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Focus: measuring impact and transformation with DERa 2.0

DEG is committed to increasing its customers’ positive contribution to economic, social and environmental targets in line with the Sustainable Development Goals (SDGs), thereby continuously improving the positive impact of its investments. It uses its Development Effectiveness Rating (DERa) to measure this contribution to sustainable development.
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DEG’s Impact.Climate.Returns. strategy has increased the importance of the DERa impact assessment. This strategy means an even stronger focus on the provision of financing and advice for high-impact and climate-friendly projects of companies that are also commercially successful.
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The DERa has also been updated in line with the new strategy. The aim of the update from DERa 1.0 to DERa 2.0 is to illustrate both positive and negative effects of investments in order to observe and measure the impact based on a “net perspective”. It is also intended to better represent aspects such as gender equity and climate action, which have gained in relevance. Additionally, the DERa now captures the role DEG plays in the transformations of customers aiming to make a greater impact with their investments. The new, expanded DERa is intended to create a greater incentive for customers to make further improvements to be reflected in their DERa score.

Structure of the DERa 2.0

The DERa 2.0 score is derived from two pillars; one reflects the impact contribution of the DEG customer, the other records the customer's transformation processes supported by DEG.

DERa pillar I, “Impacts of our clients”, is structured in the five outcome categories familiar from DERa 1.0. The new aspect is a broader and more nuanced spectrum of positive and negative impact indicators (net perspective).

DERa pillar II, “Transformation promoted by DEG”, records the work of DEG and customers on mitigating potential risks and increasing the customers' impact. The addition of this second pillar to the DERa highlights DEG's role in the customers' transformation processes.

The two pillars comprise various outcome categories and assessment mechanisms, which are weighted and aggregated to determine the final score. Up to 80 points are available in pillar I. Up to 20 points are available in pillar II.

Pillar 1: Impacts of our clients

DEG is committed to ensuring that its customers create more and better jobs, increase local income and support transformation in developing markets. It also strives to help its customers operate sustainably and have a positive impact on the local community. These factors are assessed in pillar 1.
Each outcome category contains impact areas that are relevant to DEG's business – which can have a positive or negative effect. These are largely based on indicators that are recorded in the environmental and social assessments and monitoring and are quality assured. The decision to include negative indicators in each of the five outcome categories was based on the results of a study on “net impact” commissioned jointly by DEG and the Development Bank of Austria (OeEB) in 2022. This enables each of the five outcome categories to be viewed from a “net perspective”, which includes both positive and negative effects. In addition, the indicators are weighted slightly differently depending on the impact focus of DEG's three customer clusters. For PE funds, this structure applies at the level of the fund’s investees, with a separate structure in place for the fund management level.

In comparison with DERa 1.0, the main new aspects are as follows:

Updating the DERa: Innovations

Updating the DERa: Innovations

Decent jobs

Equal opportunities
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This category assesses in particular the direct influence of the companies financed by DEG on SDG 5 (Gender equality) and SDG 10 (Reduced inequalities). This concerns safeguarding and representation of women at various levels of an institution and the prevention of discrimination. The latter is one of the ILO core labour standards. Customers with initiatives and policies that go beyond compliance with the ILO standards have a chance to score well here.

Job quality beyond compliance
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Customers who go far beyond compliance with DEG's standards in terms of working hours, living wages and additional certifications will do well in this category.

Local income

Adjusting methods
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There is a greater distinction in DERa 2.0 between direct and indirect contributions to local income. This separate consideration results in a new structure for the outcome category. For both direct and indirect contributions, the focus of DERa 2.0 is on creating local income in terms of wages, taxes and profits. Indirect contributions through local supply chains and the portfolio of financial institutions are calculated using the Joint Impact Model (JIM), which is also used in the reports of other European development finance institutions (EDFI).

Market and sector development

Contributions to sustainable development
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Direct contribution to the SDGs by the customer's core business is assessed positively here. This may include investment in educational institutions, hospitals, renewable energies or fintech companies that focus on financial inclusion, i.e. giving more people access to financial services.

New and modified country and sector model
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Similar business activities can have very different developmental results depending on the country in which they are carried out. A single investment is likely to have a greater impact in less developed countries. The same applies to investments in sectors that enable further development of the private sector. The country and sector model was fundamentally revised for DERa 2.0 in order to better reflect this aspect. Further details are available in the study conducted with the Overseas Development Institute (ODI).

The ODI study

Environmental stewardship

Climate: Climate footprint plus climate governance
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The business activities of DEG customers may have both negative and positive effects on global GHG emission reduction pathways. DERa 2.0 therefore records and assesses customers’ GHG emissions (Scope 1 and 2) on the negative side, and carbon direct removals (removing CO2 from the atmosphere and storing it permanently) on the positive side. Customers can also gain points by actively accelerating their climate transformation, for example by implementing their own science-based transformation pathway and climate strategy to reduce GHG emissions and adapting to climate change in line with the goals of the Paris Agreement.

