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

Vonovia identifies material impacts, risks and opportunities (IROs) as part of a double materiality assessment in accordance with the ESRS, which was updated for the first time this year. Necessary adjustments are identified, by way of example, using benchmarking, in particular with the company’s peers in the real estate sector, but also with other relevant (DAX-listed) companies. 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, as well as an extensive analysis of other external sources (e.g., position papers published by stakeholders).

Vonovia systematically manages the main sustainability topics for the company based on the ESRS 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 on the environment and society (inside-out perspective or impact materiality).

The ESRS methodology was applied to identify and evaluate the impacts and corresponding risks and opportunities. Ultimately, the following reporting standards were considered material for the purposes of reporting: E1, E5, S1, S4 and G1. The results of the IRO assessment underscore Vonovia’s sustainability strategy and its material areas for action.

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. Based on the “more likely than not” concept for financial materiality, Vonovia also used this as a guide for setting 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 3.0 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 connectivity. 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 one 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 also 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 assigned to the relevant subtopics within the associated ESRS standard. 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 for the current fiscal year by internal experts from the respective departments as part of the existing risk survey process, before being supplemented and validated if necessary. This survey is integrated into Vonovia’s existing risk management tool. Strategy, Corporate Development & Sustainability checks whether the new assessments have resulted in changes in materiality, and monitors the results. The Sustainability Committee reviews and adopts the results of the materiality assessment.

In the current reporting year, Vonovia adjusted its methodology and switched from the average value method to the maximum value method, which is more common practice on the market. The average value method involved calculating an average value based on the underlying IRO scores to determine the materiality of each subtopic. This calculation of the average value formed the basis for identifying the topics that were material from Vonovia’s perspective. This procedure has been simplified and standardized with the introduction of the maximum value method, meaning that the assessment of the individual IROs determines materiality in accordance with the defined threshold value. The adjusted methodology ensures that a single IRO above the defined threshold leads to a topic being classified as material and, as a result, reported in the relevant scope. This process also involved raising the threshold for impact materiality from 2.5 to 3.0 in order to ensure consistent content during the methodological switch. Compared to the previous year, all material topics are still classified as material based on the maximum value method, with one additional material IRO in ESRS E5.

Topical Disclosures on IRO-1

The general information on our materiality assessment set out under ESRS 2 IRO-1 above also applies accordingly to the (sub)topics in standards E1-E5 and G1.

E1 – Climate Change

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, its own operations 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 are heat, drought, increases in precipitation, wind and storms, snow loads and flooding. 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. 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 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. Both gross and net risks (i.e., with and without risk-mitigating measures) are taken into account. 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.

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. 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 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.

Impacts on the environment and human health were 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.

There are potential cost risks associated with possible environmental 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. This means that overall, environmental 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 impacts on water resources were 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.

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 impacts on biodiversity and ecosystems were 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 the 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

The process of identifying and assessing the material impacts, opportunities and risks associated with resource use and the circular economy looked at those business areas and assets associated with significant material flows. The assumption was applied that significant resource use occurs primarily in connection with products for new construction, modernization and maintenance activities concerning properties in all of our business areas (Germany, Austria, Sweden). This assessment is based on factors including the existing calculation of GHG emissions for purchased goods and services as well as capital goods (Scopes 3.1 and 3.2), and the average number of rented units that were newly built or modernized every year. Material flows associated with the company’s own operations, e.g., administrative activities, were assessed as insignificant.

The process revealed material negative impacts in connection with the subtopic “Resource inflows, including resource use,” as indirect negative environmental impacts (e.g., high volumes of waste, use of hazardous substances and interference with nature and the landscape) can materialize if no, or insufficient quantities of, sustainable, recycled and reusable products or materials are used in new construction, modernization and maintenance. This applies in particular to the use of construction products and materials whose manufacture in the value chain involves the use of raw materials from primary production (e.g., concrete, steel, stone, insulation materials and plastics).

Newly built living area that is constructed to be sold contains resources that constitute an inflow, but are designed for a very long life. The life cycle of new buildings is assumed to be at least 50 years on average, but can often amount to 100 years or even more with regular modernization and maintenance. The assessment concluded that no significant resource outflows/waste are/is generated over these long periods. Any additional negative impacts associated with new construction, modernization and maintenance (such as the potential contribution to surface sealing, climate change or a negative impact on biodiversity) have already been incorporated into the assessments under E1, E2, E3, and E4.

Our customers 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

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. No material opportunities or risks have been identified. 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.