EHS Due Diligence in 2022

What is EHS Due Diligence?

EHS due diligence, especially during the pandemic, involves utilizing technologies like AI and virtual site visits to efficiently identify and understand risks earlier in the deal process. This process ensures that time and resources are focused on key risk areas and helps companies consider ESG factors in their investments.

Like in everyday life, the COVID-19 global pandemic has impacted the global financial markets, including mergers and acquisitions and TRC’s Transaction Advisory Service (TAS) is no exception. Here are some of observations and trends in the EHS due diligence market since the beginning of the pandemic.

Use of Technology/Digitalization and Artificial Intelligence (AI)

AI has been around for a decade or so, however, recently we have seen that M&A transaction platforms and data room providers (such as Intralinks, Datasite, etc.) are now routinely using this technology to improve deal team collaboration, process efficiencies, content control and deal diagnostics. Increasingly, this technology is being used for both sell-side deal flow and buy-side diligence, which can increase the efficiency and therefore the speed of the data room review process. As a result, clients are able to understand the EHS risks much earlier in the deal process, ensuring that time and resources are focused on the key risk areas.

The pandemic has forced EHS due diligence providers to think differently. For example, virtual site visits are increasingly becoming more common. Whether it be a virtual real-time Zoom visit, or a having local staff upload a video to a data room, this technology is here to stay. Though virtual won’t replace the value of in person site visits, they can be beneficial when providing information to a wide audience (i.e. multiple advisors, or even multiple bidders, concurrently), minimizing travel and controlling safety risks.

Attention to Environmental, Social and Governance (ESG)

TRC continues to see more and more interest in ESG from our clients. In our experience, it’s being driven by a number of key stakeholders, including the limited partners, regulators and operational management teams. Given the pandemic, we have seen an inflection point in the demand for companies to consider ESG in their investments. Our team has developed an ESG Risk Screen tool that compares a company’s perceived or inherent ESG risk, based on factors including its sector and geographical footprint, with its actual or residual risk, based on the specifics of its operations, supply chain, customer base and risk controls. This information is used during due diligence to identify ESG risks and opportunities.

We are also seeing an increased demand in driving ESG management, monitoring and improvement through system frameworks, standards and programmatic development as part of our advisory services and post-transaction support. TRC has a developed several digital solutions to support data collection, management and reporting for both corporate and private equity clients. We have a deep bench of ESG experts who can effectively execute risk management and operational improvement projects, including greenhouse gas quantification and reporting, climate risk assessment, energy reduction, on-site and off-site renewables projects, waste minimization and water efficiency.

COVID-19 Independent Assessments for Certain Market Sectors

When working on transactions our team is frequently being asked to take a hard look at COVID-19 procedures, protocols and metrics as private equity (PE) strives to “bake in” potential down-size risk into their cost models as they negotiate transactions over the next 3 to 6 months. This has resulted in the inclusion of TRC health and safety experts in nearly all our transactions and the development of key questions and topics to discuss with target company representatives. The value that TRC brings to investment, HR and operation leads managing deals for PE firms is our practical approach to assessing and communicating COVID-19 risks, and providing reasonable cost scenarios for capital and procedural, protection and monitoring improvements. Private equity clients value this insight because it helps them to understand from an investment perspective how much impact COVID-19 could potentially have on the business until vaccines are readily available and readily accessible, which some experts estimate will not be until the 3Q-2021.

Focus on “Reshoring”

As the pandemic is forcing companies to take a hard look at their supply chains and time of delivery to their clients, many are looking at ways to be in more control and independent of third-party suppliers, which often are overseas. TRC is seeing this shift in “reshoring” as more and more companies are developing warehouse and distribution facilities closer to their end markets. Over the coming years we also expect this to be reflected in increased manufacturing, particularly of crucial supplies such as pharmaceuticals, key engineered products and food and drink, in the United States and western Europe. Our team is well suited to support this recent shift from due diligence services as properties are being sold and acquired to a host of other services along the value chain of this recent movement.

Like other transaction professionals, our team has seen a rapid increase in EHS due diligence since August 2020, and it looks like 2021 will continue to be very busy for the M&A market.