Impact, risk and opportunity management

IRO-1 – Description of the processes to identify and assess material impacts, risks and opportunities

The Lufthansa Group defined the material impacts, risks and opportunities as part of a double materiality analysis.

In order to identify, evaluate and monitor their material impacts, risks and opportunities (IROs for short), the Lufthansa Group conducted a four-stage process during the reporting year. This process is planned to be further monitored in future reporting years as part of the materiality analysis and adjusted if necessary.

1. Potential impacts of the core business have been reviewed

The materiality process started with an in-depth review of the core business activities of the Lufthansa Group. These were analysed with regard to potential environmental and social impacts, with a particular focus on the entire value chain, including direct and indirect business relationships. Geographically, the focus was on regions in which the Lufthansa Group is most active and could have potential impacts. In Europe, where the headquarters and main hubs for the Group are located, this included the management of impacts relating to the passenger airlines network. Activities in North, Central and South America, in the Asia/Pacific region, the Middle East and Africa were also analysed in order to take into account region-specific IROs.

In terms of the identification of IROs, the focus was on the Lufthansa Group value chain, including direct and indirect business relationships. This means that the analysis not only included risks that could arise from relationships with primary suppliers, for example, but also those that could arise from other upstream stages of the value chain, as far back as raw material extraction.

As part of this process, the material impacts were first identified. The relevant risks and opportunities were then attributed to these impacts. This meant that IRO pairs were created within the process, which enabled a comprehensive analysis of the topics. Individual risks and opportunities that were not directly linked with any identified impacts were labelled in order to highlight their separate significance in the overall context.

2. IRO inventory along the value chain is created

An initial IRO inventory was made for relevant sustainability aspects as per the CSRD and/or the corresponding ESRS directives. To do this, a description of the value chain was created for each of the core business activities. Using the value chains and taking into account the stakeholders affected, the actual and potential impacts, risks and opportunities were identified and recorded in the IRO inventory. This was based on the existing risk inventory for the Lufthansa Group, reports for the Lufthansa Group, industry input, public information, reports and databases – for example, ENCORE – as well as the results of the wide-ranging stakeholder survey from 2023 and the expertise of representatives of the subsidiaries for select IROs.

3. IROs are then evaluated

The identification and subsequent assessment of the risks and opportunities was done using the “outside in” principle. As such, external factors were considered that have an impact on the Company and opportunities and risks for the Lufthansa Group were derived from these factors. These risks and opportunities were assessed using a method agreed with Group Risk Management. The time horizons into which the risks and opportunities were categorised were selected to reflect the time horizons used in the risk management process. The short-term time horizon was defined as up to one year, the medium-term horizon was between one and four years, and the long-term time horizon was defined as four years or longer. The assessments were made on the basis of the time horizon within which the risk or opportunity was deemed most likely to be material.

The magnitude of each risk and opportunity was first assessed. The magnitude refers to potential impacts on the development, financial position, operating result, cash flow, access to financing or cost of capital of the Company and was assessed on a scale of 1 (insignificant) to 5 (critical). This assessment was carried out from an gross perspective, without taking into account any mitigating measures. It took into account factors such as potential financial losses, the degree of long-term damage to the Lufthansa Group, the type of financial impacts on the Group, the extent of operational breakdowns and the impacts on the reputation, business model, liquidity, assets or income of the Lufthansa Group, as well as the potential financial extent of the damage. For the opportunities, the extent was measured using the potential improvement of the Lufthansa Group’s financial position, the impacts on business operations and the extent of operational improvements.

The likelihood of the risk or opportunity was then categorised using the expected frequency of occurrence: irrelevant: between once in 50 years and once in ten years; low: between once in ten years and once in five years; moderate: between once in five years and once in three years; high: between once in three years and once in two years; extremely high: at least once in two years. Any established processes, such as existing effective ICS processes, were generally included in the assessment, which contributed to the likelihood being downgraded.

If the magnitude and/or likelihood exceeded the defined thresholds, the relevant risk or opportunity was considered material. In order to categorise the magnitude and likelihood, a brief explanation was documented for each analysis.

The identification and subsequent assessment of the impacts was done using the “inside out” principle. The analysis addressed how the Lufthansa Group’s business activities along the value chain affect people and nature. The assessment process closely reflects the methods used to measure risks and opportunities in order to create a coherent approach across all relevant areas. The defined short-term, medium-term and long-term time horizons are also applied. Here, too, the time horizon to be considered is based on the period from which the impact is the most likely to be considered material, with the time period of the highest severity being selected if several time horizons apply.

The severity of the impact was then measured. For positive impacts, the parameters of scale and scope are included, while for negative impacts, scale, scope and irremediability had to be assessed. These measurements were made on a scale of 1 (least severe) to 4 (most severe) from an gross perspective – any mitigating measures were therefore not taken into account in the measurement. For potential impacts, the likelihood was also assessed on a scale of 1 (irrelevant) to 5 (extreme). Any established assessment processes were also generally used here.

An explanation was also recorded here in order to explain the assessments, whereby the expected time horizon was specified in particular for long-term impacts. The materiality of an impact was determined by the classification under severity dimensions, while potential impacts were measured using a combination of severity and likelihood in order to determine thresholds for materiality. The Lufthansa Group applied a consistent approach to thresholds for all impacts, risks and opportunities. These are the same as the thresholds used for external reporting by the Lufthansa Group ERM system. When determining the materiality of potentially negative impacts in relation to human rights, the severity took precedence over the likelihood.

