Merger and acquisition (M&A) dealings in 2021 reached a staggering $2.4 trillion - something not seen since 2015. While 2022 may not experience that level of activity, M&As are nonetheless expected to be substantial. As these transactions increase, the organizations involved will face new risk mitigation challenges as investors are increasingly growing more concerned about the potential impacts of climate-related risks to businesses.
Taking a closer look at sector drivers for the second half of 2022, commercial space acquisitions are going to continue at a relatively strong pace, especially as many organizations adhere to a hybrid working model and no longer need, or want, to carry the cost of large offices. In addition, as global economic unrest and significant supply chain constraints continue, many businesses are suffering. For many, profitability is dropping beyond the point of survival, and building owners could be looking to cash out while they still have equity left in their organization. As construction costs surge and housing prices remain at near-record highs, there is an opportunity to refurbish or retrofit a company’s existing property to meet the shift from large commercial or industrial space to smaller, more flexible commercial space or residential space designed for the hybrid worker.
As organizations navigate a landscape where potential deals can be affected by global economic headwinds and a rising interest rate environment, they must also consider the need to update and prepare their risk models and mitigation procedures to include greater risk profiling in environmental due diligence. However, meeting these new risk demands is going to be a heavy lift for many companies but, at the same time, is not something to be ignored in this new deal environment.
Hidden environmental risks can bruise your organization’s reputation and the bottom line
The last thing any organization wants is to acquire another business or property that has a tarnished compliance history or is handcuffed with unnecessary or overly restricted permits. From an environmental compliance perspective, organizations must now include risk factors for current and future operating conditions of the potential acquisition. This is imperative to ensure that all parties involved are adhering to required regulations and permitted with the capacity to allow for expansion of production.
A prime example of this can be seen in construction and development. Changes from commercial or industrial use to residential development can trigger more stringent environmental cleanup standards. If any redevelopment work is going to be done to an acquired building or piece of land, it is important to understand if contamination may be present in any of the areas that might be disturbed by the work. In many instances, these areas may not have been previously investigated because they were under existing infrastructure and inaccessible in the past but may be exposed when demolition or new construction begins. A key part of environmental due diligence is a better understanding of any sort of contamination and how it can be remediated correctly and efficiently with the future use of the property top of mind.
Improper environmental due diligence could put a black eye on the acquiring organization, and the lack of operational flexibility due to permit limits could reduce profit margins on the investment. However, as organizations re-evaluate their due diligence processes, they need to take a closer look at their risk models to ensure they meet any new risk mitigation challenges.
Updating environmental risk models for the new deal environment
Given our collective experience of the past couple of years and an overall increased focus on sustainability initiatives, the risk models and strategies from pre-2020, which focused primarily on adverse impacts to property or operational compliance, may no longer be sufficient for future transaction evaluations. As organizations ramp up their M&A activity, it is important to make sure risk models are updated and ready to be deployed.
Issues like environmental impacts, supply chain instability, community acceptance, permit transference or termination and surprises related to operational health and safety liabilities could all have an impact and become expensive to manage down the road if not incorporated into models from the start. Depending upon the parameters of the transaction and how liabilities may or may not transfer with the assets, organizations will often find that the business costs associated with these risks may far outweigh the cost of initial due diligence.
However, many businesses limit their due diligence to simple Phase I Environmental Site Assessments (ESAs), which do not provide the full picture needed to do a thorough evaluation. The importance of considerations not covered by the Phase I ESA process is becoming even more critical with the recent changes in how sustainability initiatives must be documented and reported and the shifting focus of most global brands. By shifting focus and risk models beyond Phase I ESA, organizations can aim to further protect the interests of both parties involved in the transaction
Ultimately, wading through historical data in the due diligence process requires a large commitment upfront. There are a wide range of documents and data to analyze, and organizations should partner with a third-party that understands a buyer’s strategic goals, then manages, organizes, and interprets the data to best meet a buyer’s objectives – and fully realizes and articulate the risks associated with the investment.
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Image credit: Pavel Danilyuk via Unsplash
As BSI’s Consulting Services Environmental Practice Director, Jeffrey has over 20 years of experience of solving environmental challenges to lead highly skilled practitioners in supporting environmental, health, and safety professionals through the rigors of complying with an ever-changing regulatory world. His primary practice areas include the developing, implementing, and managing of water, wastes, and air programs, as well as supporting the environmental stabilization and decommissioning of industrial-use property.