Appeal on the Capital Market
The construction, rental and refurbishment of residential real estate is a capital-intensive business with a long-term focus. Our aim is to bring economic activity hand in hand with environmental benefit, living up to the various expectations of stakeholders. We are committed to both the principles of the social market economy and the imperative of profitability.
Appeal on the capital market is indispensable for the financing of our activities. We want to generate sustainable revenue and value increases and offer our shareholders attractive risk-adjusted rates of return. It is therefore important that we provide our stakeholders with relevant information about our company, our economic performance and our sustainable orientation. We have also established structures that enable us to participate in sustainability ratings. This means we comply with legal requirements, present a true picture of our company and increase trust in the Vonovia brand.
Economic success is the prerequisite for further investments in the fields of environmental and social sustainability. In order to guarantee this success in the future, we rely on a broad mix of financial instruments. This will allow us to hold the interest of different capital market participants like investors, banks and insurance companies while also guaranteeing our access to the capital market. The overall demand for sustainable financial products is increasing and the ESG criteria that form the basis for investment decisions are becoming more significant. We are also issuing new financing instruments to appeal to sustainability-conscious investors and take steps toward achieving our own sustainability targets.
At the same time, the potential loss of this basis for sustainable financing presents a risk for us that could manifest in repayments or reputational damage. The amount of the loss for the company would be high, but we believe the probability of such an event occurring is very low at under 5%. Nevertheless, we have observed a further drifting apart between capital market expectations and the ongoing stable developments on the residential real estate market in the current reporting year. High inflation rates, rising interest rates, a slowdown in economic growth and the risk of a recession remain matters of concern to investors, as can be seen in the price performance of our share.
Due to the ever-greater significance of certain ESG aspects for the capital market, we will continue to develop our strategy and operations management systems correspondingly. Sustainability criteria are already integrated in Management Board and management remuneration as material non-financial performance indicators through the Sustainability Performance Index (SPI). This also applies to sustainability risks, which are included in Group-wide risk management (see Current Risk Assessment).
Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are responsible for our capital market activities. The Investor Relations department and the Sustainability/Strategy department report to the CEO. The Corporate Finance and Treasury department, which is responsible for the implementation of our financial instruments, reports to the Chief Financial Officer (CFO). Communication with our stakeholders on the capital market is handled by the Investor Relations (IR) division in consultation with the Management Board. At the same time, the IR department acts in an inward-facing way so that the topics communicated to us by capital market actors come to the attention of the right people within the company. The Sustainability/Strategy department is responsible for our participation in ESG ratings, involving the operating departments in this process.
Objectives and Measures
In line with our target of ensuring the company has good access to the capital market, Vonovia uses a broad range of financing instruments, such as bonds, promissory notes, secured real estate loans, commercial papers, working capital facilities and subsidy loans from the German government-owned development bank Kreditanstalt für Wiederaufbau (KfW) and the European Investment Bank (EIB). In November 2022, the EIB granted Vonovia an unsecured loan of € 600 million with attractive conditions for the company’s multi-year energy-efficient building modernization program. Innovative sources of finance like blockchain-based promissory notes, which we issued for the first time in 2021, round off our range of financing instruments and help to diversify our risk.
Sustainable bonds play a particularly important role in our financing strategy. After issuing our first green bond in 2021, all seven bonds placed in 2022 – three green bonds and four social bonds – which accounted for a total sum of € 4 billion and SEK 1.25 billion, were designed to be sustainable. Through these bonds, we are fulfilling our aim of serving capital market demand in a targeted manner, as demonstrated by the order books, which have been oversubscribed on multiple occasions.
While the proceeds from the green bonds are primarily invested in our energy modernization program, the social bonds are used to support social projects. This will include, for example, housing for low-income households and agreements for privately financed housing with rents that are at least 15% lower than the standard local comparative rent charges, ensuring access to affordable housing. The proceeds from the social bonds will also be used to create fully accessible housing to meet the needs of an increasingly elderly population. The efficacy of these measures is assessed in the impact report, which is published annually.
