The Integration of ESG Ratings in Danish Pension Funds: Interviews with Pension Fund Managers

Environmental, social, and governance factors (ESG) are increasingly considered in portfolio decisions, and a vast number of ESG rating agencies offer different methodologies to support investors. However, the methodologies vary and are often inconsistent, which poses a challenge for portfolio managers. How should this be tackled? This chapter discusses how three of the largest Danish pension funds use ESG ratings in shaping their portfolios. We find that pension funds integrate ESG ratings in investment decisions in different ways. For example, they use negative and positive screening as well as what they call a holistic approach leaving the final portfolio decision to the portfolio manager. Given the challenges of ESG ratings, it is essential to substantiate ESG analysis through an engagement in a dialogic relation with the companies in question – a key factor to integrate ESG into practice. Moreover, this dialogue can also be seen as an instrument to influence companies to move their businesses towards a more sustainable direction (active ownership).