Procedure for and Results of the Double Materiality Assessment
For the purpose of determining which topics must be reported in the sustainability report, the ESRS stipulate that a double materiality assessment be performed in the respective standards. This process involves identifying and evaluating the Volkswagen Group’s material impacts, risks and opportunities in relation to sustainability matters. In 2023, a methodology was established within the Volkswagen Group, intended to provide both the Volkswagen Group and Volkswagen Group companies that will be subject to reporting requirements in future with guidance on implementing the materiality assessment in the reporting year 2024. The aim of this approach was to ensure that the assessment is carried out in accordance with standardized steps and criteria. As such, separate double materiality assessments pursuant to the defined assessment methodology were performed both for the Volkswagen Group and for the subgroup comprised of Volkswagen Financial Services AG (including Volkswagen Bank GmbH and Volkswagen Leasing GmbH) and Volkswagen Financial Services Overseas AG, Porsche AG Group and TRATON Group for fiscal year 2024. The intention is to update the materiality assessment annually.
Methodology, assumptions and input parameters
The materiality assessment covered both the Volkswagen Group’s own operations and the upstream and downstream value chain process steps described under “Business model, value chain and strategy”. Assets were included in the analysis in individual cases.
As we are a global Group, we took a global view of impacts, risks and opportunities. Experts from Volkswagen AG carried out the identification and assessment for the Group as a whole based on a standardized assessment scale. Selected experts from Group companies were involved in the case of certain impacts. The aim of this approach was to lower uncertainties in the assessment process and validate assumptions. Existing analyses and classifications were used where available to ensure that the assessment was based on data. This included analyses from other ESG due diligence processes, such as the Lieferkettensorgfaltspflichtengesetz (German Supply Chain Due Diligence Act) for the S-Standards, life cycle assessments for ESRS E1 and ESRS E5, SCIP chemical analysis for ESRS E2, water footprint for ESRS E3 and location analysis for ESRS E4. Where there was uncertainty about impacts (particularly in the case of impacts on business relationships and further along the value chain), conservative assumptions that had been harmonized across the Group were used. In addition, a climate risk analysis (see “Climate change” chapter) and an analysis of impacts on biodiversity (see “Biodiversity and ecosystems” chapter) were carried out.
Process steps in detail
The process within the Volkswagen Group is divided into four fundamental steps.
- Analysis of context
- Collection of impacts, risks, and opportunities
- Assessment of impacts, risks, and opportunities
- Validation of the results of the double materiality assessment
Analysis of context
As part of a context analysis, the Volkswagen Group defined its relevant stakeholder groups, business model and value chain in relation to the ESRS requirements. As a binding basis for the materiality assessment topic list, the 37 subtopics of the ESRS were defined, with sub-subtopics also taken into account. In addition, entity-specific characteristics were analyzed. The Group perspective was covered by means of a comparison with the materiality assessment for the previous year’s sustainability report, which met the requirements of the Global Reporting Initiative (GRI), and the Group sustainability strategy regenerate+. In addition, a comparison was made with topics applied by Group companies, competitors, external ESG frameworks and ESG ratings. Corporate Citizenship was defined as an additional entity-specific subtopic of the Affected communities (ESRS S3) topical standard. This is set out in the “Corporate Citizenship” chapter. Consequently, 38 topics were used for the materiality assessments in the Volkswagen Group.
Collection of impacts, risks, and opportunities
The 38 topics were used to collect positive and negative impacts, risks and opportunities. In particular the Group’s identified impacts, risks and opportunities, including the Report on Risks and Opportunities, formed the basis for this, supplemented by additional information supplied by the Group companies. The ESRS sub-subtopics were applied in order to hone the impacts, risks and opportunities at subtopic level. These granular impacts, risks and opportunities were each combined into clusters at a level considered appropriate for the reporting of a global Group. Some of these were further honed in expert discussions and modified on the basis of the Volkswagen Group’s existing ESG due diligence processes. The Group companies also used the clusters as the basis for their materiality assessment and added entity-specific matters in selected cases.
