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What are the best ways to investigate a company's environmental liabilities?

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Environmental liabilities are the potential costs and risks associated with the environmental impact of a company's operations, products, or services. They can affect the company's financial performance, reputation, and legal compliance. Therefore, it is essential to investigate them thoroughly before making any investment, merger, or acquisition decisions. In this article, you will learn about some of the best ways to conduct due diligence on a company's environmental liabilities.

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1 Review the company's disclosures

The first step is to review the company's public disclosures, such as annual reports, financial statements, sustainability reports, and environmental permits. These documents can provide valuable information about the company's environmental policies, practices, performance, and compliance. You can also compare the company's disclosures with its industry peers and benchmarks to assess its relative position and risks. However, you should not rely solely on the company's disclosures, as they may not reflect the full extent or severity of its environmental liabilities.

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Michael Santos

Analista de Faturamento Pleno | Gest?o Financeira | Finan?as | Redu??o de Custos | Contabilidade | Controller | Nota fiscal | Faturamento | Controladoria | Economia | Marketing Digital
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Revisar os números antes das publica??es externas é fundamental, qualquer divulga??o erronea, pode fazer com que a empresa de capital aberto por exemplo perca valor de mercado na bolsa de valores e mesmo que depois a empresa fa?a um comunicado informando os valores corretos, ficará dificil recuperar a confian?a na companhia, além disso a empresa corre sério risco de levar uma multa ou ter sérios problemas com a auditoria externa.

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Maulik Nagri

Experienced Finance Executive | FP&A Process Builder | Shareholder Value Creator | SaaS Finance Expert | Profitable Growth Driver
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A public company may disclose environmental liabilities in its financial statements. For US-listed companies, a good starting point is looking at the "Risk Factors" section as well as the "Accrued Liabilities" and "Contingencies and Commitments" footnotes of the documents filed with the SEC. Another source is looking at websites or filings with regulators such as the local Water Board or the local environmental agency. The movie "Erin Brockovich" is a classic case study in researching a company's environmental liabilities.

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2 Conduct site visits and audits

The second step is to conduct site visits and audits of the company's facilities, operations, and suppliers. This can help you verify the accuracy and completeness of the company's disclosures, as well as identify any hidden or emerging environmental issues. You can also evaluate the company's environmental management systems, controls, and procedures, and check for any signs of contamination, pollution, or non-compliance. Site visits and audits can also give you an opportunity to interview the company's managers, employees, and stakeholders, and gain insights into their environmental awareness and culture.

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Maulik Nagri

Experienced Finance Executive | FP&A Process Builder | Shareholder Value Creator | SaaS Finance Expert | Profitable Growth Driver
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If initial research shows the risk of environmental hazards at a particular site, further actions are warranted to quantify the environmental liability. These actions (normally called Environmental Site Assessment Phase 1 in USA) can include: * review of historical land records if the site has been used for environmentally hazardous purposes * examination of local regulatory body records * visual inspection of the site and adjacent sites * comparison of current site status with site plans * interview current and prior site occupants, owners, operators, and local government

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Ashutosh Kar

Founder & CEO | Advince – Simplifying Finance, Tax & Legal So You Can Focus on Growth | Advince Books - All-in-One Accounting Solution
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Conducting site visits and audits is crucial for investigating a company's environmental liabilities. Site visits involve physically inspecting the company's facilities, observing operations, and assessing potential environmental impacts firsthand. For example, suppose a manufacturing company is suspected of discharging pollutants into nearby water bodies. A site visit would involve examining the manufacturing processes, waste disposal systems, and any discharge points to assess the potential sources of pollution. Additionally, audits would scrutinize the company's permits, monitoring reports, and environmental management systems to determine if they are fulfilling their legal obligations and properly managing environmental risks.

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3 Hire external experts and consultants

The third step is to hire external experts and consultants who can provide independent and objective assessments of the company's environmental liabilities. These experts and consultants can have specialized knowledge and experience in various environmental fields, such as engineering, law, accounting, geology, or ecology. They can also have access to databases, tools, and methods that can help you quantify and evaluate the company's environmental liabilities. For example, they can perform environmental due diligence (EDD), environmental impact assessment (EIA), or environmental liability transfer (ELT).

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Maulik Nagri

Experienced Finance Executive | FP&A Process Builder | Shareholder Value Creator | SaaS Finance Expert | Profitable Growth Driver
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Once it is established that the risk of environmental hazards is high, the next step is to hire specialists to analyze the site more intensively (normally called Environmental Site Assessment Phase 2 in USA). This may include taking samples (soil, water, etc.) and test them for contamination (typically in a laboratory setting) keeping in mind various government guidelines. These external experts also help determine the cost of environmental clean-up, which may have accounting and financial reporting ramifications. Also, the firm may need to assess the likelihood of legal claims from environmental claims.

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4 Analyze the legal and regulatory environment

The fourth step is to analyze the legal and regulatory environment that affects the company's environmental liabilities. This can help you understand the current and potential obligations, liabilities, and penalties that the company faces or may face in the future. You can also assess the likelihood and impact of any changes in the environmental laws, regulations, standards, or enforcement actions that may affect the company's operations, products, or services. Additionally, you can review the company's litigation history and exposure, and check for any pending or potential lawsuits or claims related to its environmental liabilities.

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Maulik Nagri

Experienced Finance Executive | FP&A Process Builder | Shareholder Value Creator | SaaS Finance Expert | Profitable Growth Driver
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Knowledge of local laws and regulations is extremely important. For example, in USA, CERCLA prescribes that the current site owners are tasked with contamination clean-up even though the previous occupiers had been responsible for the contamination. Also, the liability for clean-up of certain environmentally contaminated sites is forever.

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5 Consider the market and stakeholder expectations

The fifth step is to consider the market and stakeholder expectations that influence the company's environmental liabilities. This can help you gauge the reputational and competitive risks and opportunities that the company has or may have in relation to its environmental performance. You can also evaluate the company's alignment with the environmental preferences and demands of its customers, investors, employees, suppliers, communities, and regulators. Furthermore, you can assess the company's readiness and capability to adapt to the emerging environmental trends, challenges, and opportunities in its industry and society.

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6 Adjust the valuation and negotiation accordingly

The sixth and final step is to adjust the valuation and negotiation accordingly based on the findings and outcomes of your environmental due diligence. This can help you determine the fair and reasonable price and terms for your investment, merger, or acquisition decision. You can also identify and mitigate any environmental risks and uncertainties that may affect the deal or the post-deal integration. Moreover, you can leverage any environmental strengths and opportunities that may enhance the value and performance of the deal or the combined entity.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Maulik Nagri

Experienced Finance Executive | FP&A Process Builder | Shareholder Value Creator | SaaS Finance Expert | Profitable Growth Driver
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Special accounting regulations may apply to environmental liabilities. For US GAAP, attention is invited to ASC 410-30 and ASC 450-20.

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What are the best ways to investigate a company's environmental liabilities?

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1 Review the company's disclosures

2 Conduct site visits and audits

3 Hire external experts and consultants

4 Analyze the legal and regulatory environment

5 Consider the market and stakeholder expectations

6 Adjust the valuation and negotiation accordingly

7 Here’s what else to consider

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