IRO-1 – Description of the Process to Identify and Assess Material Impacts, Risks and Opportunities

Vonovia has conducted a double materiality assessment in order to identify and assess material impacts, risks and opportunities. The materiality assessment in accordance with the ESRS was based on Vonovia’s previous materiality assessment. An initial list of topics was prepared based on the material topics identified. In addition to the topics from the previous materiality assessment, this list is based on new topics identified as a result of a comprehensive analysis of external sources (including peers, standards, regulations, ratings, trending topics, etc.), input from specialists and the ESRS list of topics/subtopics for the relevant standard identified in accordance with ESRS 1.AR 16. The potential impacts, risks and opportunities (IROs) were then derived from the issues identified. In addition to the information from the existing materiality assessment, the IROs were also identified based on the risks already identified by Vonovia’s risk management system. Vonovia utilizes the IT tool Risk2Value, as well as a comprehensive analysis of additional external sources (such as published stakeholder positions).

Vonovia systematically manages the main sustainability topics for the company based on the double materiality concept on the basis of two dimensions:

• The relevance of social and environmental risks and opportunities to the business and value creation (outside-in perspective or financial materiality) as well as
• the actual or potential, positive or negative, short, medium or long-term impacts of the business model and company activities on the environment and society (inside-out perspective or impact materiality).

The following steps were taken to identify and evaluate the impacts:

1. Arriving at an understanding of the corporate context in relation to sustainability aspects, including business relationships, stakeholders and activities.
2. Identifying actual and potential, positive and negative impacts by involving relevant stakeholder groups and experts.
3. Assessing the materiality of actual and potential impacts and identifying material aspects by setting thresholds.

An impact can be either positive or negative, and either potential or actual. An impact is considered to be an actual impact if there is no doubt that it has occurred in the fiscal year under review or in the past. An impact is considered potential if its effects could materialize in the future. Materiality is influenced by the probability of occurrence.

The following steps were taken to determine and evaluate corresponding opportunities and risks:

1. Identifying dependencies between “social” and “natural” resources. These are described as sources of financial risks and opportunities and can have an impact on:
   a) The use and procurement of resources required for Vonovia’s business processes, as well as the quality and price of these resources;
   b) Vonovia’s ability to rely on the business relationships it needs at acceptable conditions
2. Classifying these dependencies as either opportunities or risks
3. Determining the materiality of these dependencies
4. Determining the material topics for reporting

IROs were identified and assessed on a consolidated basis for the Group as a whole and at all stages in its value chain using the criteria specified in the ESRS (in accordance with ESRS 1, Sections 3.4, 3.5). When identifying and assessing IROs in the upstream and downstream value chain, we focused, in line with ESRS 1 section 3.3, on areas where impacts, risks and opportunities are considered likely due to the nature of the activities concerned, (direct and indirect) business relationships, geographical circumstances or other factors.

The IROs identified were then validated in workshops organized with the relevant stakeholders (see ESRS 2 SBM-2).

Appropriate thresholds were defined in order to determine which impacts are to be taken into account in Vonovia’s sustainability statement. In line with the EFRAG recommendation, Vonovia has used the statement “more likely than not” as a guide for the “impact” materiality threshold. Decisions on materiality are based on the result produced from the probability of occurrence and severity (impact score). This results in a threshold value of 2.5 for Vonovia, based on a predefined scale of 1–5. The resulting material impacts are prioritized for monitoring purposes.

Vonovia uses the risk management system that has already been implemented to determine the appropriate threshold for financial materiality in order to ensure consistency. The risk matrix was used as a basis to determine which risks arising from the identified impacts are material and should thus be prioritized in monitoring and reporting. Numerical values were assigned to this matrix. The severity of materialization and the probability of occurrence were given the same weighting. A threshold for material financial risks and opportunities of 1 or more was set as a result of this process.

