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Environmental Risks: A Crucial Part of Due Diligence in International Deals

piatkowski, steve, aceThis piece is co-authored by Douglas Taylor, Ruth Weinberger and Frank Westfall

Around the world, emerging and developed nations alike are placing greater emphasis on protecting the environment. Yet, many businesses seeking to build or acquire an international facility do not address the environmental exposures that may accompany a transaction until much later in the due diligence process. Putting off these issues, however, can increase the chances that the transaction will fall through after a great deal of resources have already been expended and heightens the risk of acquiring substantial environmental liabilities along with the property. By making environmental considerations a key part of due diligence from the start, along with more traditional financial and legal concerns, companies can mitigate these risks and increase their chances of long-term success.

As Trade Grows Globally, So Does Environmental Regulation

The question today for many growing companies is not whether to expand internationally, but where. Over the past two decades, investment by US companies abroad has grown sharply, reaching $4.45 trillion in 2012. New spending by US companies on businesses and real estate in foreign countries was estimated at $368 billion in 2013. Yet, establishing operations or acquiring existing facilities in a new country entails a complex array of risks. In a world that is increasingly focused on climate change and environmental protection, pollution and associated compliance risks are crucial considerations.

Around the world, many countries are enacting stricter regulations to protect the environment and preserve their natural resources. Those regulations are likely to become more rigorous over time. Companies also may face several layers of national and regional regulations. In Europe, the EU’s Environmental Liability Directive establishes a comprehensive liability standard, but individual EU countries may have stricter regulations. The risks may not be limited to fines and the costs of remediation. In Brazil, employees can risk jail time as well as fines in connection with pollution incidents. The exposures can extend beyond national borders. Even pollution incidents at remote facilities can quickly become global news and tarnish a company’s reputation at home and around the world.

Take These Steps to Evaluate Environmental Risks in Due Diligence

Environmental considerations add another layer of complexity to the due diligence process, particularly when a company is choosing between potential acquisitions in several countries. To ensure that due diligence provides a rigorous evaluation of the environmental risks, companies contemplating international deals should make these crucial steps an integral part of the process:

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