental remediation solutions and waste water treatment solutions.

The specific data set from Util as input tothis part of the model is Util’s SDG alignment data. This dataset aims to capture positive and negative impacts on 2,000 metrics underpinning the 17 UN SDGs through the application of natural language processing to120 million peer-reviewed publications to gather scientific consensus about the impacts of every business activity.

Below is a sample of graphs applied by Util to derive the assessments:

Source: Util

Operational contribution:

Operational contribution is measured through industry-specific material ESG scores mappedto the UN SDGs as a proxy to assess operational contribution. This mapping allows us to consider how well an issuer within its industry manages material sustainability-aspects in relative terms from the perspective of the goals. For example, Automobile manufacturers have “Product Quality and Safety” as a material ESG Issue. This can be linked withSDG 3.3, which aims to “halve the number of globaldeaths and injuries from road traffic accidents”, and the quantitative performance of a company in relevant car safety metrics can be used as a proxy for the given SDG contribution.

To calculate relative SDG scores for an issuer, a respective industry 20th percentile score is subtracted from each issuer’s SDG operational absolute proxy score. The final companySDG operations score is s et equal to the minimum of the relative SDG scores per issuer. Finally, issuers are assigned toan Operations Category withthe following criteria, comparing the final issuers SDG operations score against respective industry percentiles:

Operations

Operations Category

Criteria

Score

3

Best in class

Above 80th percentile

2

Minor risk of harm

Between 40th and 80th percentile

1

Moderate risk of harm

Between 20th and 40th percentile

-1

Elevated risk of harm

Below 20th percentile

The operational contribution assessment is intended to capture both the systemic nature of SDGs and the Do No Significant Harm test by not allowing for a poor performance against any individual SDG to be compensated by a strong performance against another.

The aggregation of the product service score and the operationalscores follows the principles outlined below:

Product

Product Category

Operations

Operations Category

mSDG

Score

Score

Score

4

Significant contribution

3

Best in class

5

4

Significant contribution

2

Minor risk of harm

4

4

Significant contribution

1

Moderate risk of harm

3

4

Significant contribution

-1

Elevated risk of harm

1

3

Significant Industry

3

Best in class

5

contribution

3

Significant Industry

2

Minor risk of harm

4

contribution

3

Significant Industry

1

Moderate risk of harm

3

contribution

3

Significant Industry

-1

Elevated risk of harm

1

contribution

2

Moderate contribution

3

Best in class

3

2

Moderate contribution

2

Minor risk of harm

2

2

Moderate contribution

1

Moderate risk of harm

1

2

Moderate contribution

-1

Elevated risk of harm

-1

1

Moderate industry

3

Best in class

3

contribution

1

Moderate industry

2

Minor risk of harm

2

contribution

1

Moderate industry

1

Moderate risk of harm

1

contribution

1

Moderate industry

-1

Elevated risk of harm

-1

contribution

-1

Likely obstruction

3

Best in class

1

-1

Likely obstruction

2

Minor risk of harm

-1

-1

Likely obstruction

1

Moderate risk of harm

-2

-1

Likely obstruction

-1

Elevated risk of harm

-3

Quantitative Model Component – EU Taxonomy based

The EU Taxonomy is a classification system, establishing a list of environmentally sustainable economic activities supporting environmental objectives of:

  1. Climate change mitigation
  2. Climate change adaptation
  3. The sustainable use and protection of water and marine resources
  4. The transition to a circular economy
  5. Pollution prevention and control
  6. The protection and restorationof biodiversity and ecosystems

Each of these environmental objective has a correlation to environmental objectives captured by the SDGs as (non- exhaustively) exemplified below:

  1. Climate change mitigation -> Climate Action(SDG7), Affordable & Clean Energy(SDG7)
  2. Climate change adaptation -> Climate Action (SDG7), Life on Land (SDG15)
  3. The sustainable use and protection of water and marine resources – > Life below Water (SDG14), Clean Water and Sanitation (SDG6)
  4. The transition to a circular economy -> Responsible consumptionand production(SDG12), and to some extent indirectly many other SDGs.
  5. Pollution prevention and control -> Life on Land (SDG15), Life Below Water (SDG14)
  6. The protection and restorationof biodiversity and ecosystems -> Life on Land (SDG15)

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