Assessment of impacts, risks, and opportunities
The materiality assessment was conducted at the level of the clusters identified. The assessment method for financial and impact materiality was developed centrally. The impact assessment focused on the Volkswagen Group’s impact on the environment and society, whereas the financial materiality assessment took account of the sustainability-related risks and opportunities to which the Group is exposed. The assessment of financial materiality was conducted after the impact assessment so that interdependencies between impacts and risks or opportunities could be taken into account. Dependence on aspects such as natural resources or other ecosystem services was also considered in this way when assessing the financial effects. The assessment methodology is binding.
The impacts, risks and opportunities were evaluated in workshops with experts on the topics from a variety of departments using the assessment methods described above. The materiality threshold was determined after the assessment.
Validation of the results of the double materiality assessment
In a final step, the Volkswagen Group’s materiality assessment was validated. The harmonization of the results of the Group companies’ materiality assessments was a key part of this validation. Each company subject to the reporting requirements in the future documented its results and made them available for consolidation at Group level. The consistency of the assessments was reviewed, discrepancies were discussed for appropriateness, and assessments were adjusted in some cases.
Another part of the harmonization took the form of a validation from a human rights perspective. Here, the severity of negative human rights impacts was considered and a comparison with the prioritized risks according to the German Supply Chain Due Diligence Act was conducted.
Furthermore, the results of the double materiality assessment were compared with the risks and opportunities identified by Group Risk Management and analyzed in more detail.
Finally, the results of the materiality assessment were compared with the strategic direction of the regenerate+ strategy, discussed and agreed in a cross-departmental validation process and approved by the Board of Management. The process described is protected by corresponding controls in the standard ICS. To facilitate the collection and assessment of impacts, risks and opportunities relevant for the materiality process in the remainder of the fiscal year, existing stakeholder formats and the findings from the risk management system were checked for material changes.
Stakeholder involvement
The Volkswagen Group indirectly integrated the concerns of its relevant stakeholder groups in the materiality assessment; direct consultations did not take place. In-house experts were involved in the materiality assessment. As such, we were able to leverage the knowledge of our own departments regarding relationships between the sustainability topics and the relevant stakeholders affected – for example from analyses and ESG ratings. Feedback from individual dialogs between departments and stakeholders was also integrated into the process. The members of the validation committee include further departments that also take the stakeholder group perspective into account, for example Sustainability, Investor Relations, the Works Council, External Relations, and Procurement.
Assessment methodology in detail
Impact materiality
In accordance with the ESRS, both positive and negative impacts were used to assess the materiality of the impacts. The positive and negative impacts were assessed separately in the two categories of actual impacts and potential impacts. Actual impacts in the context of the materiality assessment are impacts that are actually happening now or have already happened. This time horizon applies for all actual impacts named in the sustainability report. Potential impacts are impacts that are sufficiently likely to occur. The most relevant time horizon for potential impacts is described in the text as short term (less than 1 year), medium term (1–5 years) or long term (more than 5 years).
To determine the negative impacts, the parameters of scale, scope and irremediable character were evaluated separately and then consolidated as an average to give the severity of the impact. Scale and scope were assessed to evaluate the positive impacts. The average of these two criteria also expresses the severity.
In the case of potential impacts, the likelihood of occurrence was assessed for both positive and negative impacts. A likelihood of occurrence of 100% was assumed for actual impacts.
The impacts were divided into severity categories on the basis of scale and scope, as well as irremediable character for negative impacts. The materiality of the impacts is assessed by multiplying the factors for severity with the likelihood of occurrence. In terms of impact materiality, impacts are classed as material if their risk score is 50 or above on a scale of 1 to 100.
