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When interacting with youth players there's an option to add them to the "development list". What does that do?

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From the in-game manual:

The final list, the 'Development List', will likely feature a number of your most talented youngsters at the club. By placing them on this list, you will effectively be asking your Director of Football (or other member of staff responsible for this) to look to loan them out to suitable clubs to further their development.

You can use the staff screen (in full mode, not Classic) to assign responsibility for youth development to another member of staff (eg. Director of Football, Assistance Manager or Youth Coach). That member of staff will try to find loan opportunities for players that you place on the list.

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