Managing development impact

Managing development impact

The Development Effectiveness Rating (DERa) allows us to measure the development impact of each customer in the portfolio at the start of the investment and each year thereafter. This means that DEG maintains an overview of each individual customer’s contribution to the SDGs at all times and can work with them on improvements in a targeted manner. It also allows overarching developments to be tracked at the same time.

A comparison of portfolio assessments from 2018 to 2022 shows a positive trend. The 2022 DERa score sample has reached 81 points and is three DERa points (rounded) higher than in 2018.

Around 58% of DEG’s customers managed to improve or maintain their DERa score. A comparison was made between the development impact of all DEG customers in the project financing, financial institutions and corporates customer clusters (303 customers) already in the portfolio in 2018 and their 2022 results. Some 53% of customers received a higher DERa score and 5% remained at the same level.

Around 58% of all DEG customers improved or maintained their development effectiveness from 2018 to 2022

DEG customers in the segments financial institutions, funds, project financing and corporates. Customers with an especially high variance (more than 23 points) were not included.

An Algerian pharmaceutical company provides a good example of a positive DERa performance. This group invested in the pharmaceutical sector in the early 1990s and today has several production facilities that meet international standards and a comprehensive distribution network for wholesalers and pharmacies in Algeria. Above all, the pharmaceutical company made an important contribution to combating the COVID-19 pandemic in Algeria. DEG has been investing in the company since 2013 and has helped it to achieve a steadily increasing developmental performance. In particular, new jobs have been created since 2018 and economic growth has been generated through local income.

However, not every development turns out favourably, as demonstrated by a DEG investment in a Nepalese hydropower project. Unlike the Algerian pharmaceutical business, this company’s developmental performance has declined. The project is still not in operation as completion has been delayed by three years, partly owing to damage caused by a landslide. As a result, no revenue has been generated to date and the project has not yet made any contribution to environmental stewardship. In the end, by 2022, the DERa score had deteriorated by 19 DERa points. DEG is working with other financiers to get the project back on track in terms of environmental and social performance as well as financially, and this has already led to significant improvements compared to 2021 and a higher DERa score for 2022.

All in all, the impact of the COVID-19 pandemic has been reflected in the DERa evaluation of the DEG portfolio to a lesser extent than expected, and the DERa scores have recovered to pre-pandemic levels. This is partly due to the support provided by DEG in maintaining business operations and safeguarding jobs. The effects of Russia’s war against Ukraine, the resulting sharp rise in energy prices and associated inflation are not expected to affect the developmental performance of DEG’s customers until next year.

By 2022, improvements had been recorded above all in the categories of “Decent jobs” (by 2.2
DERa points) and “Community benefits” (by 2.8 DERa points).

Within the “Decent jobs” category, the average customer score increased from 17.0 to 19.2 DERa points between 2018 and 2022. The DEG customer sample shows that the job count increased from around 1.2 million in 2018 to 1.8 million. Almost 87% of customers improved or maintained their score.

As well as positive developments, there are also some negative ones. The average “Local income” score dipped from 23.9 to 22.6 DERa points between 2018 and 2022, thus worsening by 1.3 DERa points. This was probably an effect of the COVID-19 pandemic, from which businesses are slowly recovering. Nevertheless, a total of 52% of customers improved or maintained their score.

In the category of “Market and sector development”, the score remained relatively constant, as it relates mainly to the country and sector in which the customer operates and these factors do not change over time.

“Environmental stewardship” recorded a particularly strong increase. Customers’ average score increased from 14.8 to 15.8 DERa points between 2018 and 2022, with almost 89% maintaining or improving their score. Alongside the category of “Decent jobs”, DEG is working especially hard with its customers to improve their environmental and social management.

Customers also show a very positive trend in the category of “Community benefits”, with a score of 2.1 in 2018 and 4.9 DERa points in 2022 – the largest points increase of all categories. Overall, more than 88% of customers maintained or improved their score.

DEG was one of the first signatories of the “Operating Principles for Impact Management”, which set standards for business strategy, business development, structuring, management and assessment of developmental effectiveness for private investments. Under these standards, DEG’s impact management is verified and affirmed by an independent outside institution.