Vonovia has calculated a value (score) for each IRO based on the formulas described above. The score for each IRO is calculated based, among other things, on the company’s own risk management system and other projects (German Supply Chain Diligence Act (LkSG)), ensuring consistency in the strategic consideration, prioritization and reporting of all material risks for Vonovia, including sustainability risks. The IROs identified were clustered under the relevant subtopics within the associated ESRS standard. In order to ultimately decide which topics are above the materiality thresholds for Vonovia, making them material topics for reporting purposes, an average value was calculated for each subtopic based on the underlying IRO scores. This calculation of the average value forms the basis for identifying the topics that are material from Vonovia’s perspective. A maximum value perspective was also reviewed in addition to the calculation of an average value. In order to ensure that the average value calculation ensures the inclusion of individual IROs with potentially high scores in the analysis and, where appropriate, in the reporting, an individual threshold of 80% was set for individual IROs in addition to the materiality threshold for clusters. Consequently, an IRO is only considered material if the average value of all IROs in the sustainability subtopic is considered material from one of the two materiality perspectives, and the IRO itself exceeds this threshold. All IROs identified were then added to our risk management tool to ensure continuous monitoring and prioritization, as with all other material risks for Vonovia.

The IROs identified, and their assessment, are reviewed by internal experts from the respective departments in the second half of each reporting year as part of the existing risk survey process, before being supplemented if necessary and assessed for the current fiscal year. This survey is integrated into Vonovia’s existing risk management tool. At the end of the assessment process, Strategy, Corporate Development & Sustainability checks whether the new assessments have resulted in changes in materiality, and checks and calibrates the results. The Sustainability Committee reviews and adopts the results of the materiality assessment.

The materiality assessment process (IRO Assessment) according to the ESRS was conducted for the first time for the 2024 fiscal year. This means that the procedure for this year’s materiality assessment differs from that followed in previous years, when it was based on the requirements set out by the Global Reporting Initiative (GRI). The materiality assessment is reviewed every year to ensure it is up-to-date and adjustments are made if necessary.

Topical Disclosures on IRO-1

E1 – Climate Change

The general information on our materiality assessment set out under ESRS 2 IRO-1 above also applies accordingly to the (sub)topics in standard ESRS E1.

In order to assess Vonovia’s impact on climate change, the company introduced a comprehensive energy and GHG controlling system several years ago. This system includes the energy consumption and GHG emissions of all of Vonovia’s own office sites as well as the entire housing stock. Indirect effects at other stages in the value chain are also captured if they are material. The results of this process are set out in E1-6.

In order to determine the positive impact that our modernization measures have, the difference in energy consumption before and after the measures is determined for each measure, and the savings and GHG reductions achieved are also measured.

We have established a life cycle calculation as a firm component of the planning process for our development projects. This enables our planning departments to determine the carbon footprint of the planned development and new construction projects early on in the project planning and include this in their design.

Since 2022, Vonovia has been using an IT tool in accordance with EU taxonomy requirements in order to identify and analyze the physical risks associated with climate change. This climate risk tool covers Vonovia’s portfolio and development projects in Germany, Austria and Sweden and allows material negative impacts on our business activities due to the effects of climate change to be analyzed at portfolio and property level. This tool enables physical climate risks to be identified and evaluated for the location of each building in the Group-wide portfolio on a continuous basis using the prescribed climate scenarios (RCP2.6, RCP4.5 and RCP8.5), with this data then being aggregated at portfolio level. This does not cover the upstream or downstream value chain. The impacts are assessed with a view to the medium term (up to 2030) and long term (2045 and 2085) in order to cover the lifespan of both existing buildings and new buildings, which is assumed as 50 years. The scenarios considered range from scenarios with low emissions (RCP2.6) and medium emissions (RCP4.5) to high emissions (RCP8.5). The climate risks examined using this tool are heat, drought, increases in precipitation, wind and storms, snow loads and flooding. Depending on the granularity of the available data source, we measure climate risks at the building or neighborhood level and are able to identify the climate risks for each building in the portfolio and, as a result, its vulnerability. The risk assessment at company level is based on scenario RCP4.5, which, according to the United Nations (UNEP Emissions Gap Report 2023), represents an increase of around 2 to 3 degrees Celsius in the global average temperature that will result from the Nationally Determined Contributions (NDCs) to climate change mitigation that have currently been defined and implemented. In this scenario, no material risk has been identified for any of the climate-related hazards at portfolio level up to 2045.

