The basis for recording, evaluating and managing the portfolio and for DEG’s reporting on its developmental effectiveness is the multidimensional, index-based Development Effectiveness Rating (©DERa). The DERa assesses the contribution that each individual customer makes to development and shows the changes that have occurred in this respect since DEG made the investment. The DERa is based on a “Theory of Change”, whereby five key outcome categories have been identified to assess the development contributions of each customer.
The outcome categories “Decent jobs”, “Local income” and “Market and sector development” assess the key development effects of the private sector and make up 75% of the total score. “Environmental stewardship” and “Community benefits” – the way of doing business – together account for 25% of the total score, with “Environmental stewardship” carrying more weight as it is partly related to community effects and is included there.
The DERa is designed along these five categories. Each category consists of a set of indicators that capture a client’s contribution to that specific category. These indicators are mostly quantitative in nature or are qualitative expert judgements. Some indicators are more static while others are dynamic, which allows the valuation, firstly of absolute, realised effects and secondly, the growth processes. These indicators likewise differentiate between mitigating risk and proactive development contributions.
The DERa differentiates between indicators used for scoring and those used only for reporting. Here, we explain the indicators relevant to assessment.
The DERa measures the contribution to the outcome category of “Decent jobs” on the basis of three components:
Number of decent jobs
Indirect job potential
The first component, the number of decent jobs, assesses the actual number of jobs for formally employed workers and their quality. Quality is measured based on compliance with defined standards (ILO core labour standards) and the establishment of an appropriate safety and HR management system. An index (between 0% and 100%) is calculated on the basis of this assessment. The number of jobs is multiplied by the index. This means that DEG customers can only achieve the full score for the total number of jobs if job quality is 100%.
Job growth is measured based on new jobs created since DEG’s investment. Measurement of job growth – and not just the absolute number of jobs – introduces a dynamic indicator that allows small but fast-growing companies to score positively here.
Indirect job potential assesses the extent to which a company supports jobs in the local supply chain. Here, a model-based approach is used to assess whether the sector in which a company operates has low, medium or high potential to support and increase jobs in the supply chain. In order to fully consider how a company supports employment and avoid favouring labour-intensive investments, the DERa also assesses a company’s indirect job potential. In practice, this means that a customer in a sector with high employment impacts in the supply chain, such as a car manufacturer, scores better on this indicator than a customer with low upstream employment impacts, such as a financial services provider.
Effects realised through the business activities of bank customers are approximated under “Market and sector development”.
The DERa measures the contribution to the outcome category of “Local income” on the basis of two components:
Sum of local income
Annual growth of local income
The first component, sum of local income, measures all monetary transfers to local actors in the country of operation. These include, among other things, monetary flows to employees (salaries, bonuses, pensions), to the government (taxes, fees, licences), to suppliers (procurements) and to capital providers and shareholders (capital expenditure, interest expenses, share gains). The sum of local income is weighted with the gross national income per capita in purchasing power parity (GNI per capita PPP) to allow comparison of the EUR value created in the investment country.
Average local income growth is approximated using the three-year average of revenue growth. If local income growth can be assessed directly, this value is used. This dynamic indicator also allows small but fast-growing companies to score positively.
The DERa measures the contribution to the outcome category of “Market and sector development” on the basis of two components:
Country and sector focus
The first pillar is about channelling investments to the countries and sectors where they will have the greatest impact. The indicators used are model-based assessments of a country’s investment needs (= country evaluation) and the potential for investment in specific sectors to address development bottlenecks in that country (= sector evaluation). The less developed a country is and the more the sector contributes to addressing a bottleneck in that country, the higher the score.
The second pillar is about changes in market structures. The indicator relating to business innovation assesses whether the company is introducing a new product, a new process, a new technology or a new financing structure, for example. The second indicator relates to increased competition. In many markets, there are only a handful of dominant companies. If new companies become active in these markets and challenge the market leader, the DERa assesses this contribution positively.
The DERa measures the contribution to the outcome category of “Environmental stewardship” on the basis of two components:
Environmentally responsible practice through compliance with standards
Avoidance and reduction of environmental pollution
The first component of environmentally responsible practice (“do no harm”) assesses compliance with environmental standards and the existing environmental management system.
The second element is about avoidance and reduction (“do good”). A company scores highly here if it generates renewable energy, significantly reduces CO2 emissions or substantially increases the efficiency of resource use. As global standards are changing rapidly, the detailed definition is constantly evolving.
The DERa measures the contribution to the outcome category of “Community benefits” on the basis of two components:
Management of community risks
Proactive community development
The first component is focused on managing impacts on the community (“do no harm”) and assesses compliance with standards for managing the health, safety and security of the community and the existence of a formal complaint mechanism.
The second pillar is concerned with community development (“do good”). The sum total of contributions to community development is the relevant indicator here; the DERa rating is in turn based on the share of company profit that customers allocate for this purpose. This is the most comparable and valid indicator so far. However, community engagement often goes far beyond quantitative spending.