Environmental and social risk management

Environmental and social risk management

The first step of the environmental and social impact assessment is the screening, which involves categorising the finance according to possible environmental and social impacts and risks. Investments are assigned to categories A, B+, B and C (financial sector to categories FI A, FI B and FI C) according to 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 action plans and contractual agreements. Customers in the portfolio report annually on environmental and social impacts and on the implementation of their environmental and social action plan, if agreed. In complex and large projects, external independent monitoring is also usually agreed. In addition, DEG carries out regular on-site visits, although these were still restricted in the early months of 2022 due to COVID-19. Every year, DEG creates or updates a data sheet (Environmental and Social Indicator (EASI)) for each company. Relevant data on compliance with standards and the customer’s “performance” is included in the annual recording of customers’ development impacts via the DERa. The requirements for environmental and social reporting by customers and the data sheet are currently being reviewed and expanded as part of the ongoing development of the DERa.

The standards applied to the environmental and social impact assessment by KfW IPEX, KfW Development Bank and DEG are presented schematically on page 93 of KfW Group’s current Sustainability Report 2022.

DEG’s environmental and social risk management and the underlying standards are continuously being developed. The following new features were introduced last year and in the early months of 2023:

The common environmental and social standards and processes for dealing with private equity funds were revised in 2022 in collaboration with the European Development Finance Institutions (EDFIs) and adopted at the beginning of 2023. Funds that are potentially in only a medium environmental and social risk category (FI B), but that seek a small number of individual investments with higher risks, will be monitored more closely in future with regard to the implementation of their management systems.

The updated Human Rights Declaration of KfW Group was approved and published by the Executive Board in April 2023. The Declaration does not result in any fundamental changes for DEG, as the EDFIs published a summary of human rights principles and standards applicable to DEG in April 2022.). Both declarations reflect the increasingly significant role of human rights due diligence in financing business.

DEG and KfW’s enhanced Web-based training platform offers training to customers and other interested parties. More than 180 banks and funds have taken up the offer so far. Some 19,000 licences have been issued since 2020, and 2,500 training sessions were held in 2022 alone.

The environmental and social risk categorisation of DEG’s new commitments in 2022 continues a trend among banks that was already apparent in 2021. Fourteen of the 27 committed financial institutions – i.e. just over half – were in the highest risk category (FI A). This slightly higher share compared to the long-term portfolio average of approximately 40% in FI A is due on the one hand to slight changes to the system for assessing environmental and social risks at the respective banks, and on the other hand to the selections made by banks during business acquisition. In practice, this means that DEG’s environmental and social experts, with the assistance of DEG Impulse’s Business Support Services (BSS), are using their expertise to help the growing number of banks with higher risks to set up and implement robust environmental and social risk management systems. In the case of funds, 40% of new commitments (5 out of 13 committed funds) had a risk profile in the FI A category, an increase of around 12% on the previous portfolio figure. In the non-financial sector, at just under 80% (30 out of 38 new commitments in risk categories A and B+), new commitments were somewhat above the portfolio average, which currently stands at 88%. In the risk profiles of funds and the non-financial sector, there is no obvious reason for the differences between the portfolio and new commitments, and they are attributed to normal variability in the acquisition of different types of business.

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.

94% of the funds in DEG’s portfolio have an adequate ESMS, while 68% have a system that meets international standards; of the financial institutions, 67% have a good or adequate system in place.

Non-financial sector customers are also expected to manage environmental risks appropriately; 85% of NFS customers (corporates and project finance) already have good environmental management systems in place.