Climate transition risks and opportunities in our own business, as well as in the upstream and downstream value chain, are identified via the central risk management process. As part of the risk management process, risk owners assess the transition risks and opportunities (related to factors including regulation, legal liability, and technological and market changes, as well as the company’s reputation) and use various scenarios, where available, for the risk being evaluated or the factors influencing it. The scenarios and assumptions used to develop the relevant influencing factors are selected by risk owners themselves. The transition risks and opportunities are assessed over a period of five years as a mandatory requirement. If a risk or opportunity also has a long-term impact, i.e., extending beyond the five-year period, then the relevant period also has to be specified and a qualitative assessment performed. The opportunity identified regarding “earnings potential through energy-efficient modernization of the housing stock/increase in the modernization volume,” which relates to the housing stock primarily in Germany, but also in Sweden and Austria, is assessed as having a long-term impact. Both gross and net risks (i.e., with and without risk-mitigating measures) are taken into account. The risks assessed also provide the basis for the estimates and assumptions in the consolidated financial statements. The knowledge currently available suggests that the risks assessed do not have any accounting-related implications from either a gross or net perspective. No assets or business activities were identified as incompatible with the transition to a climate-neutral economy.

All in all, as part of our materiality assessment, we identified the material opportunity “Positive effects through mitigation of consequences of climate change” and the material impacts “Negative contribution to the global increase in greenhouse gas emissions,” “Positive effect on greenhouse gas reduction through modernization as part of the core business,” “Positive contribution to the energy transition,” “Contributing to negative effects of climate change through new construction and densification” and “Positive effects through mitigation of consequences of climate change”.

Procedure for Standards E2 to E5

Our materiality assessment involved reviewing our business activities in our business regions of Germany, Austria and Sweden as well as within our upstream and downstream value chain in order to identify (potential) impacts, risks and opportunities. The general information on our materiality assessment set out under ESRS 2 IRO-1 above also applies accordingly to the (sub)topics in standards E2 to E5. Our business activities were also analyzed as follows for the topics E2 to E5:

E2 – Pollution

In the context of our business activities, local and temporary construction, demolition and modernization activities are performed on a regular basis at various properties in all business regions. These activities can lead to pollution (e.g., pollution of air, groundwater contamination, negative effects on flora and fauna). Substances of concern in new or existing buildings can also result in environmental contamination. We have not identified any locations in our value chain that give rise to such problems.

The impact score for impacts on the environment and human health was classified as low in all business regions, as there are standard processes in place for handling substances of very high concern and regulatory requirements governing or prohibiting their use (e.g., the German Hazardous Substances Ordinance (Gefahrstoffverordnung)). Any potential pollution in the construction industry is only localized and has a minor, short-term impact. In order to avoid and prevent pollution (EU environmental objective 5), compliance with certain EU directives must be ensured. Substances of very high concern (SVHC) are generally not present in the building materials used (see also the chapter on the EU Taxonomy Regulation). No material dependencies have been identified.

In particular, there are cost risks associated with possible pollution resulting from construction, demolition and modernization activities, from potential regulatory changes or failure to comply with such requirements, and from the use of substances of very high concern in new construction. These risks, however, were not classified as material. No (material) opportunities have been identified. This means that overall, pollution has not been classified as a material topic.

E3 – Water and Marine Resources

Our business activities can result in increased water consumption as a result of construction activities or use of water by our customers, leading to an increasing scarcity of water and lowering the groundwater table. Increased water consumption can also occur in the upstream value chain (e.g., in the production of building materials). No locations were identified in connection with marine resources and river basins in our business operations or in the value chain, as our properties (particularly our neighborhoods) are largely located in urban areas, which is where our construction activities are also performed.

The impact score for impacts on water resources was classified as very low, as the influence on groundwater, if any, is only temporary, for example during the construction phase or potentially in the future due to droughts, and is limited to specific local areas. We also consider increased water consumption by customers to be temporary (e.g., in periods of extreme heat) and not material to date. Consequently, we do not exert any general influence over water scarcity. No impact was identified for marine resources, as our properties are located in urban areas. Our diversified value chain means that we are not reliant on any specific producers of building materials. As a result, there are no significant dependencies on water and marine resources.

In particular, there is an opportunity to make long-term cost savings by implementing measures to save water. This opportunity, however, was not classified as material. No (significant) physical risks, transition risks or systemic risks were identified in this context. Acute physical climate risks related to water are addressed in ESRS E1. Overall, water and marine resources has not been classified as a material topic.