Financial materiality
The Report on Risks and Opportunities in the Group management report describes the Volkswagen Group’s risk management processes. The quarterly risk process covers all acute situations irrespective of the type of risk, e.g., sales risks, environmental risks, or personnel risks. An additional risk and opportunities identification process was created to meet the requirements of the ESRS. The process to identify and assess risks and opportunities for the sustainability report is based on the quarterly risk process already established in the Group. A score is determined based on the ESRS requirements for each risk and opportunity in the area of sustainability. The score is calculated by multiplying the likelihood of occurrence by the potential severity and makes the risks and opportunities comparable. The severity is calculated by combining the weighted criteria of financial effect and reputational effect. A score between 0 and 10 is assigned to each of these criteria. The management and control measures taken are included in the assessment on the basis of the ESRS requirements.
The score for the likelihood of occurrence increases as the probability increases until it reaches the highest score of 10 for a likelihood of greater than 90% in the period under review. For the criterion of financial effects, the score rises in line with the scale of the loss; the highest score of 10 is reached when the potential loss is upwards of €1 billion. The criterion of reputational effects can have characteristics ranging from local erosion/building of confidence and loss/gain of trust at local level to loss/gain of reputation at regional or international level.
The assessment is carried out for each risk or opportunity in terms of the financial impact on the operating result in the relevant time horizon in which it may occur. A distinction is made here between short term (less than 1 year), medium term (1–5 years) and long term (more than 5 years). Acute sustainability risks are also identified, assessed, and managed in the quarterly risk process. Sustainability risks are addressed with the same importance as other identified risk types.
Sustainability risks/opportunities are assessed to be material in the sense of financial materiality if their risk score is 50 or above or their potential financial effect is €1 billion or more. This process is similar to the quarterly risk process’s established reporting requirements.
The assessments were discussed at Group level with the relevant departments in a process based on the materiality assessment, and the material risks and opportunities are presented in the respective ESRS chapters.
The RMS and ICS are regularly optimized as part of the continuous monitoring and improvement process, with equal consideration being given to internal and external requirements, in particular the requirements of the ESRS. External experts assist in the continuous enhancement of our RMS and ICS on a case-by-case basis.
Materiality threshold
In accordance with the ESRS requirements, the materiality threshold was set for both the impacts and the financial materiality following the completion of the assessment phase. On a five-point scale ranging from informative to critical, a topic becomes material for the Volkswagen Group when it crosses the threshold to the second-highest category of significant. For a subtopic to be defined as material, it is sufficient if either an impact or a risk or an opportunity is considered material. In the event of a financial effect of more than €1 billion, the risk or opportunity is classified as material irrespective of the overall assessment.
Procedure for identifying material information
The relevant disclosure requirements from the ESRS were identified on the basis of the material impacts, risks and opportunities for the report in fiscal year 2024.
To determine which information is to be reported, the Volkswagen Group first allocated the datapoints to one or more of the 38 topics. Datapoints relating exclusively to immaterial topics were then excluded from the reporting process. Voluntary datapoints with phased-in Disclosure Requirements considered to have no relevance for the report were eliminated in a subsequent step. Finally, metrics that were allocated to a material topic but were not categorized as relevant were excluded for various reasons. These reasons were clearly documented.
Results of the materiality assessment
In the context of the double materiality assessment, 28 of the 38 topics considered were identified as material. A total of 17 positive impacts, 19 negative impacts, 8 risks and no opportunities were categorized as material. Further impacts, risks and opportunities that have not reached the threshold for reporting were also identified in all topical standards. Inherent risks are described in the management report. It was possible to assign the material impacts, risks and opportunities to the subtopics of the ESRS (see chart). Only the impact of the topic of Corporate Citizenship is covered by additional entity-specific information. The option to present the material impacts, risks and opportunities under the respective topical standards was applied for the reporting year 2024. Current financial effects – where they are both material and recorded – are described in the chapters on the topical standards. The double materiality assessment was conducted in accordance with the requirements of the ESRS for the first time, meaning that there is no change to report compared with previous years. It will be updated for the next sustainability report.
