Background and Objectives of the EU Taxonomy
The EU Commission has set out the “Sustainable Finance” action plan, which seeks to 1) promote sustainable investment, 2) tackle financial risks arising from climate change, resource scarcity, environmental destruction and social problems and 3) boost transparency and long-term focus in the area of financial and economic activity. One concrete measure of the action plan is the introduction of a sustainability taxonomy, which has been established through the Taxonomy Regulation1. The EU taxonomy, which came into force midway through 2020, constitutes a classification system for environmentally sustainable economic activities. Starting from the 2021 fiscal year, this gives rise to a reporting obligation for Vonovia with respect to the disclosures required by the EU taxonomy; we are hereby meeting this reporting obligation.
In particular, listed industrial companies must state the following key performance indicators (“KPIs”) in their non-financial Group Declaration2: Disclosure of the share of revenue generated with products/services that are associated with economic activities to be classified as environmentally sustainable. In addition, disclosure of the shares of investment (“CapEx”) and operating expenses (“OpEx”) in association with assets or processes that are associated with economic activities to be classified as environmentally sustainable.
Only those economic activities currently outlined in the Annexes to the delegated act on EU taxonomy (Annex I) or for the purpose of adapting to climate change (Annex II)3 are eligible for taxonomy in the first stage. Further delegated acts to specify additional environmental objectives are expected and will then be taken into consideration accordingly.
The performance indicators are ultimately designed to provide information about the share of taxonomy-aligned and therefore sustainable economic activities. A determination of taxonomy eligibility requires that the eligible economic activity concerned 1) makes a significant contribution to the attainment of one or more environmental objectives, 2) does not significantly impair any other environmental objective and 3) is carried out in compliance with the minimum requirements for occupational health and safety and human rights. With respect to the first two steps, the technical evaluation criteria for the individual climate objectives are defined in Annex I and Annex II of the delegated act, observance of which is a prerequisite for classification of an activity as taxonomy-aligned.
The EU taxonomy formulates six environmental objectives:
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems.
The initial reporting obligation with respect to the EU taxonomy for the 2021 fiscal year encompasses the first two environmental objectives, i.e., climate change mitigation and climate change adaptation. On the basis of the reflief provisions4 applicable for the 2021 fiscal year, we disclose taxonomy-eligible and non-taxonomy-eligible economic activities as a share of revenue, CapEx and OpEx. Starting in the 2022 reporting year, entities are required to report on the compliance of economic activities with the EU taxonomy. Starting in the 2023 reporting year, the disclosure of prior-year figures is mandatory.5
Identification and Categorization of Economic Activities Eligible for Taxonomy
Based on Annex I and Annex II of the delegated act on the climate targets of the EU taxonomy, Vonovia has analyzed all activities and determined those that are deemed eligible for taxonomy based on the descriptions in the taxonomy and, where applicable the supplementary NACE codes6.
Alongside the letting of housing, our business model includes the development and construction of new rental units for the company’s own stocks and for the purpose of sale. Vonovia is also a modern provider of housing-related services, such as energy services, senior-friendly apartment modernization, and caretaker and craftsmanship services.
For our company, we have identified the following activities as being environmentally sustainable and therefore eligible for taxonomy:
- 4.1 Electricity generation using solar photovoltaic technology7
- 7.1 Construction of new buildings8,
- 7.2. Renovation of existing buildings
- 7.3 Installation, maintenance and repair of energy efficiency equipment
- 7.4 Installation, maintenance and repair of charging stations for electric vehicles in buildings (and parking spaces attached to buildings)
- 7.5. Installation, maintenance and repair of instruments and devices for measuring, regulation and controlling energy performance of buildings
- 7.6. Installation, maintenance and repair of renewable energy technologies and
- 7.7 Acquisition and ownership of buildings9.
Definition and Calculation Method
In order to calculate the taxonomy-eligible shares, we proceeded as follows. Calculation of the performance indicators is based on the accounting and measurement methods of the consolidated financial statements. The consolidated financial statements of Vonovia are prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted in the EU.
In order to calculate the KPIs reportable in accordance with taxonomy, which are presented as percentages, the taxonomy-eligible net revenue, CapEx and OpEx are determined in relation to total net revenue, total CapEx and total OpEx. The definition of each KPI is based on Annex I of the Delegated Act on Article 8 on the content and presentation of the information to be disclosed.
The taxonomy-eligible net revenue (numerator) comprises amounts that were generated from taxonomy-eligible economic activities (see also the chapter entitled “Categorization of relevant taxonomy-eligible economic activities”).
In the numerator (total net revenue), Group revenue from the income statement is used in the calculation of the taxonomy-eligible revenue. For more details on accounting methods, please refer to the accounting and valuation methods within the Notes to the IFRS consolidated financial statements (Section (B): Profit for the Period, Chapter [B10] Income from property management, Chapter [B11] Profit on the disposal of properties and Chapter [B12] Profit on the disposal of properties (Development).
