When evaluating a business acquisition, the environmental, health, and safety (EHS) risks associated with the deal can often be underestimated. A well-structured EHS due diligence process helps identify and manage these risks, ensuring informed decision-making and long-term business stability.
Why EHS Risk Identification Matters
EHS risks can impact everything from regulatory compliance to financial liabilities and corporate reputation. These risks may arise from:
- Subsurface contamination (e.g., groundwater pollution, underground storage tanks)
- Infrastructure hazards (e.g., asbestos, lead-based paint, PFAS-containing fire suppression systems)
- Operational compliance risks (e.g., air and water discharge permitting and compliance issues, worker safety deficiencies)
- Business-related liabilities (e.g., legacy pollution, unaccounted legal obligations, ESG concerns)
Failing to identify these risks early can result in unexpected financial burdens, operational disruptions, and legal consequences post-acquisition.
Common Pitfalls in EHS Risk Identification
Many organizations rely on standardized Phase I Environmental Site Assessments (ESAs) and basic compliance reviews, assuming these will uncover all potential risks. However, EHS risks are often more complex. Some common oversights include:
- Assuming regulatory compliance equals no risk – A facility may have no current violations but could still pose imminent future risks due to concerns such as high risk infrastructure failure events, pending changes in regulations, or required process changes.
- Underestimating the significance of legacy contamination (both known and unknown) – Previously owned sites or former industrial processes can lead to future claims and remediation obligations.
- Neglecting workforce health and safety – many diligence scopes go far too light on health and safety: employee exposure risks, inadequate PPE policies, or gaps in safety culture can lead to costly workplace injuries or penalties.
- Overlooking ESG and sustainability risks – Investors and regulators are placing increasing importance on sustainability compliance (e.g., EU decarbonization plans) and ESG (Environmental, Social, and Governance) factors, which can affect a company’s valuation and compliance burden.
How to Effectively Identify EHS Risks
A thorough risk identification process requires a multi-faceted approach. Key steps include:
- Review historical site usage – Look beyond current operations to identify past activities that may have left behind contamination.
- Conduct facility and operational assessments – Ensure compliance with air, water, and hazardous waste regulations while evaluating safety practices.
- Analyze business risk factors – Consider potential liabilities associated with former properties, indemnifications, and pending legal issues.
- Evaluate workforce safety programs – Assess the effectiveness of employee training, safety culture, and compliance with OSHA/EHS regulations.
- Understand Corporate Culture and Management Systems – Assess the EHS&S priorities, management systems, and degree of competence throughout the EHS management teams.
- Incorporate ESG risk screening – Understand sustainability commitments, carbon footprint concerns, and reputational risks related to environmental performance.
- Incorporating a deal-specific investment thesis – understanding the feasibility of a client’s plans post-acquisition is absolutely critical to understand how changes in operations or makeup of the portfolio will affect future compliance requirements.
Managing Identified Risks: From Discovery to Decision-Making
Once risks have been identified, the next challenge is determining their materiality and developing a management plan. This involves:
- Prioritizing risks based on severity and likelihood – Not all risks are deal-breakers, but those with high regulatory, financial, or operational impact require immediate attention.
- Assessing cost implications – Quantify potential expenses for corrective actions, compliance costs, and insurance coverage considerations.
- Exploring risk mitigation strategies – Options may include contractual protections (e.g., indemnifications, escrow agreements), operational adjustments, or long-term remediation planning.
- Aligning risk tolerance with business strategy – Buyers must weigh identified risks against the overall investment thesis, considering whether mitigation is feasible within their financial model.
The Bottom Line: Turning EHS Risks into Strategic Advantages
EHS due diligence should not be seen as a box-checking exercise but rather as a proactive risk management strategy that enhances deal confidence and long-term value creation. Organizations that integrate robust risk identification and management into their M&A strategy can avoid costly surprises, improve regulatory compliance, and strengthen their ESG positioning.
By understanding and addressing EHS risks upfront, businesses can make smarter, safer investment decisions that stand the test of time.
