I have worked extensively and deeply on projects as they progress through the project lifecycle and enter into the stage known as Financial Close of FC. This stage is typified by getting one’s house in order in terms of contracts, models, the project itself and also the required due diligence (DD) to either divest or finance via non-recourse project finance.
Typically, a seller and a funder will instruct lawyers to undertake a legal due diligence. They will also instruct suitable consultants to undertake a technical due diligence. I believe there is an oft overlooked gap here. There is rarely an environmental due diligence exercise undertaken.
Environmental due diligence falls between the two standard exercises often conducted by engineers and lawyers. The purpose of the environmental due diligence is to identify and examine the broad range of environmental factors which can adversely impact on the project and also give rise to unreasonable risks.
Generally, the purpose of due diligence is to:
• Confirm the accuracy of data provided and to then assess the credibility of the specialists used in the work;
• Validate the processes, methodologies, tools and techniques used to evaluate the environmental feasibility and value creation;
• Test and validate the baseline scenarios;
• Substantiate that a thorough and complete environmental risk identification and mitigation was performed which is fair, reasonable, complete and recommends best practicable solutions leaving funders in the best place to manage residual risks;
• Confirm that all existing contracts adequately address areas of risk and are enforceable in their local context;
• Validate that environmental elements which input to the financial model are well structured and that their inputs and output tests are fair and representative;
The above hides a multitude of areas work looking at in more detail. I’m going to do my best to avoid miring you in Alphabet Soup!
There are a number of environmental issues which an affect a site or project. Some of these are:
• Soil contamination;
• Groundwater contamination;
• Hazardous building materials: –Asbestos –Lead Paint –PCBs;
• Underground Storage Tanks (USTs);
• Building conditions: –Mould –Indoor Air Quality (IAQ)/Vapor intrusion;
• Permit Compliance;
• Regulatory Compliance;
• Impacts on Natural Resources;
• Planning Consent Compliance;
• Discharge of all planning conditions;
• Social impacts; and
• Health impacts;
So, we can see that major environmental pollution problems and the health, economic and social effects associated with large industrial and infrastructure projects have increased public awareness that measures should be in place to ensure that they do not repeat themselves in new projects. Hence, environmental due diligence is performed.
To ensure that this happens, environmental due diligence must:
• Verify that all permits have issued;
• Ensure all owners, sponsors and equity providers understand their environmental risks, obligations and responsibilities;
• Confirm that the site has ben visited and that the required reports, outputs and findings conform to those expected form the data gathered on the site visit;
• Ascertain access, road access, utility, water and power connection are as per the project description;
• Validate, as far as is reasonable, the findings of the experts who undertook the original site work;
• Substantiate that the project is in accordance with the Equator Principles;
• Ensure all licenses are for the relevant area, the relevant works and the relevant location;
• Establish that assumptions made in the revenue model and financial model are fair, reasonable and do not have any adverse risk factors not known about by the funder;
• Demonstrate a baseline of plausible scenarios which care then shown to be mitigated by best practice; and
• Establish reasonable value creation in the project form an environmental perspective.
The report itself is often like a technical or legal due diligence with a structure which is well understood and rehearsed. From this, risks, their impact and their mitigation can be seen, tracked and managed to give a project which is economically sound, fundable and also socially and environmentally credible.