Before carrying out commercial transactions such as mergers, acquisitions, or financing arrangements, it is advisable to review the environmental management practices of the companies involved. This provides sufficient information to properly assess risks and, above all, ensure the sustainability of the transaction within its surrounding environment. This research and analysis is known as Due Diligence. Environmental Due Diligence seeks to determine, quantitatively or qualitatively, the impact that a company’s activities may have on the environment. In fact, one of the main objectives of this research and analysis process is to identify potential environmental contingencies associated with both the company’s activities and the property where it conducts its operations. This helps prevent environmental issues from reducing the value of the business or property, while avoiding potential contingencies or liabilities arising from obligations assumed without prior knowledge.
Environmental Due Diligence is a type of investigation that, ideally, should not be limited to document analysis and review. It should also include site visits to gain firsthand knowledge of the actual condition of the company’s operations, as certain circumstances are difficult to identify merely by verifying the permits issued by regulatory institutions. These site visits help determine or estimate the investment required to bring a site into compliance with accepted environmental standards, which can significantly influence the valuation of the transaction.
Environmental Due Diligence assessments are conducted in different phases, with the depth of each phase depending on the scope established by the client. The preliminary phase generally includes a document review, verification of the permits applicable to the company’s activities, a preliminary site assessment, and verification of compliance with the applicable legal framework. The second phase may include specific studies and analyses, the collection of evidence of improper environmental management, and an assessment of environmental legal implications. Finally, the remediation phase includes implementing measures to address contamination and estimating the time and costs required for these measures. Including environmental considerations in the due diligence process is extremely important because it makes it possible to:
- Identify and quantify current and potential environmental liabilities, as well as the risks that may be assumed as a result of the transaction;
- Establish an amount to cover environmental risks associated with current or future operations, which may significantly affect the transaction price;
- Determine the investment required to bring the property or company in question into compliance with reasonable environmental standards;
- Verify compliance with current and applicable regulations.
Therefore, overlooking this essential matter during a due diligence process could result in substantial costs arising from environmental damage caused by the company’s activities that was not properly investigated or assessed, and could ultimately lead to the suspension or even permanent closure of its operations.