E4 – Biodiversity and Ecosystems

In the course of our business activities, soil sealing for residential construction measures and the development of new areas could have a negative impact on the habitat of regional species. The same applies to the downstream value chain when buildings are demolished. Identifying and assessing (potential) impacts on biodiversity and ecosystems forms an integral part of process involved in planning new construction projects. The associated risk assessments include analyses of the existing land for construction, as well as biodiversity reports for flora and fauna. Woodland surveys are also used to determine the health and conservation value of existing trees.

The impact score for impacts on biodiversity and ecosystems was classified as low, as new construction and densification measures are generally performed in areas with relatively low levels of biodiversity (urban cultural landscape, brownfield (re)development). This impact on biodiversity is also very localized, as Vonovia’s sphere of influence does not extend beyond the neighborhood concerned. What is more, there are regulations in place to protect and restore biodiversity. There are no material dependencies.

Vonovia has not identified any physical risks, transition risks, systemic risks or opportunities related to biodiversity and ecosystems. As a result, no material opportunities or risks have been identified either. According to the tool ENCORE, used to identify material dependencies and impacts related to biodiversity and ecosystems, there are no material impacts in the real estate sector that could exert significant pressure on ecosystems. As a result, biodiversity and ecosystems has not been classified as a material topic.

Vonovia does not have any locations in, or close to, areas with biodiversity in need of protection. These primarily consist of existing residential buildings and rental parking spaces, meaning that activities related to these locations do not impact the habitat of species for which the respective protected areas were designated. Our new construction is built in compliance with EU taxonomy, meaning that these buildings are not constructed on valuable agricultural and cultural land, recognized high-value underdeveloped areas or forests. We therefore do not consider remediation measures regarding biodiversity to be necessary.

E5 – Resource Use and Circular Economy

Construction, demolition and modernization activities on properties in all of our business regions can have negative environmental impacts (e.g., failure to reduce waste, failure to minimize the use of hazardous substances and failure to mitigate impacts on nature) if no, or insufficient, sustainable, recycled and reusable products or materials are (or can be) used. This may be due to supply bottlenecks, mounting procurement or recycling costs, or changes in regulatory requirements.

The impact score for the impacts on resource use and the circular economy was classified as low, as Vonovia only consumes resources in connection with modernization, demolition and new construction activities on a regional level. Resources already used in properties can only be recycled, and are only likely to be recycled, over the long term. No shortage of resources (suppliers and raw materials) or any major changes in regulatory requirements are expected in the underlying short, medium or long-term period covered by our assessment. As a result, there are no material dependencies. The assessment was conducted as part of the materiality assessment using internal departmental analyses.

In particular, there are risks associated with rising material and waste disposal costs, for example, due to changes in regulatory requirements or a general increase in market prices. These risks, however, were not classified as material. No (material) opportunities have been identified. Overall, resource use and circular economy has not been classified as a material topic.

Our tenants are always informed of any necessary construction, demolition and modernization activities. The relevant city or municipal administrative bodies and their responsible authorities also have to be involved as a mandatory requirement. In cases involving new buildings, all affected residents are involved in the process before any measures are implemented to comply with both mandatory and voluntary consultation procedures. Aside from involvement in the context of specific construction measures, our customers can also raise concerns relating to environmental pollution, water and marine resources, and the residential environment, as well as resource use and circular economy, at any time as part of our regular customer satisfaction surveys, via our customer service centers, the respective caretakers, and other whistleblowing channels.

G1 – Business Conduct

The general information on our materiality assessment set out under ESRS 2 IRO-1 above also applies accordingly to the (sub)topics in standard ESRS G1.

Our IT risk management tool Risk2Value is used to capture and assess risks of corruption and bribery, as well as risks related to corporate culture, for the entire Vonovia Group as part of a systematic, standardized process, ensuring 100% coverage across all Group companies in Germany and abroad. Appropriate measures are identified based on the risks that are identified and assessed. “Positive impact on employees through the Code of Conduct and the establishment of a corresponding corporate culture” has been identified as a material impact, while the “financial risk resulting from bribery and corruption” has been identified as a material risk. Our business partners are obliged to sign our Business Partner Code, in which we set out our expectations and requirements that our contractual partners have to meet, before any contracts are concluded. The potential risks resulting from breaches committed by contractual partners in our value chain are included in the risks recorded in the Risk2Value tool.