Is the Target Really a Big Environmental Risk? A business-like approach to environmental inquiry can speed up dealmaking.

In the early days of environmental due diligence, many good deals were hampered by the consultant's inability to properly define and communicate the environmental

liabilities. Multi-million-dollar deals were delayed or cancelled due to uncertainty about relatively minor environmental issues. Attimes, inordinate time and money were invested to further quantify environmental liabilities that were negligible when compared with the size of the deal and overall due diligence costs.

Many environmental consultants are trained to resolve technical problems. But equity investors are focused on a targeted return on investment and need sound financial information. What we have learned in years of providing environmental due diligence services is that effective business-oriented environmental due diligence must go beyond technical ability to identify environmental risks. It must provide deal participants with an understanding of these risks in financial terms to support informed business decisions.

Effective environmental due diligence requires bridging this communication gap. The consultant must possess an "investor orientation" that includes a pragmatic assessment of environmental risks, development of plans and budgets to mitigate the identified issues, and the ability to work with the management team in implementing the plans. It is important at the outset of a diligence effort for the consultant to understand stakeholders' risk appetite, materiality threshold for environmental risk, and their overall goals. From that starting point, an effective and pragmatic diligence program can be implemented.

Identifying and quantifying environmental risks

The industry standard for assessing environmental risks is commonly referred to as a Phase I environmental site assessment. This approach has many benefits and may be required by certain lenders, but a Phase I may not always be feasible or the most efficient use of available time and resources. …