Environmental due diligence: what it is and why it’s so important
Environmental risks can hinder and complicate property transactions. Identifying these risks early on can prevent unexpected costs, delays, and liabilities.
Environmental due diligence is all about helping clients understand and mitigate these environmental, regulatory, and financial risks. Rosie Jones, Consultant, answers key questions on environmental due diligence and explains why it’s a fundamental and valuable component of risk mitigation during property transactions.
What is environmental due diligence?
Environmental due diligence works to provide environmental liability advice to clients involved in property and corporate transactions. It’s also the formal process that assesses sites for the actual or potential presence of environmental risk, such as contaminated land. Environmental due diligence often broadens in its scope to include issues such as climate change, sustainability, flood risk, and Environmental, Social and Governance (ESG).
What are environmental liabilities?
Environmental liability is the risk of financial or legislative penalties presented by a particular set of environmental circumstances, often regarded as either operational or residual. Operational relates to business performance and compliance with environmental standards, such as whether permits are in place. Residual relates to liabilities associated with land or property, including ground or groundwater contamination, deleterious materials, or flooding.
Why is environmental due diligence important?
During the transaction process, a number of environmental risks may arise. These can present themselves as direct, indirect, or reputational.
- Direct - relates to regulatory action and/or remediation costs
- Indirect - relates to the impact to property value, saleability, rental income, and revenue costs
- Reputational - relates to stakeholder perception of the management of environmental issues extending to lenders, suppliers, and purchasers.
Carrying out due diligence works would identify these risks early on during the process and could potentially save clients from buying a site where they could take on a potential environmental liability. On the other hand, it could help clients resolve ongoing environmental issues which could enable them to sell their site in the future.
What environmental legislation should I be aware of?
Numerous forms of environmental legislation exist, such as:
- The Environment Act 2021
- The Hazardous Waste Regulations 2005
- The Clean Air Act 1993
- The Environmental Protection Act 1990 - Part 2A in particular
- Environmental Damage Regulations 2015
- The Water Resources Act 1991
The Environmental Protection Act 1990 (Part 2A) provides a means of dealing with unacceptable risks posed by land contamination to human health and the environment based on its current use as a result of historical contamination. Local Authorities are required to have a Strategic Inspection in place to deal with such land, considering the characteristics of its area and prioritising sites it considers pose the greatest risk. Sites may be determined under this legislation if found to be posing an unacceptable risk. We help our clients consult with Local Authorities regarding a site’s status under this legislation.
What are some common environmental risks?
From undertaking site inspections over the years, common sources that represent a potential environmental risk have included:
- Above Ground Tanks (ASTs) and Underground Storage Tanks (USTs) storing fuels, oils and chemicals
- Diesel powered generators
- Interceptors
- Japanese knotweed
- On-site sewage treatment plants
- Waste storage and management issues
- Hazardous waste
These have the potential to devalue a property if a contamination incident were to occur. Helping clients understand the risk and how to apply best practice to avoid a potential contamination risk is one of the many services we provide for our clients.
Environmental due diligence services
Specialising in supporting highly regulated sectors and industries, our environmental due diligence team helps clients understand and mitigate environmental, regulatory, and financial risks.
Combining decades of multidisciplinary expertise to assemble a due diligence team that suits your specific asset class and transaction objectives, we can help you develop a comprehensive risk matrix and management plan. Whether you are looking to confirm environmental, safety and yield assumptions for an energy asset acquisition, demonstrate your ESG credentials during sale, or understand the costs associated with regulatory changes for your property portfolio, we provide practical recommendations for de-risking transactions, identifying opportunities and maximising returns.
If you would like to discuss our due diligence services further, please get in touch.
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