Biodiversity score
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Protecting biodiversity has become a key issue in current sustainability debates in addition to mitigating and adapting to climate change. It is becoming increasingly clear that companies can damage biodiversity through their business activities. DERa 2.0 includes a score based on the anticipated damage and corresponding action taken. Customers who actively work towards preserving biodiversity can also score highly here.

Community effects

Negative effects on local communities
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Companies can boost or damage communities through their business activities. In order to assess potential damage and the mitigation required of DEG customers, this impact area is based on the IFC Performance Standards (primarily IFC PS 4, 5, 7 and 8):

• Community Health, Safety, and Security
• Displacement
• Indigenous Peoples
• Cultural Heritage

The assessment considers whether the effects of the investment are avoidable and how well these risks are managed. DEG works closely with its customers to minimise avoidable risks and actively manage unavoidable effects.

Pillar 2: “Transformation promoted by DEG”

The second pillar records and assesses DEG’s work with its customers to mitigate the negative and promote the positive impact of their investments. This pillar primarily concerns DEG's role in supporting customers with their transformation processes. The focus is on value additionality beyond financial value creation. The transformation can be economic, social or environmental. Four aspects are considered, some of which are already included in DEG financing process or are currently being piloted:

1. Structuring: The structuring stage of an investment involves an assessment of the organisational, legal and equity participation structure of the company in order to obtain a comprehensive understanding of its corporate management and its effects on financial performance. Transformations proposed and contractually agreed at this stage, such as increasing transparency through audited annual financial statements and an improved corporate governance structure, put the company in a much better position and secure the impact contributions achieved.
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2. Closure of environmental and social compliance gaps: DEG's comprehensive environmental and social assessment concerns the potential effects and risks of the financing. This approach assesses the transformation resulting from the agreement of environmental and social action, such as in action plans, and its implementation by the customer with the aim of offsetting the risks and significantly improving environmental and social performance.
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3. Technical assistance: DEG can also offer supplementary developmental financial and advisory services to help implement action plans and increase the impact contributions of its customers through its promotional programmes (e.g. BSS), thereby actively supporting its customers' transformations.
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4. Impact-climate commitment beyond compliance: Some DEG customers are prepared to start their impact and/or climate transformation journey with DEG and work together via a formal commitment that extends beyond the minimum requirements. This form of cooperation is currently in the pilot stage and will be assessed in this area in future.

The scoring is based on the level of ambition (impact potential) of the measure and the status of implementation. Moreover, the effect is also apparent in pillar 1 of the DERa in many cases after the agreed changes have been carried out, for instance when certification is achieved or management systems have been successfully introduced.

From 2024, DEG will apply DERa 2.0 for all investments.

New country and sector model

The country and sector model for DERa 2.0 was revised in 2023 in cooperation with the Overseas Development Institute. Using this model, the DERa records whether an investment is going to a country or sector in which it is still particularly necessary and will potentially have a particularly positive development effect. All project countries eligible for promotion are assessed for this purpose based on three factors:

1. Economic Vulnerability assesses the susceptibility of a country to external economic shocks. A very vulnerable country would benefit the most from investments to increase resilience.
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2. Additionality refers to the additional value or benefit DEG investments give a country, which would not have occurred without its involvement.
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3. Economic Capacity assesses a country's ability to effectively use investments, such as those in infrastructure or education and skills acquisition, for sustainable growth.
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Each project is assigned a score for its focal country based on its performance in these three areas. There are also certain sectors of particular importance for the economic development of a country, which could generate positive spillover effects. These include energy, information and communications technology (ICT), transport infrastructure, finance and water management.
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The underlying indicators come from international databases and are updated on a regular basis. A summary of the study is provided here.

Impact of development financing from the “net perspective”

Which is more important – creating new jobs or preserving biodiversity? Can local income offset the negative environmental impact of a project? What is the “net impact” of an investment? Most impact assessment systems in current use focus exclusively on the positive effects, while the negative aspects are generally considered from a risk perspective or in terms of environmental, social and governance criteria.

In order to approach the possibilities of impact measurement from a “net perspective”, i.e. to consider both positive and negative development effects in a system, DEG and OeEB carried out an “Exploratory Research Study on Approaching DFIs Development Impacts from a Net Perspective” with the support of Syspons GmbH.

The aims of this exploratory study were:

  • to expand the knowledge base and determine the relevance of a net impact approach;
  • to create awareness of a broader context of investments relating to the SDGs; and
  • to provide options and building blocks to integrate the net impact into the activities of development finance institutions (DFIs) and their impact management.

The study was based on a literature review, interviews with other DFIs and an in-depth analysis. Another step involved selecting sectors of particular relevance for OeEB and DEG and illustrating their contributions to individual SDGs in terms of their (positive and negative) impacts, along with the weighting processes used. The study formed the basis of the development of the DERa to include a net perspective.

The DEG and OeEB study

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