Notes From the Summit: Enhanced Environmental Due Diligence and Reserves Management

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December 19, 2022 - Environmental due diligence has been at the forefront of mergers, acquisitions, and divestitures (MAD) activity for decades. In 1993, ASTM International (American Society for Testing and Materials) issued the standard ASTM-E1527 that environmental professionals still fundamentally follow when evaluating whether environmental conditions exist at a location. Conditions typically noted as risks through the Environmental Site Assessment (ESA) process are:

  • Releases on the subject property (known and unknown)
  • Historical underground storage tank operations (known and unknown)
  • Offsite conditions that impact the subject property (upgradient groundwater contamination)

During this Phase I process, attention has historically been focused only on the property. If environmental conditions were found, further discovery would lead to a Phase II investigation. However, as deals have become more sophisticated, simply conducting a traditional ASTM Phase I investigation to check a box isn’t enough.

New risks beyond those related to just the property subsurface and structures must be considered and can be the deciding factor in the MAD process. Stakeholders, investors, and even everyday consumers are looking far beyond basic soil and groundwater remediation because they are now focusing on larger environmental compliance initiatives, sustainability programs, and an entity’s ESG program and goals.

Understanding, prioritizing, and reducing risks related to operational regulatory compliance; site safety and worker protection; supply chain operations; onsite security, cyberthreats, and resiliency planning; sustainability; and meeting GHG targets all require new, enhanced ways of approaching risk identification, mitigation and due diligence.

Why is it important to look “Beyond Phase I” during transactions?

  • The largest environmental liabilities are not always associated with physical property.
  • Compliance data is easier to obtain. The available data impacts public perception and can potentially elevate or damage brand reputation.
  • Worker safety and health are more prominent as the employer-employee dynamic has shifted, and the investment needed to ensure worker safety can be significant.
  • Sustainability goals and established targets have an impact on investment and operating costs. Failure to have adequate reserves to meet publicized targets can have both real financial and perceived public impacts.
  • Security breaches (digital and physical) can cause immediate and irreparable harm to the business.
  • Supply chain risk impacts top-line revenue and bottom-line profitability.

An enhanced due diligence approach offers benefits such as the identification of “hidden” transactional risks and improved return on investment and allows for more effective post-transaction risk-mitigation planning and implementation.

Listen to Environmental Practice Director Jeffrey McBride and Remediation Program Management Practice Director Dan Smith’s full Connect Summit session Enhanced Environmental Due Diligence and Reserves Management. Both experts will cover more of this topic during The new CHIPS and Science Act’s wide-ranging environmental requirements webinar.

Follow along with our ongoing series emphasizing strategic planning and environmental risk mitigation as both Jeffrey McBride and Dan Smith address how to turn traditional environmental liabilities into opportunities for your business. Read Risk Assessment is a Major Play for M&A Due Diligence, Risk Mitigation: Re-evaluating Cash Reserves, and Risk Mitigation Adds Long-Term Value.

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