4. External preliminary evaluation results validated by internal experts

After the methods were established, the Lufthansa Group selected the approach of industry experts and subject matter experts pre-evaluating IROs by including desktop research and online publications. The results of the preliminary evaluation were then validated by internal subject matter experts at the Lufthansa Group. After the validation, internal representatives from the key stakeholder groups carried out a validation of the results from the perspective of the stakeholders. This involved validating the results with the Investor Relations and Customer Experience departments. In a second validation, the results were analysed from various management perspectives and presented to the management together with an overview of the evaluation process. The management reported back on the materiality of specific sub-topics, which were then sent back to the internal experts and stakeholder representatives in order to ensure agreement with the expertise of the internal experts and to make any necessary amendments. The final results of this extensive validation process were then shared with the employee representatives, the Executive Board and the Supervisory Board.

The results were sent to the Executive Board in August 2024 and presented to the Supervisory Board within the ESG Committee in September 2024. The results were also discussed, recorded and documented in an internal steering committee of the CSRD project in mid-July 2024 in order to create a comprehensive decision-making basis for the management.

The process of identifying and measuring material impacts, risks and opportunities was newly developed within the Lufthansa Group in order to comply with the requirements of the CSRD and ESRS. It builds on the existing materiality analysis. The ESRS contain specific requirements with regard to the intervals at which a materiality analysis must be conducted. For material changes to the Lufthansa Group business model, such as establishing a new business segment or in the event of major acquisitions, the topics in the materiality analysis will need to be re-evaluated. Furthermore, the materiality analysis must be reviewed annually for changes and to ensure that it is up to date.

The identification, measurement and management of opportunities have not yet been seamlessly integrated into the overall management system.

All material IROs have always been attributed to the relevant sub-topic in the ESRS framework. As soon as just one individual IRO was evaluated as material, the relevant sub-topic was defined as material.

Connection with risk management is planned

The CSRD-related risks for the Lufthansa Group were derived as part of the double materiality analysis described. The underlying risk methods were adapted to the Group risk management so that CSRD-relevant risks could be integrated into the Company’s regular risk management process. In the coming years, CSRD risks will become an integral component and the standard methods and processes with CSRD-relevant features will be applied, where necessary.

The process for identifying, measuring and managing CSRD risks is tailored to the methods used in Group risk management. The risks are recorded and measured by probability and impacts (qualitative and quantitative). In 2024, CSRD risks were assessed qualitatively from a gross perspective and transferred into the central ERM platform.

In future, CSRD risks are to be integrated into the regular ERM process and to be considered part of the overall risk situation.

Other topic-specific disclosures regarding the materiality process

E2 – Pollution

In addition to the methods and frameworks described in the general approach, no other sites or assets were analysed with regard to pollution because the Lufthansa Group only operates a very limited number of production processes at its sites.

Furthermore, the impacts of noise pollution by aircraft were part of the stakeholder surveys carried out in 2018 and 2023, where stakeholders, including representatives from affected communities, were able to submit a quantitative assessment on the sustainability-related topic of noise pollution. Stakeholders were also able to submit qualitative feedback in the form of comments. In addition, the analysis conducted by the Lufthansa Group’s internal experts also took into account insights from local dialogue forums involving residents near airports.

E3 – Water and marine resources

In addition to the methods and frameworks described in the general approach, no other sites or assets were analysed with regard to water and marine resources because the Lufthansa Group only operates a very limited number of production processes at its sites. In this context, a site-based analysis was not a suitable method for the Lufthansa Group to identify material impacts, opportunities and risks.

Furthermore, the potential impacts of the Lufthansa Group on water resources were part of the stakeholder surveys carried out in 2018 and 2023, in which participants were able to submit a quantitative assessment on the sustainability-related topic of water. Stakeholders were also able to submit qualitative feedback in the form of comments.

E4 – Biodiversity and ecosystems

In addition to the methods and frameworks described in the general approach, no other sites or assets were analysed with regard to biodiversity because the Lufthansa Group only operates a very limited number of production processes at its sites. For this reason, a site-based analysis was not a suitable method for the Lufthansa Group to identify material impacts, opportunities and risks.

Dependency on ecosystem outputs was addressed as part of the double materiality analysis described under IRO-1 and specific impacts, risks and opportunities were formulated. In doing so, the upstream and downstream value chain of the Lufthansa Group was taken into account. However, the defined impacts, risks and opportunities were not identified as being material. The materiality analysis also considered potential opportunities, as well as physical and transition risks, which were also not deemed material. A more comprehensive analysis was therefore not conducted. Systemic risks were not considered within the double materiality analysis.

No consultations were conducted with affected communities regarding shared biological resources or ecosystems because no material negative impacts were determined in this regard.

No actual or potential site-specific impacts, risks and opportunities were identified as part of the double materiality analysis. For this reason, a more detailed evaluation was not conducted to establish whether the Lufthansa Group sites are located near areas that are essential to maintaining biodiversity.

The double materiality analysis did not reveal any actual or potential material impacts that would require the implementation of additional remedial measures.

E5 - Resource use and circular economy

In addition to the methods and frameworks described in the general approach, no other sites or equipment were analysed with regard to resource use and the circular economy because the Lufthansa Group only operates a very limited number of production processes at its sites. For this reason, a site-based analysis was not a suitable method for the Lufthansa Group to identify material impacts, opportunities and risks.

Furthermore, the potential impacts of the Lufthansa Group on resource use and the circular economy were part of the stakeholder surveys carried out in 2018 and 2023 where participants were able to submit a quantitative assessment on the sustainability-related topic of resource use and the circular economy. Stakeholders were also able to submit qualitative feedback in the form of comments.

IRO-2 – Disclosure requirements in ESRS covered by the undertaking’s sustainability statement