Why is it important to know the environmental risks of my company?

(And will remain so during and after the COVID-19 crisis)

Article by Joana Capote Soares, Transaction & Finance Services Iberia Director

The market is constantly moving, adapting, and evolving and requires the business community to look for tools to accompany these challenges. These processes, already standardized, have been highly affected in the last two months and have required society adaptation.

The one-million-dollar question now is how to drive transformation in an ‘uncertain global economic environment’. During the latest weeks, the media has been filled with news on COVID-19 progress around the world and how markets are being awfully affected. On March 30, EY published a report that sought to anticipate the question: How to find clarity during the COVID-19 crisis? The same report revealed that more than half (about 56%) of worldwide executives are opting to transform themselves through a transaction and are considering an acquisition over the next 12 months, according to the Capital Trust survey (which considers more than 2,900 board executives from around the world).

As it is well known, the purchase of one company by another (acquisition) or the merger of two companies, resulting in a larger one, are two of the most recurring ways today to gain size and competitiveness. However, at a time where we are all re-evaluating our ways of thinking, acting, working, and even living within 4 walls, it seems important to identify, analyze, and assess the risks to which these processes are subject to.

In the business context, the risk assessment considers the following: operational, financial, legal (including labor aspects), safety and health, and without any doubt, environmental risks.

For the first time in ten years, the top five global risks in terms of probability, as stated in the 2020 Global Risks Report, are all environmental.

Bad practices, or poor environmental compliance, extended over time are inherited or transferred (between owners, executive committees, or management) which may imply in future added costs and legal responsibilities that will have to be assumed.

The environmental risks of a company, if not known (identified), analyzed, and mitigated can give rise to environmental liabilities. Environmental liability means the sum of the uncompensated damage caused by a company to the environment throughout its history, during its business activity, or in the event of an accident (ICONOS 123, Russi & Martinez-Alier, 2002).

Some national, European or global media examples have been widely discussed and even taken to cinemas around the world. For instance, the award-winning film Erin Brockovich (USA, 2002) relates real and true facts related to groundwater reserves contaminated with hexavalent chromium (in a California municipality), for decades, by an energy supply company. Contamination related issues caused numerous cases of public health, biodiversity loss and has ended in a settlement amount of $333 million to be distributed among the litigants.

In conclusion, the non-assessment of risks and the unawareness of potential environmental liabilities in business activities can give rise to significant economic losses, reputational damages (to the management team and its professionals), litigation or ecological crimes allegations and the loss of assurance from third parties or investors when possible transactions or financing processes.

A rational assessment of a company’s environmental liabilities, based on scientific and objective criteria, is essential to protect the entity and its professionals, and to maximize its value in transactional processes. More than ever, transparency and access to information will be the basis for an ecological transition and to a sustainable economy.

At Anthesis Lavola we work every day to support our clients in designing strategies for environmental risk assessments, performing compliance audits, Due Diligence audits, environmental, social, and corporate governance (ESG) strategies, and by defining optimized paths for defined goals management and in the achievement of objectives.