Risk Assessment and Mitigation: Environmental Management Strategies for Mergers and Acquisitions

As commonplace as they are, business transactions like commercial real estate sales, mergers, and acquisitions can get complicated when there are certain risks and potential environmental liabilities on the table.

These complexities are born out of opposing goals between sellers, who may be carrying known liabilities on their books, and buyers looking to insulate themselves from potential environmental issues.

While buyers hope to negotiate deals that shield them from legacy problems and protect them against unexpected issues in the future, sellers seek agreements that limit their post-closing exposures. Luckily, there are several strategies buyers can use to gather as much information as possible about past problems and presumably clean assets, all while moving toward a successful closing.

Abbi Cohen, partner with Philadelphia environmental law firm Dechert LLP, weighed in on these effective risk mitigation strategies during a panel discussion at the fall meeting of the American Bar Association’s Section of Environment, Energy and Resources in Chicago, as reported by Bloomberg BNA.

One important risk mitigation strategy for buyers, Cohen said, is to look closely at the Phase I environmental site assessments during the process of assessing risks, and then compare them with other publicly available resources.

These resources can include disclosures made to the Securities and Exchange Commission and other environmental agencies. Cohen suggests using these documents to complement one another, rather than relying on simply one or the other, to get a complete picture of operational risks of the assets being acquired.

There are also a host of digital research tools Cohen says buyers can use to determine whether the sites have been the subject of previous litigation or investigation. While much of this information is publicly available, it can be incredibly difficult to decipher. By working with environmental consultants, buyers can benefit from their expertise in every aspect of environmental site assessment, including:

• investigating all relevant environmental concerns within the project scope
• promptly communicating any environmental concerns upon discovery that may significantly impact closing or alter the scope of work
• compiling and presenting findings clearly and concisely, allowing buyers to more easily make informed decisions before property transfer.

In every real estate transaction, buyers must ensure their interests are protected. By scouring the documentation and performing their own extensive risk analysis, environmental consultants can help buyers with financial risks, avoid late transaction surprises and expedite the closing process.

Understanding Environmental Risk

Environmental risk refers to the potential harm or damage that an organization’s operations or activities may cause to the environment. This type of risk can have significant consequences, including damage to ecosystems, loss of biodiversity, and negative impacts on human health. Additionally, environmental risk can lead to financial repercussions such as fines, penalties, and reputational damage.

Organizations can take proactive steps to mitigate environmental risk by implementing sustainable practices, reducing waste and emissions, and ensuring compliance with environmental regulations. Conducting regular environmental risk assessments is crucial in identifying potential risks and developing effective strategies to mitigate them. By understanding and using best practices for addressing environmental risks, organizations can protect both the environment and their long-term viability.

Risk Management Planning

Risk management planning is a systematic process that involves identifying, assessing, and prioritizing risks, followed by developing strategies to either mitigate risk or manage them. A comprehensive risk management plan should include the following elements:

1. Risk Identification: Identify potential risks that could impact the organization. This involves a thorough analysis of all aspects of the organization’s operations and activities.
2. Risk Assessment: Assess the likelihood and potential impact of each identified risk. This step helps in understanding the severity and probability of risks.
3. Risk Prioritization: Prioritize risks based on their likelihood and potential impact. This ensures that the most significant risks are addressed first.
4. Risk Mitigation Strategies: Develop strategies to mitigate or manage each risk. This can include risk avoidance, risk transfer, risk reduction, and risk acceptance.
5. Risk Monitoring: Regularly monitor and review the risk management plan to ensure its effectiveness. This involves tracking risk indicators and making necessary adjustments.

A risk management plan should be tailored to the specific needs and goals of the organization and should be regularly reviewed and updated to ensure its continued effectiveness. By following a structured, risk management strategy and process, organizations can better prepare for and respond to potential risks.

Risk Mitigation Strategies

Risk mitigation strategies are actions taken to reduce the likelihood or impact of a risk. There are several types of risk or mitigation measures or strategies, including:

1. Risk Avoidance: Avoiding a risk by not engaging in a particular activity or operation. This strategy is effective for risks that have severe consequences and can be completely avoided.
2. Risk Transfer: Transferring a risk to another party, such as through insurance or outsourcing. This strategy helps in managing risks by shifting the responsibility to another entity.
3. Risk Reduction: Reducing the likelihood or impact of a risk through controls or safeguards. This can involve implementing safety measures, improving processes, or using technology to mitigate risks.
4. Risk Acceptance: Accepting a risk and taking no action to mitigate it. This strategy is used when the cost of mitigating the risk is higher than the potential impact of the risk itself.

Risk mitigation strategies should be tailored to the specific risk and the organization’s goals and objectives. Often, a combination of various risk mitigation tools and strategies is used to manage a particular risk effectively. By prioritizing risk mitigation, organizations can better protect themselves from potential threats.

Implementing Risk Management Plans

Implementing a risk management plan requires a structured approach to ensure its effectiveness. The following steps should be taken:

1. Assign Responsibilities: Assign responsibilities for implementing and monitoring the risk management plan. This ensures accountability and clarity in the execution of the plan.
2. Develop Policies and Procedures: Develop policies and procedures to support the risk management plan. These should be clear, comprehensive, and aligned with the organization’s goals.
3. Provide Training: Provide training to employees on the risk management plan and their roles and responsibilities. This ensures that everyone is aware of their part in managing risks.
4. Monitor and Review: Regularly monitor and review the risk management plan to ensure its effectiveness. This involves tracking progress, identifying any issues, and making necessary adjustments.

Implementing a risk management plan requires a commitment to ongoing monitoring and review to ensure its continued effectiveness. By following these steps, organizations can create their risk mitigation plans and a robust framework for managing risks.

Monitoring and Reviewing Risk Management Plans

Monitoring and reviewing a successful risk mitigation and management plan is essential to ensure its effectiveness. The following steps should be taken:

1. Regularly Review the Risk Management Plan: Regularly review the risk management plan to ensure its continued effectiveness. This involves assessing whether the plan is still relevant and effective in addressing current risks.
2. Monitor Risk Indicators: Monitor risk indicators to identify potential risks and trends. This helps in early detection and proactive management of risks.
3. Update the Risk Management Plan: Update the risk management plan as necessary to reflect changes in the organization or its operations. This ensures that the plan remains relevant and effective.
4. Report on Risk Management: Report on risk management to stakeholders, including the board of directors and senior management. This ensures transparency and accountability in the risk management process.

Monitoring and reviewing a risk management plan requires a commitment to ongoing evaluation and improvement to ensure its continued effectiveness. By regularly assessing and updating the risk mitigation plan, organizations can better manage risks and protect their interests.