What is Environmental Due Diligence to the Power and Energy Sector?

By Sarah Mogford – Director RSK Environment Ltd

Posted: 4th April 2014 08:56

Recent economic and M&A deal outlook have noted that there is likely to be a continuing positive trend in the number of deals we see in the energy, power and renewable sectors internationally over the coming year.  There are, as one might anticipate, a wide variety of potential environmental issues which may be encountered in in these sectors.  Environmental due diligence (EDD) is now firmly part of the liabilities assessment of transactions because  environmental matters have been proven to have financial, operational and reputational impacts and so investors and vendors have to take a commercially driven approach to EDD. 
 
The scope of EDD is starting to extend beyond the traditional liability assessment of the past to consider the potential for leveraging other environmentally related matters in a transaction.  Environmental matters such as sustainability and management practices might be considered but we also see social performance included particularly in international lending funded by development banks.
 
RSK’s heritage is in supporting the energy, traditional power and more recently renewable sectors globally in delivering world class environmental performance.  We are seen as a safe pair of hands when it comes to providing robust environmental due diligence on either side of a transaction.  Our client list including BP, Shell, European Bank for Reconstruction and Development (EBRD) and the Worldbank only serves to endorse this.
 
RSK has been advising BP on its acquisitions and divestitures internationally for over 10 years.  These projects have included divestiture of solar business in Saudi Arabia and France, Dutch Sector offshore and onshore gas operations, of its UK North Sea operations and onshore operations at Wytch Farm and potential acquisitions in Kuwait.  Environmental, Health, Security and Safety performance are seen as a critical indicator of business health for the BP organisation and this is considered both at divestiture and acquisition. 
 
As a due diligence supplier RSK is required to deliver a scope which covers a broader spectrum of disciplines. Due diligence often includes consideration of the environmental, public health, security and safety performance change management of a business and may also consider construction methods, integrity management, and building structures which are critical in the protection of reliable operations.  It is also important during a divestiture to identify areas of positive environmental and safety practices to demonstrate the good management of assets.
 
International lending organisations such as the EBRD and World Bank have well publicised standards for the completion of due diligence.  Projects applying for finance are screened for environmental and social risk and normally, all corporate loans assessed as medium or high risk during this process will require an environmental and social due diligence report.  The scope will likely consider both environmental and social performance such as air emissions, waste water, hazardous waste generated, land acquisition, labour standards and impacts on cultural heritage.  These clients are keen to understand any measures taken/planned by the borrower, in particular any financed through the loan, to further improve the environmental or social performance of the enterprise, e.g. energy efficiency, cleaner technology, waste reduction, occupational health and safety management, employee welfare and community relations.  These banks are rigorous in the consideration of these matters and compliance with their requirements is usually a contractual requirement of the loan.  RSK has been advising the EBRD on projects in the renewable sector in Eastern Europe for a number of years including wind farms in Bulgaria and biomass plants in Romania.
 
RSK has recently been advising on power and energy projects for corporate and investment clients in countries across Africa.  It is particularly important when investing in emerging markets that there is an approach to acquisition and divestiture which is robust and well designed to protect business interests.  It is essential that the EDD commissioned provides the basis to know exactly what is being bought or sold.  As I have mentioned this scope of work may not just consider environment, but also consider health and safety, social aspects and security depending on the operations and geography under consideration. 
 
Consideration of EDD early in a transaction is important and, as well as applying internal standards, may also require consideration of international lending principles such as the Equator Principles.  The Equator Principles (EPs) is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in projects and is primarily intended to provide a minimum standard for due diligence to support responsible risk decision-making.  They apply globally to all sectors and currently 79 international funding institutions in 35 countries have officially adopted the EPs representing over 70% of international project finance debt in emerging markets. 
 
Consideration of these factors at an early stage in the investment decision making process allows clients to establish not only the immediate liabilities associated with a project, but also the longevity of the investment with regard to the potential for additional financing in the longer term.

In the end corporate and investment clients will often have a very different approach to conducting environmental due diligence, primarily because their long term plans are often quite different.  As an advisor it is important for RSK to understand our client’s objectives and also tolerance to environmental risk.  Determining what sort and size of issues are material in the context of the proposed transaction early on can support the development of a scope of work and reporting format which supports the requirements of the project.

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