Sustainable Finance Framework
The products, processes and strategies of providers of financial products and financial advisers such as banks, asset managers, institutional investors and insurance companies must align with ESG criteria in accordance with the European Union Sustainable Finance Disclosure Regulation (SFDR). Funds are named Article 6, Article 8 and Article 9 funds, for instance, whereby Article 9 denotes the highest fulfillment of sustainability criteria. We have made our Sustainable Finance Framework consistent with the EU taxonomy, which was confirmed by an independent third party in a Second Party Opinion (SPO). This means that all green bonds that we issue under this framework are environmentally sustainable as defined in the EU taxonomy and are thus an Article 9 fund investment option pursuant to the SFDR. We have published our Sustainable Finance Framework, the impact report and further information about our sustainable bond strategy on our Investor Relations website.
Inclusion of External Financiers
The Green Finance Committee coordinates and refines this and other sustainable financing activities. It includes representatives from several different departments and is chaired by the Head of Corporate Finance & Treasury. Individual financiers are included occasionally, for example, in anonymous market soundings to determine certain key figures. Through formats such as investor conferences and roadshows, too, we seek out dialogue – especially on ESG topics – with our shareholders and potential investors. Other communication channels include face-to-face conversations, property tours and participation in conferences for private investors.
After a two-year pause due to the coronavirus pandemic, Vonovia’s seventh Capital Markets Day was held in Bochum on September 27, 2022. We took the event, which focused on the environmental aspect of the megatrend of sustainability (which corresponds with the E in ESG), as an opportunity to delve deeper into various topics including, in particular, decarbonization tools, the Energy Center of the Future and the “Internet of Things,” with around 50 investors and analysts. Our Capital Markets Day ended with a property tour in Bochum. We visited our laboratory “Energy Center of the Future” and explained our work there researching and testing innovative energy systems to participants.
We include various reporting formats and standards in our ESG reporting in order to present ourselves as comprehensively and transparently as possible (see About This Report). We will be focusing closely on the new European Sustainability Reporting Standards (ESRS) in 2023, which will be mandatory for us – due to the implementation of the Corporate Sustainability Reporting Directive (CSRD) – from the 2024 fiscal year as a European, capital market-oriented company. We are also monitoring the activities of the International Sustainability Standards Board (ISSB) for indications of developments relating to potentially binding reporting standards in English-speaking countries.
Ratings and Indices
Our participation and good performance in a variety of ESG rating systems is evidence of our commitment to sustainability. Our aim is to be represented in all relevant international ESG indices and obtain good to very good results in comparison to our peers. In order to systematically select the ESG ratings relevant to our important investors, our Investor Relations department performs a survey every two years. We use these surveys to check whether we are represented in the ratings that are most important for us and our stakeholders on a regular basis. Our sustainability committee determines which ESG ratings Vonovia will focus on.
Once again in 2022, we achieved good to very good results, even managing to improve further in some cases. As such, we continue to be listed on both the renowned Dow Jones Sustainability Index Europe as well as on sustainability indices such as the DAX 50-ESG or the STOXX Global ESG Leaders, to name but a few examples, and have been awarded Prime status by ISS-ESG. In terms of MSCI ESG Ratings, we were promoted to the highest rating category (AAA) in 2022, while at Sustainalytics we remain among the top global performers.
The outcomes of certain ratings can be found on our Investor Relations website under ESG Publications and Downloads and under ESG Ratings and Indices in this sustainability report. In 2022, we again had to turn down participation in the GRESB Assessment, which is specific to the real estate sector. Due to changes in the assessment methodology, participation is not possible (or meaningful) for large residential real estate companies like Vonovia since 2020.
For 2023, we have set ourselves the goal of maintaining our consistently high performance in the ESG ratings, including for the integrated Group, and continuing to present our sustainability performance to the capital market in a comprehensive and transparent way. As well as performing regular checks to see whether we are listed in the relevant indices, we also use the results of the rating process and peer group comparisons to further develop our sustainability measures in a targeted manner.