Corporate risk managers cannot have failed to recognise the growing environmental pressures upon their business activities. Indeed, in recent years, certain environmental issues have become critical – acid rain, global warming, ozone depletion, toxic air emissions, waste generation and disposal, water resource depletion and contamination to name but a few. Industry in general contributes to these problems and the potential solutions are in the hands of the wider international industrial and political communities. As the drivers forcing improvements to industrial pollution abatement systems harden, the cost burden to industry is set to increase and so too do the potential pitfalls for the unwary.
Individual businesses may also face specific environmental liabilities literally in their own backyards, namely the potential for liabilities arising from soil and groundwater contamination. Liability may materialise as a result of enforcement of current legislation, future costs associated with compliance with future legislation, civil actions and public scrutiny.
Businesses can inherit land - and asset-based liabilities during purchase and sale of land or buildings, mergers and acquisitions, joint ventures, financing, asset or stock purchases. The exercise of due diligence during evaluation of environmental liabilities is essential to protect businesses from unexpected exposure to liabilities. Due diligence can be described as showing appropriate attention and care or caution in dealing with or meeting one's responsibilities. Environmental due diligence can be described as the proactive seeking out and evaluation of environmental liability scenarios.
Environmental due diligence requires the completion of the following steps:
An important goal of environmental due diligence is to gain adequate and reliable information upon which to reduce the potential for surprises (usually unpleasant ones), to determine the likely capital and operational costs associated with identified liabilities, to assist in the evaluation of the true net value of property and to set aside adequate reserves. Although environmental due diligence is usually undertaken prior to asset disposal or acquisition, it is also frequently carried out to support investment decisions, for insurance purposes, to prevent regulatory action or to obtain regulatory approval.
Environmental due diligence is most effectively undertaken in a phased manner to manage costs in relation to risk, and to give a timely feed of information to the risk management team.
Phase one consists of a review of the site's history and environmental setting, interview with facility management and an examination of site layout plans, management system for environmental control and process documentation. The use of information request protocols helps to ensure consistent data coverage. Various companies now offer cost-effective access to public domain data.
A walk-over survey is essential to identify suspect signs such as visible signs of contamination, lack of bunding, untested tanks, past on-site waste disposal practice, storage and use of chlorinated solvents, use of asbestos on site, history of industrial use, condition and use of adjacent properties, physical condition or staining of paved areas, vegetation stress, odours and sheens. In the case of sites where environmental contamination is suspected, an important deliverable of phase one work is a sampling and analysis plan for phase two.
The trend over the last decade has been for phase one environmental due diligence to more frequently proceed to phase two sampling and analysis of environmental samples in order to verify earlier phase findings. This trend has been observed both in acquisitions, where the potential for price reduction may be an outcome, but also in divestiture, as sale “with knowledge” may relieve the seller of long-term liabilities. A number of organisations have made it their policy to obtain site-specific soil and ground-water quality data prior to acquisition, even where there is no evidence of prior potentially contaminating activities.
Phase two will include sampling and analysis of soil, groundwater and other media. Solid wastes and sludges, surface water courses, effluent discharge, local water supplies, stream bed or soakaway pit sediments and other potentially suspect material may be sampled. The sampling and analysis plan should document the reasons for selection of sampling locations and media, and the scope of analyses. The targeting of analytes, from the potentially immense range of contaminants, based on an understanding of the current and past processes undertaken on the site, is a key objective of the sampling and analysis plan.
An outcome of phase two sampling and analysis is the development of a better conceptual model of the soil and groundwater conditions beneath the site, and the distribution of contaminants within it. The focus should be on the quantified assessment of liability.
Questions addressed by phase two
On completion of laboratory analysis, analytical data needs to be assessed in order to clarify the magnitude of potential liabilities. A preliminary step is the comparison of data against pre-agreed assessment concentrations. A variety of such comparison values are available. Each has its limitations and advantages and none should be viewed as an absolute standard. Often the Dutch intervention criteria are used as a rigorous multifunctional land use ecotoxicologically-derived comparison covering a wide range of inorganic and organic contaminants both in soil and groundwater. In addition, the spatial distribution and trends in contaminant concentrations are important factors and these should also be carefully studied as they often give clues to sources and movement of contamination.
In the United Kingdom and in many other countries, remediation standards for contaminated land are based on a “suitable for use” and “risk- based” assessment. The recent implementation of the Environment Protection Act Part 2A regulations in the UK, with the attendant publication of numerous draft and final guidance documents, has given the impression of a revolution within the field of land contamination assessment. In reality, experienced consultants have been using risk assessment techniques to evaluate ground contamination and remediation solutions for many years. However, within the context of environmental due diligence, such an approach usually has to remain on the “wishlist” as the rapid deployment and reporting requirements imposed often severely constrain the use of this more sophisticated and data-hungry approach.
Liability cost estimates for soil and groundwater contamination remediation are often broadly drawn after phase two on account of limited knowledge of the contaminant distribution and mobility, and hence uncertainty in the selection of the most appropriate remediation strategy. This often results in lively debate between the interested parties in negotiation. At this stage, proposed remediation engineering may appear conservative, but it should be borne in mind that some apparently elegant in situ remediation solutions often fail because of non-technical issues such as permitting, concern over residual contamination, investor perception, timescale and the ultimate requirement for warranties. The buyer needs to exercise a cautious approach to the acquisition of contaminated land.
Additional work may subsequently be undertaken where phase one and two assessments identify serious issues requiring additional data and risk assessment to define the level of risk and to develop risk management solutions.
Prior to commissioning a specialist consultant to undertake environmental due diligence a number of factors should be considered.
Nick Postlethwaite is joint managing director of environmental consultant Marcus Hodges Environment.