Pursuant to Section 91 (2) of the German Stock Corporation Act (AktG), "the Management Board of a listed company is obliged to take appropriate measures, in particular to set up a monitoring system, to ensure that any developments that might jeopardise the continued existence of the company as a going concern are identified at an early stage".
With LEG Risk Management, the Group has established a system for identifying, analysing, assessing, managing, documenting and communicating business risks and monitoring them.
The main objective of risk management is to avoid identified risks, mitigate them (e.g. by taking appropriate countermeasures), transfer them to others (e.g. to insurance companies), make financial provisions (e.g. by setting aside reserves) or consciously accept risks.
LEG's risk management is part of the audit of the annual financial statements and is thus subject to an annual external audit. In addition, risk management is reviewed every three years by LEG's internal audit department (usually with the support of an external auditor).
Management of Sustainability Risks and Climate-Related Risks at LEG Immobilien SE
In recent years, the requirements for risk management have once again increased significantly, particularly with regard to the consideration of sustainability and climate-related risks.
The company has taken this into account. The full Management Board of LEG Immobilien SE deals intensively with the risk report and risk inventory on at least a quarterly basis. New risks that exceed a defined threshold are reported immediately to the full Management Board. The basis for discussion by the overall Management Board is the consolidated risk inventory prepared by the Controlling and Risk Management department and the responsible board member, Susanne Schroeter (CFO).
In 2021, the existing Audit Committee of the Supervisory Board was converted into an Audit and Risk Committee in order to further emphasize the steadily increasing importance of risk management and to be able to discuss significant changes in the assessment of relevant individual risks without delay. The Management Board reports to this dedicated Supervisory Board Committee on a quarterly basis on the LEG Group's risk assessment and discusses current risk situations there. This explicitly includes sustainability risks and climate-related physical and transitional risks as part of the TCFD (Task Force on Climate-related Financial Disclosures). The Audit and Risk Committee in turn reports to the overall Supervisory Board.
The chart below provides a schematic illustration of the governance structure in risk management:
LEG’s conservative risk strategy, regular and extensive training for risk managers, the option of anonymous risk reporting (by any LEG employee), and an open risk culture that encourages the transparent presentation of potential risks are important components that stand behind the governance system.
Sustainability Risks and Climate-related Risks in internal and external reporting
The main risk category "Sustainability risks" was newly integrated in the 2020 financial year and forms the interface to the LEG Sustainability Report. Herein, the Group companies report on risks associated with its business activities, business relationships, products and services that are very likely to have a serious negative impact on external third parties. These risks are described and assessed in qualitative terms.
In the course of financial year 2021, the risk management system was also expanded to include the separate, systematic recording of physical and transitional climate risks in accordance with the TCFD recommendations, which were previously recorded on a case-by-case basis under other risk groups. These are now fully integrated into the Group's risk management system and are fully identified and monetized by the respective risk managers at management level (5-year horizon in line with economic planning), recorded in the risk management tool and assigned appropriate measures.
Management of Sustainability Risks
As part of its non-financial reporting, the Group undertakes to report on sustainability risks that are linked to business activities, business relationships, the Group's products and services and are very likely to have a serious negative impact on the aspects subject to reporting. Sustainability risks are not assessed in monetary terms, but according to their negative impact (low, medium, high) on the environment and/or society. The risk categories correspond to the CSR (Corporate Social Responsibility) guideline.
LEG Immobilien SE does not currently have any reportable risks in this sense.
However, in order to identify developments that meet the "materiality criterion for society and the environment" at an early stage, the respective risk managers record sustainability risks that do not have to be reported externally under the applicable regulations and report them to the Management Board and the Audit and Risk Committee as part of the risk inventory. In this context, appropriate measures are derived to manage or adapt to possible sustainability risks. The risk management system for sustainability risks also ensures the early identification, assessment, management and monitoring of all material risks that could jeopardise not only the company's results but also its value and the Group’s reputation.
