Tata was no doubt aware of the hefty environmental liability it was taking on. But for some businesses it can come as a nasty shock. This is why a full environmental risk assessment is a key part of due diligence reporting. It is a vital part of many commercial transactions, from property conveyancing and leasing to investment decisions, loans and company acquisitions.
Due Diligence Reports Should Not Waste The Clients Time
Assessing and Managing Environmental Liabilities So what should companies do in terms of risk management of these environmental liabilities? The due diligence report will include an assessment of risk and recommendations on how the risks can be mitigated and managed, and it should also include advice and information – not just raw data, in short it should point out the concerns and come up with some conclusions.
The Tata steel example is an extreme one, but the same issues are present when a brownfield site is being redeveloped for other building work. Previous manufacturing / industrial activity on the site or potential future liabilities revealed by environmental impact assessments can substantially affect the value of the site, and in some cases may lead to the decision not to proceed with a transaction.
The problem with environmental liabilities is that they can be hidden and hard to quantify. Some specialists try to overcome this problem by hurling raw data at their client, who is left not much better informed about the business risk presented by the environmental liability. The key point about such a report is that it should assess and balance the liabilities and then advise on whether they can be mitigated and how they should be managed.
Assessing Risk – Phases 1 and 2
In Phase 1, the assessment process begins with a desk review of the available environmental information, both current and historic. This may draw on a large number of sources, from Ordnance Survey and geological maps to industrial archives, perhaps even from aerial photographs. It will also take account of reports from petroleum officers, radiological protection authorities and others. A key part of the process consists of data searches for environmental data, these records often covering many years. These bring to light any activity licences or permits that have been granted in the past. Flood risk, soil structure, landslip and subsidence are among the hazards that are assessed.
The consultant will produce a profile of the site’s characteristics and may use geotechnical information to further inform their assessment.
Unless the Phase 1 review indicates a complete lack of issues, the next step is to arrange a Phase 2 site review. This assesses the contaminants possibly present in the soil and the general ground condition and examines any current activities on the site. Positioning of utilities and communications cabling is checked. Soil and water samples may be taken and any contaminants measured. These are assessed against the government standards for levels at which these substances could cause possible harm to human health.
In essence, these phases produce an environmental assessment of risk for a client which measures the risk in terms of possible financial liability to anyone owning or using the land. This, in turn, affects the land valuation, particularly where there is a development proposal. Some sites are far more environmentally sensitive than others, so the process of assessing risk is very dependent on the nature of the site.
At this point, some buyers or sellers will feel that they do not wish to proceed. But others will want to develop a plan for managing risk which allows them to put appropriate mitigation in place and specify actions that will be used to monitor and manage the risk.
Remediation Plans
An important phase now follows, in which the seller or developer (the ‘responsible party’) may put a remediation plan in place to reduce the contamination / environmental damage done to the site and ensure that minimal ecological damage occurs in the future. The remediation plan must meet all requirements and be sustainable – that is, it’s not just a one-off exercise to get the required compliance and then proceed to planning permission. It must work in the long term, this being the responsibility of the owner.
The remediation plan needs to say what is going to happen and why and list criteria that will be used to guide the work and assess whether it has been acceptable. Objective assessment will also be necessary, and there is a verification process for this. Part of the verification of the remediation work will be a check on whether a long-term maintenance plan has been put in place.
Most clients will want to know the cost of any proposed remediation. These are sometimes worked out by balancing some of the site’s characteristics, such as geology and location, against market assessments of value.
Future Developments
Pension funds, investment trusts and other large corporate investors are becoming increasingly aware of the need for responsible investment. There is growing emphasis on considering the environmental, social and other impacts of a company before investing in it. People who are placing funds with wealth managers and investment professionals are increasingly demanding transparency about the real estate investments that are being made and are rejecting those deemed environmentally unsustainable.
Choosing the Right Environmental Agency or Consultant
Due Diligence Environmental reports are here to stay, and they are undoubtedly going to become more important as environmental standards rise. Ensure that your due diligence process benefits from using agencies and consultants who understand the full range of issues involved, and then it need not be a deal-breaker.
Argyll Environmental has years of experience in the complex area of Environmental Due Diligence and we know that our expertise and our in depth investigations on any real estate you are planning to invest in offers our clients significant advantages. You will find that our services provide the professional quality needed, all of our projects being based on carrying out the necessary level of inspection /investigation / sampling and testing, so that any hazardous material can be identified and the risks quantified.
We also have a team of legal experts on hand who have experience in all sectors of land use and laws regarding the environment. So, if you have a specific issue in mind, or would like to know more about our services, please do contact us.