The Role of ESG and EHS in Mergers and Acquisitions
To say the past two years have been difficult for manufacturers – big and small – would be a huge understatement! In addition to the unprecedented challenges presented by COVID-19 during 2020 and 2021, businesses must now deal with supply chain issues, labor shortages and surging inflation.
How can an organization balance all of these challenges? Throughout the business world, management teams are working and reworking their strategy to deliver shareholder value. Talk in boardrooms includes the need for additional capabilities, access to new markets, improved marketing of products and services as well as scalability. For smaller companies, business owners may be burnt out and start evaluating their next move. With all the uncertainty, owners are exploring mergers or selling. Step in Mergers and Acquisitions (M&A) specialists which could be comprised of banks or private equity groups (PEGs).
The primary goal of a Merger and Acquisition (M&A) specialist is to help companies grow. The M&A market had impressive increases in the number of transactions in 2021 as compared to 2020. Activity outpaced expectations with record-setting volume and value. Most banks and PEGs expect another strong year of deal-making since they are sitting on record amounts investment capital and cash.
One of the most compelling reasons for companies to consider M&A is the need for or to share technology and digital assets as well as other resources; however, companies merge for a variety of reasons such as entering new markets or to improve business efficiency as well as gain or maintain market position. Even more as of late, many mergers and acquisitions are stemming from the importance of technology in production processes.
Whether your organization is considering acquiring or merging in the near term, or you are preparing your company for a future transaction, the selling as well as the buying side of M&A must be a strategic process that should include the assistance of subject-matter experts to provide guidance throughout the due diligence phase.
For both buyers and sellers, there is a roadmap that should be followed – a playbook of sorts. The roadmap helps establish clear roles and tasks for the team members involved. While there are multiple steps, the due diligence phase tends to be the most time-intensive and stressful. Due diligence consists of a thorough review of EVERY aspect of the entity, such as products, services, customer base, human resource records, financials and regulatory. For all intents and purposes, it is a process that provides information related to value, liabilities and risk.
One important aspect of due diligence are the topics of environmental, health and safety (EHS) and environmental, social and governance (ESG) which have traditionally been overlooked (or delayed to the 11th hour) by M&A “dealmakers”; however, most are now realizing its inevitable rise in prominence. After all, there is clear evidence that socially conscience investors use ESG criteria to screen investments. M&A groups are challenging their teams to ensure sellers and buyers are considering targets to advance an organization’s plan toward sustainability. Both ESG and EHS due diligence reveals information - track records of behaviors and insight into actions and the status of compliance or lack thereof. The resulting information is an aid to investors to identify material risk.
Looking at environmental and safety concerns, dealmakers are increasingly challenged to assess post-close risks associated with non-compliance, pending government inquiries, potential litigation, contamination/remediation and reputational concerns, which can extend to long term operational burdens. The process begins with evaluating risks and opportunities and, in many cases, ends with review of ESG disclosures. (ESG disclosures; how to measure and manage with no common standard is an important and challenging topic on its own!)
Whether you are contemplating M&A or strategizing on how to build value in your organization, it is prudent to ensure ESG and EHS is part of your strategy. Build a culture of competency, conduct due diligence by having a third-party, subject matter expert audit EHS compliance. After all, to make your way through ESG and set sustainability goals, an organization must start from a solid base of regulatory compliance. ESG is a framework to evaluate the overall health and resiliency of an organization – environmental, health and safety are defined by laws/regulations and are mandatory. Some components of the “E” and “S” involve judgement – making choices about conduct that reflect values. Both are essential for the longevity of business today.
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Permit Ownership Change is an Important Part of M&A Process
By Cassie Lee It may have been the economic uncertainty of 2020, the emotional rollercoaster of quarantine or too much time to think and reflect on business but I had many clients reach out in the first quarter of 2021 asking for support in changing the ownership on their environmental permits. Just like when you transfer the deed to a house or a title to a car, if a commercial property changes ownership or name, all applicable permits held on the property or facility must be transferred to the new entity. Federal and state environmental regulations and statutes may also apply to the property transfer or merger process. While many permits may be held for a property, the most common Cornerstone assists with transferring include:
Air Permits
Stormwater (NPDES) Permits
Process water Discharge Permits
Wastewater Discharge Permits
Hazardous Waste Identification Numbers
Timeline and Applicability
Many times, the owner entity or individual contact person can be changed during the next reporting period for certain compliance obligations. Unfortunately, since state and local forms and applications vary, there are no hard and fast universal instructions. While a Phase I Environmental Site Assessment and any necessary environmental due diligence assessments occur prior to an ownership transfer, permit transfers are completed after closing. Experienced real estate and environmental attorneys recommend completing these transfers promptly after closing, usually within 60 days.
More Information
Feel free to contact me at clee@corner-enviro.com or (317) 501-7060 to discuss your merger and acquisition environmental, health and safety documentation needs. Cassie Lee is has spent more than 10 years serving Environmental Health and Safety Managers, Human Resource professionals, company owners and presidents navigate environmental compliance and worker safety. Prior to account management, she was in the field executing and reporting for property transactions and building health in the realm of environmental due diligence and industrial hygiene.