3 ways to reduce environmental risk in your transaction

Despite today’s difficult macroeconomic environment, merger and acquisition (M&A) activity remains an important component of companies’ plans for strategic growth. But transactions are under increased scrutiny, underscoring the need for both buyers and sellers — whether in the US or abroad — to understand and employ creative solutions to reduce their risks. These include identifying and addressing any environmental exposures that could impact the return on investment, and in some cases derail the transaction itself.

Many organizations — especially those in the chemical, oil and gas, and power generation industries as well as real estate investors and developers — have become more aware of potential environmental risks inherent in a property transaction. Existing property contamination or pollution conditions, for example, can result in significant environmental liabilities, which could require costly remediation and substantial monitoring expenses. Regulatory action for natural resource and biodiversity damage may lead to hefty fines and penalties. Organizations may also face third-party liability and mass tort claims, which often bring about significant legal defense expenses.

Mitigating environmental risks

Organizations can reduce their risks and increase the likelihood of a successful transaction by taking three steps:

1. Conduct thorough environmental due diligence

Carry out a comprehensive review of environmental risks as part of the transaction due diligence process. It is important to keep in mind that environmental risks can arise gradually; some liabilities may not be readily apparent. Consulting with environmental professionals early to help you identify and quantify the expected costs of both obvious and potential hazards is critical. This will allow you to begin to evaluate suitable solutions — such as contractual indemnifications, purchase price adjustment, escrow or holdbacks, regulatory programs, and insurance — early in the transaction process.

2. Include clear indemnification clauses in the purchase agreement

Attracting financing during a difficult economic period with high interest rates can be challenging, especially when an investment has known or potential environmental contamination risks. Identifying contractual ways to transfer these risks can increase lender comfort and help you secure financing. When designing the transaction agreement, seek to create clarity regarding known or suspected environmental conditions, and which party will assume liability. This will allow both parties to devise the appropriate solution to address their potential liabilities. It is important to review any indemnification clauses with your legal counsel to help you understand the extent of your protection and your potential exposures.

3. Use specialty risk transfer solutions

Once you have a clear view of your organization’s potential liabilities and their impact on your balance sheet, work with your insurance broker or risk advisor to develop an insurance solution that is tailored to your risks and can help you mitigate identified environmental threats that could impact your property. Specialty environmental risk transfer products, such as pollution legal liability, excess of indemnity insurance, and environmental liability buyouts, can help reduce risks for both buyers and sellers.

Whatever the size of the transaction and irrespective of the industry, buyers and sellers will likely face environmental risks. Careful due diligence, clear indemnification clauses, and a tailored environmental risk insurance program can help you address these challenges and successfully close a deal.

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Article

3 ways to reduce environmental risk in your transaction

Mitigating environmental risks

1. Conduct thorough environmental due diligence

Buyers should

Sellers should

2. Include clear indemnification clauses in the purchase agreement

Buyers should

Sellers should

3. Use specialty risk transfer solutions

Buyers can

Sellers should

Related insights

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3 ways to reduce environmental risk in your transaction

Mitigating environmental risks

1. Conduct thorough environmental due diligence

Buyers should

Sellers should

2. Include clear indemnification clauses in the purchase agreement

Buyers should

Sellers should

3. Use specialty risk transfer solutions

Buyers can

Sellers should

Related insights

Understanding and addressing PFAS: Risks, regulations, and mitigation strategies

Mitigating potential environmental risk to facilitate asset sale

Effective risk management in the clean energy transition

Supporting the transition to clean energy