CapEx and OpEx
The taxonomy distinguishes between three different types of taxonomy-eligible CapEx and OpEx (numerators):
- CapEx/OpEx A,which relates to assets or processes associated with economic activities that are taxonomy-eligible, or
- CapEx/OpEx B, which is part of a plan to expand taxonomy-aligned economic activities (e.g., through the initiation of a new economic activity) or part of an upgrade plan for the conversion of taxonomy-eligible activities into taxonomy-aligned activities (e.g., through the energy modernization of a property classed as investment property (“CapEx Plan”10)), or
- CapEx/OpEx C, which relates to the acquisition of products and services from taxonomy-eligible economic activities or individual measures through which the activities are carried out in a low-carbon manner or the emission of greenhouse gases is lowered, and insofar as these measures are implemented and operational within 18 months.
Pursuant to the EU taxonomy, the numerator of CapEx consists of additions to property, plant and equipment and intangible assets (including additions from business combinations) before depreciation and amortization, including depreciation and amortization from remeasurements and impairments, without taking into account changes to fair value. As such, Vonovia incurs costs that are recognized as additions on the basis of IAS 16.73(e) (i) and (iii), IAS 38.118(e) (i), IAS 40.76(a) and (b) and IFRS 16.53(h) pursuant to this definiton11, 12.
Pursuant to the EU taxonomy, the OpEx numerator encompasses direct, non-capitalized costs relating to research and development, building renovation measures, short-term leasing, maintenance and repair, as well as all direct expenses in connection with day-to-day maintenance of property, plant and equipment that are necessary in order to ensure the continuous and effective functionality of these assets. To this extent, this is an addition to the performance indicator of the recognized CapEx values rather than a full presentation of the OpEx of Vonovia, as shown under Section (B) Profit for the Period, Chapter [B15] Cost of Materials in the Notes to the consolidated financial statement. We regard direct costs as those costs that can be clearly and directly attributed to an identified activity, but not to a specific building. Pursuant to the requirements, we include costs for building renovation measures and costs for maintenance and repair when defining the denominator. With respect to direct expenses, costs for maintaining the functionality of property, plant and equipment are included. Expenses for research and development and short-term leasing are usually capitalized and therefore part of CapEx.
The denominator includes direct non-capitalized operating expenses in connection with the day-to-day maintenance of property, plant and equipment that are necessary to maintain the continuous and effective functionality of these assets.
Duplicate counting is avoided by means of direct allocation of the taxonomy-eligible revenue, CapEx and OpEx to a taxonomy-eligible economic activity.
Shares of Performance Indicators That Are Associated with Taxonomy-eligible and Non-taxonomy-eligible Economic Activities
In order to comply with regulatory requirements for the 2021 fiscal year, Vonovia discloses the following shares in performance Indicators that are associated with taxonomy-eligible and non-taxonomy-eligible economic activities. The key figures shown relate solely to the legally required disclosures pertaining to the first two environmental objectives of climate change mitigation and climate change adaptation.
CapEx for 2021 is heavily influenced by the business combination with Deutsche Wohnen. Deutsche Wohnen is included in three months of OpEx and revenue (October to December).
Share of taxonomy-(non-)eligible economic activities
Share of taxonomy-eligible economic activities
Share of Taxonomy-non-eligible activities
The largest share of taxonomy-eligible revenue is attributable to activity 7.7 “Acquisition and ownership of buildings.” In addition to these revenues, revenues from 7.1 “Construction of new buildings” and 4.1 “Electricity generation using solar photovoltaic technology” are also eligible for taxonomy. Non-taxonomy-eligible revenues include revenues from management of residential property, energy distribution and multimedia.
The activities 7.7 “Acquisition and ownership of buildings” and 7.2 “Renovation of existing buildings” account for a large share of CapEx. Non-taxonomy-eligible CapEx results chiefly from undeveloped land, technical equipment and goodwill.
The OpEx includes maintenance expenses from the income statement including those that were the internal craftsmen’s organization. In order to prevent double counting, the capitalized share already included in CapEx has been deducted. Maintenance expenses for property management, on the other hand, are not eligible for taxonomy.
On February 2, 2022, the European Commission published a second FAQ document addressing questions regarding the interpretation of Article 8 of the EU Taxonomy Regulation. This interpretation guidance came too late in the financial statement preparation process for the Vonovia Group and could not be implemented in the current financial statements. The corresponding comments in the FAQ document could only be taken into account for the second environmental objective, climate change adaptation, when determining the activities eligible for taxonomy. The interpretation issues will be evaluated and implemented in the taxonomy reporting processes for 2022.
Outlook for the 2022 Reporting Year
As described in the section “Background and Objectives of the EU Taxonomy,” relief provisions apply for the 2021 reporting year that only require the disclosures stated above. Further details will be provided for the 2022 reporting year. These include on the one hand the breakdown of KPIs into various activities and, on the other, the additional disclosure of compliance.
The significant CapEx influence of the Deutsche Wohnen acquisition will no longer be reflected in the figures next year. By contrast, the revenue and OpEx will reflect twelve months of Deutsche Wohnen.