LEG will continuously review the following fundamental and potential sustainability risks according to the CSR guideline in order to focus on their development:
Respect for Human Rights:
- Human rights standards in the supply chain
- Corporate culture & values
- Diversity & equal opportunities
- Education & Training
- Health protection & occupational safety
- Work-life balance & family friendliness
- Sustainable growth & resilience
- Sustainable Building Materials & Material Use
- Land Use & Conservation
- Energy & Emissions Reduction
- Resource Conservation & Waste
- Tenant satisfaction & participation
- Socially acceptable rents
- Neighborhood development
Fighting corruption and bribery:
- Good governance and compliance
Management of TCFD Risks (or: Climate-related risks)
To mitigate future climate-related and transitional risks, LEG has started in 2021 with the integration of TCFD (Task Force on Climate-related Financial Disclosures) risks into the risk management system. The integration of the corresponding risk measures is constantly being expanded.
The Group‘s TCFD risk assessement includes all risks resulting from climate change (physical risks) as well as risks resulting from the transition towards a climate-friendly economy (transitional risks). Currently, the risk potential is recorded in monetary terms. Possible TCFD risks are recorded in the risk management tool and the probability of occurrence is identified.
At the current time, TCFD risks do not have a significant impact on financial targets of LEG Immobilien SE.
In 2020, climate change and transitional risks have been recorded in the apportionability of the CO2 levy in the category legal risks/changes in the law as well as in dry cracks in buildings due to climate change in the category property risks/modernisation/maintenace. In 2021, LEG will further assess if there are any potential physical or transitional environmental risks which have a risk potential in monetary terms and, if so, the company will integrate these into LEG’s risk management system. The following climate risks or criteria are considered in detail:
Climate-related physical risks
In terms of climate change risks, LEG assumes that climate change and changeing weather conditions will continuously lead to (further) physical risks. To mitigate future climate-related physical risks, LEG has started in 2020 with a systematic recording and identification of potential climate-related high-risk buildings, which is of central importance for LEG’s long-term climate strategy. LEG analysed the energy demand and the associated CO2 emissions of the LEG's building portfolio. In this context, the Group has developed modernisation roadmaps for existing buildings that could be exposed to climate-related physcial risks. This is recognised in the Group’s modernisation investment plans and its implementation. Acute risks such as extreme weather conditions are usually covered by appropriate building insurance policies. Here, the risk is more likely to be seen in rising insurance premiums, deductibles and maximum compensation limits, or a possible discontinuation of insurability of individual risks.
LEG has screened its regional portfolio in regions with longer draught periods. The potential physical risk was defined as manageable. This was taken into account in LEG‘s risk management system and technical coutermeasures (early investigation and stabilisation of draught cracks) have been taken. In LEG’s new building section, the company will take care of a foresighted design of future buildings.
LEG will continuously look at the following fundamental and potential climate-related physcial risks according to TCFD in order to monitor on their development:
- Extreme climatic events such as floods, storms, hail, forest fires, avalanches
- Basic, constant climatic changes of climate change such as average temperature, precipitation patterns, dry land, etc.
Climate-related transitional risks
In terms of transitional risks, LEG especially monitors and investigates political, legal, technological and reputational developments.
Germany introduced a German carbon tax based on fuel emissions trading act in 2021. LEG understood that the “polluter pays principle”, where 100% of the CO2 price would have been payable by the tenant being the consumer, would lead to political discussions. As a political compromise, a 50:50 burden sharing was regarded as most likely. We did reflect this in our risk management system, business planning and portfolio valuation in 2020. Although the risk did not materialise in 2021, we will continuously monitor the development of this political risk to take appropriate actions in aforementioned aspects.
LEG will continuously look at the following fundamental and potential climate-related transitional risks according to TCFD in order to monitor on their development:
- Uncertainty of regulatory and political framework conditions
- Non-compliance with legal regulations (climate laws) and resulting fines
- Risks arising from disruptive/new technological development, e.g., substitution of oil and gas heating
- External perception (stakeholders) of LEG's contribution to climate protection
Market risks / Procurement:
- Changing market prices for raw materials, products and services as well as bottlenecks in general availability (e.g. craftsmen, building materials)
Market risks / Tenant relationship:
- Medium-term change in tenant preferences regarding housing amenities (e.g., air conditioning) or regional location (rural exodus)