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 CO₂ 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.

Current medium-term planning confirms the long-term planning assessment over a period of ten years conducted in the previous year. In each case, scenarios using different assumptions were defined, 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 transformation into 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 customer 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 manage 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 pursuant to the ESRS. 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 four material impacts, risks and opportunities (IROs) related to the topic of climate change:

• Contribution to the global increase in greenhouse gas emissions
• Earnings potential through investments in modernization, heat pump cubes, serial refurbishment and PV expansion
• Contributing to negative effects of climate change through new construction and densification
• Contribution to urban climate resilience through climate change adaptation measures in the portfolio

We currently expect our actual material impact “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.

By implementing the strategic initiatives that have a direct impact on GHG emissions (in particular serial modernization, heat pump cubes, photovoltaic expansion and electricity sales), the company can further increase its income by passing on modernization costs via rental income and by selling electricity from the PV expansion. 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 “promoting negative consequences 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 “Contribution to urban climate resilience through climate change adaptation measures in the portfolio” 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, also beyond the boundaries of our neighborhoods. 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.

The revision of our materiality assessment (for details, see ESRS 2 IRO-1) resulted in the following changes for ESRS E1:

• The material impacts in the previous year “Positive effect on greenhouse gas reduction through modernization as part of the core business” and “Positive contribution to the energy transition” are no longer defined as separate impacts. This is because a negative impact on the contribution to the increase in greenhouse gases has already been defined, and this takes account of aspects previously described as positive impacts as mitigating activities.
• The material impacts in the previous year “Earnings potential as a result of the energy-efficient modernization of the housing stock/increase in modernization volume” and “Positive effects through mitigation of consequences of climate change” have been made more specific in terms of their content and are now referred to as “Earnings potential through investments in modernization, heat pump cubes, serial modernization and PV expansion” and “Contribution to urban climate resilience through climate change adaptation measures in the portfolio.”