Stockholm (NordSIP) – In a bold move, the Velux Foundations recently decided to explore impact investment as a viable opportunity. NordSIP reached out to Anders Lyngaa Kristoffersen (pictured), Head of Impact Investments at the Velux Foundations, to understand the foundations’ innovative investment approach. The discussion highlighted the foundations’ commitment to sustainability and how they use a detailed and active evaluation of its investment managers to lead the way in the pursuit of competitive opportunities in impact investing.
The Velux Foundations are two non-profit organisations founded by Villum Kann Rasmussen (1909-1993), a Danish entrepreneur whose legacy company among other things specialises in the production of roof windows and skylights. The Velux Foundations provide grants in support of technical and scientific research, as well as environmental, social and cultural projects and research. The Foundations consist of two funds: Villum Fonden, set up in 1971 and Velux Fonden set up in 1981. As of the end of 2018, the funds had a total endowment of DKK 13.3 billion (€ 1.8 billion).
“We believe that responsible investing makes a positive contribution towards achieving global goals for sustainable development and addressing societal challenges,” says Kristoffersen in Velux’s 2018 Yearbook. For several years now, both funds have been moving from an investment model narrowly focused on traditional investments to a more nuanced approach across a spectrum of increasingly sustainable investments.
In the fall of 2018, the funds officially adopted a new responsible investment policy that governs the foundations’ work on ESG and Impact investments. “Our long term target is to minimise the share of investments classified as ‘Classic’ – ideally to 0%. We are not there yet, and the realisation of the target depends on us being able to find attractive products classified as ‘Responsible’ or higher in the spectrum,” adds Kristoffersen.
Source: Policy for Responsible Investments at VILLUM FONDEN and VELUX FONDEN
According to Velux Foundations’ ESG category, responsible investments should achieve competitive returns while considering ESG factors to minimise risk, following international conventions. Sustainable investments, on the other hand, use ESG for value creation to produce competitive yields, such as through the use of green electricity in production processes.
The innovative way in which Velux Foundations treat impact investment as a source of competitive returns is where it stands above its peers. Indeed, within the impact category of investments, thematic investments are expected to achieve market yields from projects where sustainability is directly integrated into the business model. The Generation Investment Management Climate Solutions Fund II is one of the examples of the foundations’ thematic investments. “Mission-related investments relate to the foundations’ mission within environmental sustainability”, according to the two funds’ policy for responsible investment. An example of this approach is the direct investment into Merkur Cooperative Bank, a Danish values-based bank that combines classical banking with a vision of a sustainable society. “Our target for ‘Impact Investments’ is 10% of the fixed endowment and we hope to reach at least US$235m by 2020,” says Kristoffersen.
“Although it is relatively straightforward to distinguish between the Classic, ESG and Impact investment categories, distinguishing between the Responsible and Sustainable investment subcategories can be more difficult,” Kristoffersen explains.
Investments and external managers are assessed along the investment spectrum based on how the ESG factors are integrated into the investment process. “We consider who performs the ESG assessment, at which point in the process ESG factors are included, whether the ESG integration is formalised or opportunistic, which ESG data they use and whether they do engagement,” Kristoffersen clarifies. “We also ask for examples of companies invested in and excluded for ESG reasons. A semi-annual screening of our listed company investments for United Nations Global Compact compliance and if a manager has many portfolio companies on the list we ask about this.
The specific forms of impact investment can also vary and may include equity or debt financing of sustainable real asset projects, control-oriented buyouts or minority growth equity investments in sustainable businesses and venture capital investments in high risk-return-impact opportunities. The investment decisions of each impact investment are taken independently by each of the foundations participating in the impact investments program, including Villum Fonden, Velux Fonden and sister funds V. Kann-Rasmussen Foundation in the USA and VELUX Stiftung in Switzerland and with the assistance of Cambridge Associates.
“We have worked with ESG and Impact Investments for some years now but it’s still early days for us, and we are eager to work with and learn from like-minded investors on developing the area. Ideally, we can also inspire others to follow suit down the road”, concludes Kristoffersen.
Harvard Business School (HBS) has taken notice of this important trend towards achieving positive impact along with financial returns and has written a case on Velux Foundations’ approach.
Velux Foundations’ approach offers an alternative to the model of impact investment, as illustrated by Amundi and responsAbility earlier this year, which emphasises protecting investors from risks. In these cases, blended investments with separate tranches can target different investors creating a safe but less profitable investment for private investors in the senior tranche, leaving the heavy lifting of the junior tranche to MDBs.