The first step of the environmental and social impact assessment is the screening, which involves categorising all financing based on possible environmental and social impacts and risks. Projects are assigned to categories A, B+, B and C (financial sector to categories FI A, FI B and FI C) in accordance with international standards. The results are subject to an internal review that is independent of the respective front-office department. The categorisation determines the content and depth of the assessment as well as the scope of any environmental and social action plans and contractual agreements. Customers in the portfolio report annually on their compliance with the environmental and social standards and, if agreed, on the implementation progress of their environmental and social action plan. In complex and large projects, external independent monitoring is also usually agreed. In addition, DEG carries out on-site visits as necessary. Every year, DEG completes a data sheet (Environmental and Social Indicator (EaSI)) for each company. Relevant data on compliance with standards and the customer’s environmental and social performance is included in the annual recording of customers’ development impacts via the DERa.
The standards applied to the environmental and social impact assessment by KfW IPEX-Bank, KfW Development Bank and DEG are presented schematically in KfW Group’s current Sustainability Report 2023.
DEG’s environmental and social risk management and the underlying standards are continually developed. The following new features were introduced last year and in the early months of 2024:
In implementing the DEG strategy
• DEG initiated a process to further develop its central environmental and social data management tool (Environmental and Social Indicator (EaSI)).
• DEG reviewed and expanded the requirements for environmental and social reporting by customers (questionnaires).
An e-learning platform was developed to support the environmental and social performance of DEG customers. A total of 1,600 licences were provided for DEG customers free of charge in 2023 via a Business Support Services programme. Employees of 200 financial institutions and funds have used the platform since 2020. The platform is also used by many other development finance institutions to train their own employees and those of customer companies.
Opportunities and challenges: digitalisation makes a key contribution to achieving the SDGs. Companies that invest in innovation and digitalisation often face the challenge of how to identify potential ESG risks. The “Responsible investment in technology” study offers helpful guidance in this area.
The environmental and social risk categorisation of DEG's new commitments in 2023 shows an overall reduction in the proportion of risky transactions (by 12%). In the non-financial sector, new commitments stood at just under 80% (22 out of 28 new commitments in risk categories A and B+), somewhat below the portfolio share, which currently stands at 90%. Of the 32 financial institutions receiving financing, 16 – i.e. half – were in the highest risk category (FI A). The share of A projects in the portfolio is similar at 52%. In the case of funds, 43% of new commitments (10 out of 23 funds) had a risk profile in the FI A category, around 18% higher than the current portfolio figure.
The quality of DEG customers’ environmental and social risk management systems (ESMS), which is also directly reflected in the DERa rating, is in line with the previous year’s figures:
95% of the funds in DEG’s portfolio had an adequate ESMS, while 72% had a system that met international standards; of the financial institutions, 69% had a good or adequate system in place.
Non-financial sector customers are also expected to manage environmental and social risks appropriately; 83% of NFS customers (corporates and project finance) already have good environmental management systems in place.
Deep dive: Responsible investments in technology
Digital technology has the potential to have a positive effect on many aspects of human development. For instance, it can boost financial inclusion and education, and thereby contribute directly to the UN's Sustainable Development Goals (SDGs). For this reason, investors are increasingly trying to invest in companies that offer digital solutions – either directly, or indirectly via technology funds. However, rapid pace of technological advancements can also mean an increase in new environmental and social risks, such as with respect to data privacy, customer protection, data security and algorithmic discrimination.
How can we invest responsibly in technology companies? How can the new environmental, social and governance (ESG) risks be assessed and avoided? Together with its subsidiaries DEG Impact and DEG Impulse, DEG conducted a market study and produced an investor guideline, which it hopes will contribute to the current debate on responsible digitalisation. Analysis of existing frameworks shows that there is still no overarching sector and business model framework and that there are still no recommendations for investors in this regard. The guidelines developed by DEG are an initial approach to recognising, categorising, assessing and mitigating ESG-related risks in technology investments. They make suggestions as to how investors might assess these issues and integrate them into existing investment processes.
The complete study is available here. The investor guidelines are available here.
