Environmental Due Diligence 101
To learn about Environmental Due Diligence, Finance Monthly talks to Alex Ferguson, Managing Director for Delta-Simons Environmental Consultants – a company specialising in Environment, Health & Safety and Sustainability, providing support and advice within the property development, asset management, corporate and industrial markets. One of the firm’s specialisms is providing environmental due diligence services to investment and pension funds, commercial property developers and banks for UK and international transactions. It also supports clients with the environmental aspects for the sale, purchase and development of potentially contaminated land and property.
Environmental due diligence is a now an important part of a broader due diligence process – what makes environmental due diligence so important? In what ways does it increase the value of portfolios/real estate investments?
Environmental liabilities have the potential to manifest in significant costs in both M&A and Real Estate transactions. Costs can take the form of both immediate financial impacts to address liabilities and also in terms of longer-term reputational issues. A programme of targeted environmental due diligence can manage risks and avoid liabilities.
Traditional environmental due diligence is the process that assesses assets for potential risk associated with environmental issues such as: soil and groundwater contamination; flood risk; and permitting and compliance issues.
We are also recognising that there are other emerging issues to be considered as part of corporate M&A and real estate due diligence. At the forefront of these is the concept of Responsible Investment. Responsible Investment explicitly acknowledges the relevance to the investor of environmental, social and governance (ESG) factors and addresses the key elements of value, risk and compliance associated with ESG.
Investors and asset owners are increasingly looking at due diligence that incorporates ESG. We are seeing more investors integrating ESG into their acquisitions – 60% of assets managed for EU investors now incorporate sustainable investment strategies.
Can you detail your typical environmental due diligence process? Which strategies do you employ?
We work with both vendors and purchasers to inform them on potential environmental risk/liability and impact on receipt/purchase price. This is a staged process commencing with a Phase I report but may also include assessment of environmental conditions through ground investigations and other surveys such as flood, asbestos or ecology. We also provide environmental advice to Development Planning professionals on development feasibility and abnormal cost appraisals. ESG advice focusses on reviewing corporate level ESG commitments and advising on the impacts the asset under consideration will have on the wider portfolio performance against ESG criteria.
An important part of the due diligence process is the monetisation of environmental risks. We work with our clients to advise early on potential opportunities to add value.
At Delta-Simons, what are the common challenges you face when trying to obtain information for an environmental due diligence process? How do you overcome these challenges?
M&A deals present a unique set of environmental, health & safety and sustainability risks and liabilities which require rapid and rigorous quantification as part of the transaction process. On average, the due diligence window lasts two to eight weeks (according to the number of people involved and the scale of the deal) and, therefore, a structured process is critical to ensure that effective and focused due diligence is delivered. The key challenge on the acquisition side of the deal is obtaining rapid access to the key data. When working with vendors, we pull together a clear and robust vendor pack to smooth the due diligence process and minimise uncertainty.
Going forward, the challenge is translating Corporate ESG commitments into standard format for investment committees or other decision makers. Working with our clients to ensure that we capture risks and opportunities around corporate stated environmental goals.
More investors are looking to create sustainable properties as investments – why do you think that is?
Strong performance in ESG means better stakeholder engagement, greater operational-savings and higher asset values. The aim for many is now investment in assets that are truly sustainable over the investment period, both in terms of the environment and in terms of business longevity. Our global alliance, Inogen, is a partner of Global Real Estate Sustainability Benchmark (GRESB) so we work closely with GRESB’s objective to provide real estate investors and managers with the tools they need to accurately monitor and manage sustainability performance to prepare for increasingly rigorous environmental, social and governance obligations.
GRESB is an investor-driven organisation committed to assessing the ESG performance of real assets globally. More than 250 members, of which more than 60 are pension funds and their fiduciaries, use GRESB data in their investment management and engagement process, with a clear goal to optimise the risk/return profile of their investments.