ESRS 2 SBM-3 – Material Impacts, Risks and Opportunities and Their Interaction with Strategy and Business Model

Resilience of Our Business Model

The resilience of Vonovia’s climate change strategy is reviewed on the basis of the climate risks identified as part of the risk management process. All risks identified for the Group as a whole that relate to climate change are marked as such. Both climate-related transition risks (e.g., increased costs due to regulatory requirements, substantial increase in the CO₂ price) as well as climate-related physical risks are taken into account. When assessing transition risks, the scenarios and assumptions used for the development of the relevant influencing factors, such as regulatory requirements, electricity or material prices, are selected by risk owners themselves. As far as the risk “substantial increase in the price” is concerned, a scenario has been defined for the development of the CO₂ price in Germany that corresponds to a 1.5-degree pathway at national level. There is no direct link to any specific emissions or global warming pathway for the other risks. A long-term projection spanning a total period of ten years was also added to the medium-term planning in the reporting year. Scenarios using different assumptions were defined for both planning periods, e.g., with regard to the cost of capital and the level of investment in energy-efficient modernization. These scenarios can be triggered by a number of factors, such as the transition to a low-emissions economy. When assessing transition risks as part of the risk management process, changes in the relevant influencing factors that could emerge from the transition to a low-emissions economy are also taken into account where possible. By way of example, growing concerns regarding climate change can result in changes in the regulatory environment, subsidy conditions and tenant preferences, and can have an indirect effect by triggering changes in the relative prices of various commodities and materials.

The assessment of climate-related physical risks looks at the effects on the Group’s entire housing stock (Germany, Austria, Sweden) up to the year 2045, taking various climate scenarios into account (RCP 2.6, RCP 4.5 and RCP 8.5). The climate risks examined are heat, drought, increases in precipitation, wind and storms, snow loads and flooding. The downstream value chain, and tenants in particular, is also included in the analysis of physical climate risks. The upstream value chain is not explicitly included.

The resilience of Vonovia’s strategy and business model is analyzed and evaluated annually as part of risk management. This involves assessing all climate-related impacts, risks and opportunities and identifying appropriate measures to reduce impacts and risks and to exploit opportunities. First-level executives below the Management Board are responsible for identifying and assessing risks within their areas of responsibility during the semiannual risk inventory process. The risk management horizon and the evaluation period extend five years beyond the reporting year, with assessments focusing on net risks, i.e., the risks after taking into account those measures that have already been taken, such as the implementation of the transition plan. The process involved in identifying material impacts, risks and opportunities is characterized by various uncertainties, such as the medium and long-term development of the regulatory framework, the prices for key technologies, materials and services, or the legally regulated CO₂ price. 

Vonovia has not identified any material risk related to climate change when identifying impacts, risks and opportunities.

Consequently, the company is unhindered in the ability to adapt its strategy and business model to climate change in the short, medium and long term.

Vonovia identifies and assesses climate-related impacts, risks and opportunities as part of a double materiality assessment. This procedure is described in detail in ESRS 2 IRO-1. In order to be able to identify all relevant sources for greenhouse gas emissions, Vonovia carries out a comprehensive assessment of the relevant business activities and scopes of GHG accounting at regular intervals in accordance with the GHG Protocol and the criteria set out by the Science Based Targets initiative (SBTi). In case a new business is launched or acquired an assessment of greenhouse gases to be included is exercised. The Scope 3 categories were screened for any changes in their materiality in the reporting year.

Material impacts, risks, and opportunities

Within the scope of our materiality assessment, we identified six material impacts, risks and opportunities (IROs) related to the topic of climate change:

• Negative contribution to the global increase in greenhouse gas emissions
• Positive effect on greenhouse gas reduction through modernization as part of the core business
• Earnings potential as a result of the energy-efficient modernization of the housing stock/increase in modernization volume
• Positive contribution to the energy transition
• Contributing to negative effects of climate change through new construction and densification
• Positive effects through mitigation of consequences of climate change

We currently expect our actual material impact “negative contribution to the global increase in greenhouse gas emissions“ to have an influence on our business model, strategy and value chain in the short term. Vonovia’s business activities, in particular property rental and management, including new construction and densification, cause GHG emissions due to the supply of heat and warm water, as well as through building materials and construction activities. Some of the GHG emissions are generated in Vonovia’s own buildings, while others result from the generation of power or district heating in the energy sector. GHG emissions in (new) construction activities are associated with the manufacture of building materials and the use of construction machinery and vehicles. These emissions contribute to the global greenhouse gas effect and to global warming, which, in turn, has far-reaching consequences for human beings and the environment in the long run. Vonovia has developed, and is implementing, a climate strategy to reduce this negative contribution.

We currently expect our actual material impact “positive effect on greenhouse gas reduction through modernization as part of the core business“ to have an influence on our business model, strategy and value chain in the short term. Ever since the company was established, Vonovia’s business activities have involved maintaining and modernizing its housing stock in order to ensure that its properties can be rented out in the long term. This also results in continuous improvements in energy-efficiency status to comply with state-of-the-art standards, which has a positive effect in the form of reduced GHG emissions. Part of the reduction relates directly to the buildings concerned, while another involves an indirect effect thanks to lower energy demand and reduced demand for district heating and electricity, both of which generate emissions. This reduction in emissions lowers the global greenhouse gas effect and global warming, thereby also mitigating the long-term far-reaching consequences for human beings and the environment.

We currently expect our material opportunity “earnings potential as a result of the energy-efficient modernization of the housing stock/increase in modernization volume“ to have an influence on our business model, strategy and value chain in the long term. Increasing the financial modernization volume allows us to increase rental income by passing on modernization costs. This opportunity relates to our own operations in Germany. The opportunity could have a potentially significant positive effect on Vonovia’s financial performance in the medium term.

We currently expect our actual material impact “positive contribution to the energy transition“ to have an influence on our business model, strategy and value chain in the short term. Part of Vonovia’s current and future business activities involves expanding the capacity to generate electricity from photovoltaic modules installed on the roofs of its own housing stock. The electricity generated is used to operate heat pumps in the building and is also offered to tenants as tenant electricity. Any electricity that is not used for either of these two purposes is fed into the grid, helping to boost the share of renewable energies in the German electricity mix. This contribution to the energy transition lowers the global greenhouse gas effect and global warming, thereby also mitigating the long-term far-reaching consequences for human beings and the environment.

We currently expect our actual material impact “contributing to negative effects of climate change through new construction and densification“ to have an influence on our business model, strategy and value chain in the short term. Part of Vonovia’s current and future business activities involves building new residential properties and performing densification measures in existing neighborhoods. This promotes the expected local consequences of climate change, such as local heat islands or reduced precipitation drainage. This can affect both the environment and human beings in the immediate vicinity. Vonovia could incur higher operating costs for its buildings or the residential environment.

We currently expect our actual material impact “positive effects through mitigation of consequences of climate change” to have an influence on our business model, strategy and value chain in the short term. Part of Vonovia’s current and future business activities involves further developing its neighborhoods, both buildings and the residential environment. Neighborhood development typically also involves unsealing areas, creating seepage areas, installing landscaped roofs and balconies, and taking other measures to create shade. This lessens the expected local consequences of climate change, such as local heat islands or reduced precipitation drainage. This affects both the environment and human beings in the immediate vicinity. The positive impact has a positive effect on our business model, as it leads to an increase in the value of our properties and higher levels of customer satisfaction.