Slowly but surely, addressing the social and environmental impact of a company’s business activities is finding its way into boardrooms. KfW has been tackling these issues for decades – as the promotional bank of the German Federal Government and the Federal States, it is committed to improving economic, environmental and social living conditions around the world.
But how can this contribution be measured and guided to provide impetus? This is the question facing the future KfW-wide impact management team. The aim is to make the effects of the co-financed programmes and projects visible, e.g. with resources saved, forest areas protected, access to infrastructure or decent jobs.
With a regular promotional business volume of more than EUR 70 billion – and as much as EUR 135 billion in the coronavirus year 2020 – KfW is aware of its responsibility to track the impacts of the projects it co-finances and to make them transparent. This is why we decided as part of the KfW Roadmap Sustainable Finance and tranSForm sustainability projects to establish a harmonised impact management system throughout the group based on business sector-specific impact monitoring systems.
KfW’s business generally impacts on sustainable development in two ways: firstly, by directly promoting sustainable activities, such as financing for a wind farm, and secondly, by ensuring sustainable standards during implementation, for example with the KfW Efficiency House.
In both cases, the economic, environmental and social impacts of the financing are far removed from the offices of KfW Group, which is why impact management faces the challenge of demonstrating and quantifying a resilient link between KfW’s input through its financing and the associated output, outcome and impacts. Modelling our own impact structure as a “theory of change” is a good point of departure in this case. With our theory of change, we can systematically demonstrate KfW’s key areas of impact.
KfW Theory of Change
DEG’s impact management
Some of KfW’s business areas have already had comprehensive impact management instruments in place for many years, which make it possible to track the impacts that have been achieved. KfW’s private sector development financing and consulting subsidiary DEG has been using a specially developed tool for the entire portfolio since 2000. In 2017, it was developed into the “Development Effectiveness Rating“, or DERa.
With the DERa, development contributions of clients are rated in five outcome categories, aligned with the SDGs. Based on these categories, we determine the investment impact for DEG’s clients as well as their SDG impact. The first three categories assess what has been achieved, the latter two deal with how it has been achieved:
- decent jobs
- local income
- market and sector development
- environmental stewardship
- community benefits
In its annual Development Report, DEG provides information on the impacts and effects recorded by the DERa.
Learn more about the DEG impact management
KfW Development Bank, too, reports extensively to its partners, the public and the Federal Ministry for Economic Cooperation and Development (BMZ) on its aggregated results and impacts. Following the resolutions of the KfW Roadmap Sustainable Finance, the remaining business areas are now also establishing their own structures to allow them to better track impacts as part of the tranSForm implementation project. The group-wide concept of impacts (see above) and the areas of impact of the individual business areas intertwine to create a harmonised system that also meets the specific needs of the business areas.
Our group-wide impact management system will provide us with a viable toolbox for the future that makes the impacts of our financing transparent. It will give management the ability to analyse and drive the impact of our financing across all three dimensions of sustainability, enabling us to engage in even more focused dialogue with shareholders and customers.
Impact categories and indicators
The system is formed by specific impact categories and indicators. They make KfW’s primary objective of transforming the economy and society with the aim of improving economic, environmental and social living conditions around the world tangible and measurable. The impact categories are also aligned with the UN Sustainable Development Goals (SDGs) and the Paris Climate Agreement. This also clearly shows that KfW’s work in practice is always in line with the overarching goal of achieving Agenda 2030 and the two-degree target.
A total of around 20 impact categories have been identified. Impact indicators are currently being developed for these categories and will be included in reporting from next year onwards. The indicators are clearly measurable, uniform metrics that represent qualitative and quantitative impacts on the economy, environment and society. In turn, they consist of specific sub-indicators of the business areas, for example export financing or SME support.
Through the interaction of the impact management teams specific to the business areas and a new central team, we are pooling all our expertise to ensure that our financing is even more sustainable in the future. Guiding principles that apply to the entire group will ensure that the design of systems for each business area will be state of the art, harmonised and effective.
Effective management and reporting
All impact indicators that we will use in the future are directly linked to the United Nations SDGs. Since 2019, KfW has already been systematically mapping its new commitments to the 17 SDGs as a first step (SDG mapping). This makes the group’s contributions to sustainable development transparent. Impact management is now another component for determining the actual impact more accurately and making it transparent.
This will make it possible for impact management to build up reliable knowledge about the actual impact of KfW financing over the long term. The diverse results of the analysis within the group will be incorporated in the future into a shared data system and managed in a new specialised team in group development. Moreover, we are introducing group-wide guiding principles that will be oriented around international standards such as the IFC Operating Principles for Impact Management. These internationally recognised guiding principles encompass five dimensions including strategic alignment, portfolio management and independent verification.
The results of impact management will be regularly included in internal management reports as of 2022. We will also inform our external stakeholders of our progress on an annual basis.