According to Norfund’s mandate, the company’s investments are intended to be additional, in that they provide access to capital and expertise to enterprises that would not otherwise have had such funding because of the high risk involved. Norfund’s investments are assessed through an extensive selection process that consists of checking against Norfund’s mandate, thorough evaluations and analysis of legal, financial, commercial and ESG-related aspects. The Investment Committee and/or the Board take the final decision regarding investment.

Efforts are made to diversify portfolio risk by achieving portfolio breadth in terms of countries, industries, business partners, instruments and investment times. Norfund exercises active ownership in the largest investments in its portfolio through representation on boards, investment committees and other governance bodies.

Norfund is exposed to several different types of risk, including liquidity risk, credit risk, currency risk, interest-rate risk and other market risk, including political risk. The financial risk management has been established to identify and analyse these risks, and to establish appropriate risk limits and risk controls. Norfund regularly reviews the established risk management guidelines and the system that has been established to ensure that changes in markets are reflected in the risk limits.

Responsibility for Norfund’s risk management and control is shared between Board and management.

The Board has adopted Norfund’s zero tolerance policy, which is based on the risk Norfund is willing to take in order to deliver on its mandate. This includes country risk and political risk, and in 2021 developing a system for managing country risk has been a high priority task. Efforts to actively minimise risk are largely about how Norfund chooses its investment partners and how the investment process and other operational processes in the business are carried out. This concerns risk of corruption, for example, and if this is detected an immediate response is triggered. Minimising and managing risk associated with ESG and questions concerning the integrity of our business partners are based on best practice for development finance institutions (DFIs). Norfund’s approach to risk is summarised in a Risk Appetite Statement adopted by the Board and published on Norfund’s website.

Market risk

Norfund’s mandate is to invest in developing countries, which means investing in countries, markets and companies that are characterised by high risk. Future returns depend among other things on the ability to manage and mitigate risk in all phases of an investment.

In addition, movements in interest rate levels and inflation in the individual markets in which Norfund operates will influence the results achieved. Loans to projects are usually based on variable LIBOR or corresponding rates plus a margin.

Credit risk

Norfund has a substantial number of loans, and a semi-annual review is made of the borrowers’ financial situation and their ability to service the loan in accordance with the payment plan.

Loans are assessed individually, and if default appears highly likely, the value of the loan is written down.

Norfund does not carry any general loss provisions for the loan portfolio but makes a specific allocation for each loan; see also Note 3.

Liquidity risk

Liquidity risk is the risk of Norfund being unable to fulfil its commitments. This risk is regarded as low, as Norfund operates with substantial cash holdings, receives annual allocations from the Owner and has an investment portfolio that generates reflows in the form of interest, payments, dividends and through exits from enterprises. The cash holdings are intended to cover future committed investments that have not yet been disbursed.

Currency risk

Norfund’s investments are largely made in USD (more than 90%), but in some cases in other currencies, the next largest being EUR and ZAR. As Norfund’s base currency is NOK, its future returns and gains/losses for accounting purposes are strongly influenced by the exchange rate between NOK and USD. The portfolio companies are subject to a greater or lesser extent to fluctuations in the exchange rate between USD and the local currency in the individual country, which in turn may affect the results and values of the portfolio companies on Norfund’s balance sheet.

Three-month forward contracts are used to hedge the portion of the bond portfolio denominated in EUR and GBP against USD.

Norfund’s liquid assets are mainly placed in NOK-denominated, interest-bearing accounts in Norges Bank.

FX Rates Used in Conversion
31.12.202131.12.2020Change during the year
US DollarUSD8.8198.5333.4%
South African randZAR0.5530.581-4.8%
Rwandan francRWF0.0080.009-1.9%
Kenyan shillingKES0.0770.078-0.9%
Ugandan shillingUGS0.0020.0025.6%
Mozambican meticalMZN0.1370.11320.6%
Bangladeshi takaBDT0.1010.0991.5%
Cambodian rielKHR0.0020.0021.9%
Swaziland lilangeniSZL0.5520.584-5.6%

Operational risk

Operational risk is the risk of financial losses occurring as a consequence of faults in internal processes and systems, human error or as a consequence of external events. In principle, we expect this risk to be low, but risk in some areas has increased, such as cyber risk. Management of operational risk is monitored continuously at many organisational levels through clearly defined processes, procedures, guidelines and training. The risk and threat picture is mapped and coordinated by means of the Enterprise Risk Management System.

Norfund’s risk exposure and management thereof is followed up by the company’s external internal auditor, and reports are submitted regularly to the Board and the Risk and Audit Committee.