Still not sure what Environmental Due Diligence is?

With the end of the economic crisis, a series of purchase/sale movements of companies, activities and/or facilities begin to take place, which in the industrial sector usually have “due diligence” incorporated, to be carried out prior to the transaction.

These previous “due diligence” studies are also associated, with increasing frequency, an environmental component that, due to various circumstances that we will analyze below, has become especially important in recent years.

What is “Environmental Due Diligence”?

“Due diligence” It is an Anglo-Saxon term, commonly used in the business environment, which relates to business acquisition transactions. In practice, it is used to define the “audits” carried out on the company being sold, prior to the signing of the acquisition contract, which are aimed at evaluating the state of the company and its assets, and at verifying the risks that would be assumed in the transaction by the buyer.

Thus, when we talk about “environmental due diligence” we are talking about the same analysis process that occurs in the usual “due diligence”, but applied to the environmental field. A prior research process aimed at evaluating the state of the company, the requirements required throughout its life cycle, the degree of compliance, the resulting responsibilities and the associated environmental costs.

The fact is that, for all of us who work in the field of the industrial environment, it is clear that the environment is of special importance in the purchase/sale of a company, due to three factors that every good buyer, or the consultant they hire, must take into account:

1. The environment in a company in crisis is often the first factor that is abandoned without receiving appropriate attention. Installations that are for sale at bargain prices, and more so in times of crisis, are often associated with a significant abandonment of this area of management.
2. The hidden defects and costs associated with environmental malpractice are one of the few that can be prolonged over time and are “inherited” between owners, something that does not happen in other areas of business management. This is what makes them an added cost in the future that will have to be taken into account, apart from the legal responsibilities that may be assumed.
3. The start-up, the restart of paralyzed activities, the operation, or even the cessation and closure of facilities, are processes within the life cycle of the facilities that could lead to the fulfillment of certain environmental requirements that could cost the buyer time and money.

So much so that the environmental factor usually ends up having a significant influence not only on the decision-making process itself, but also on the valuation of assets and therefore on the final price of the acquisition transaction, on the way the transaction is structured, or even on the potential requirement of additional guarantees from the seller.

The environment is a significant risk factor in the acquisition of companies that can lead to investments in the face of millions of dollars in losses.

It goes without saying that, if the company to be purchased belongs to the environmental sector (generation of renewable energy, biofuels, waste management, water purification, etc.), the need for environmental professionals with extensive knowledge in the sector is even more important. The contribution of these professionals to other “due diligence” processes such as economic and financial analysis, market analysis, or even the evaluation of the business strategy followed, can provide very valuable information.

The perfect Environmental Due Diligence.

At Ideas MedioAmbiental, we always recommend to investors who come to our consultancy firm, whether individuals, institutions, companies or investment funds, that when they want to make a purchase or acquisition, or even simply want to invest in an existing company, to incorporate “Environmental Due Diligence” into their usual analysis process.

In this sense, for us, the perfect Environmental Due Diligence will be one that contemplates the following areas of analysis, adapting the analysis process to the type of activity in question and to the conditions of the environment in which it is being carried out.

For this purpose, the perfect Environmental Due Diligence:

• You will acquire adequate knowledge of the environment in which the company develops and its evolution. You will study your sector, the geographical and political area in which the activity has been established, its main environmental aspects and the problems associated with the center under study.
• It will also study the environmental requirements and the case law applicable to the facility. The legal framework establishes in each country different obligations and rights for both the buyer and the seller, as well as requirements legally applicable to each of the phases of the life cycle of the company for sale (start-up, operation, shutdown, closure and closure, etc.). Knowing these is vital to understanding the environmental risks and costs associated with the purchase.
• It will carry out a detailed study of the environmental record available to the company for sale, gathering information on technical projects, authorizations, permits, notifications, inspection records drawn up, etc.
• You will know in detail the environmental status of the company at the time of its potential sale, as well as the accumulated environmental history in each of the areas that affect it. For this purpose, it will be essential to carry out inspection visits, to collect documentary evidence of environmental behavior (studies, analytics, controls, etc.), to carry out complementary studies if appropriate, or to conduct interviews with the different actors (administration, workers, suppliers, etc.).
• It will design the different scenarios and evaluate the potential environmental risks associated with the acquisition and subsequent exploitation, cessation or closure of the activity, establishing an economic valuation for each of them.