ehs due diligence assessments adding value, managing .adding value, managing risk ehs due diligence

Delivering sustainable solutions in a more competitive world

EHS Due Diligence AssessmentsAdding Value, Managing RiskEHS Due Diligence AssessmentsAdding Value, Managing Risk

Taipei, TaiwanAgora Hotel

Taipei, TaiwanAgora Hotel

Mark ErringtonMark ErringtonAsia Pacific Practice Leader M&A Due Asia Pacific Practice Leader M&A Due Diligence Advisory Services ERM GroupDiligence Advisory Services ERM Group20 September 200620 September 2006

2006 Business Integration Forum 2

International PerspectiveERM Forums - October 2005 - June 2006

October 2005Seville, SpainOctober 2005Seville, SpainApril 2006

Scottsdale, Arizona

April 2006Scottsdale,

ArizonaJune 2006Shanghai,

China

June 2006Shanghai,

China

2006 Business Integration Forum 3

Context: Similar to peers from AP, different to peers in North America/Europe Business climate a year from now

-40%

-20%

0%

20%

40%

60%

80%

100%

CompanySales

YourBudget

YourStaffing

CompanySales

YourBudget

YourStaffing

Column 5up a lotup a littledown a lotdown a little

Beijing 2005 Phoenix 2006

2006 Business Integration Forum 4

Significant challenges and changes in your company in the next three years

1. Increased pressure to apply common EHS standards to all operations globally

2. Increased pressure on companies to be held responsible for supplier behavior

3. Regulatory change and inconsistent enforcement of regulations in Asia4. Increases risks associated with global low-cost strategy5. Dealing with plant safety issues6. Being responsible for more and working with less resources

2006 Business Integration Forum 5

National GovtRegulators

Purchasing

Localcommunities

Local GovtRegulators

Board/CEO

Suppliersin Asia

Joint venturepartners

Linemanagement

Humanresources

Customersin Asia

Customersoutside Asia

NGOs

Other Local Govt Officials

Finance

GlobalEHS

Legal

Commercial Focus

Civil Society Focus Government Focus

Corporate/Financial Focus

EHS Team

2006 Business Integration Forum 6

In summary

Many issues to manage

Budgets are getting cut back, staffing is decreasing

Constantly evolving EHS regulatory environment

High public profile of EHS issues Inconvenient Truth

Litigious culture EHS is class action territory - Erin Brockovitch

This is very risky stuff

EDD sit along side all other types of Risk Management Due Diligence you would do on a transaction (Financial, Commercial, IP, IT, Human Capital)

EHS liabilities touch all parts of a company

2006 Business Integration Forum 7

The Business Case for EHS Due Diligence

2006 Business Integration Forum 8

The Business Case for EHS Due Diligence

Just Closing the Deal Doesnt guarantee success

60% of merged companies fail to meet expectations and provide lower than average shareholder returns

Executives are left figuring out how to mitigate the liabilities

2006 Business Integration Forum 9

The Business Case for EHS Due Diligence

ProfileHigh profile (CEO to the supermarket)Corporate EHS functions under pressurePublic relations NGOs, media, even Hollywood, class actions

Financial Risk ManagementProper valuation of the assetAdequate reserves for contingent liabilities (FRS12, Fin 47)Appropriate representations, warranties, indemnitiesEstablish baseline conditions at entrance to ownership/leaseSatisfy a lending syndicates risk thresholdsManaging post merger costs

Business ContinuityCompliance assurance Fines, prosecutions, legal actionsProduction assurance Shut down costsAchieving the optimum value from indemnities

Exit Strategies Vendor DDRealising value from redundant real estate assetsCreating a low liability business:

to maximise value of non-core asset sales and ensure a clean exit or for further capital raising

2006 Business Integration Forum 10

Deal Stage OngoingOperations

Post M&AIntegration

Activity

Integrating EH&S Issues into Business Planning and Performance

Pre-M&APlanning

Benefit

M&AAssessments

Risk Management

Operating Efficiency

Risk Management

Operating Efficiency

Further improvements in efficiency & management of long term

risk

Using M&A assessment to plan, prioritise, integrate EHS systems and develop strategy

Using M&A assessment to plan, prioritise, integrate EHS systems and develop strategy

Understanding and quantifying EHS risks during due diligence

Understanding and quantifying EHS risks during due diligence

Identifying internal and external stakeholder needs, linking EHS & business goals

Identifying internal and external stakeholder needs, linking EHS & business goals

Ensuring compliance

Managing riskContinuous

improvement

Focused transaction

management system

Early warning alarm and

negotiating tool

2006 Business Integration Forum 11

Risks you need to look for

2006 Business Integration Forum 12

Traditional EHS Risk Issues Site History contaminating industries, previous reports EHS prosecutions - accidents, pollution incidents, regulator interviews Site Setting Neighbours, sensitivity and vulnerability (geology and hydrogeology) Housekeeping Processes and Material Use Chemical Use and Storage Aboveground storage tanks and belowground storage tanks Contaminated Land soil and groundwater, spills Solid and Liquid Waste - duty of care Waste Water WWTP discharges, storm water run off, septic tanks, dry drains Air quality - dust, noise Utilities - Water supply wells Hazardous materials - asbestos-containing materials (ACM), PCBs, lead, radon, radiation, sources Biological contaminants mould, e coli, cryptosporidium, anthrax Healthy and Safety - injury and illness logs, worker exposure Legal third party claims, worker claims, property blight

2006 Business Integration Forum 13

Non-Traditional Financial Risk Issues

EnvironmentalGreenhouse gas emissionsCarbon tradingWEEEROHSDeferred maintenance & trainingCompliance

Social/EthicalEnvironmental justiceWorking conditionsDisplacementChild laborWorker health & safetyEquitable wages

2006 Business Integration Forum 14

Some Sources, Pathways, Receptors

SurfaceSource

Leaching/Percolation

Groundwater Transport GroundwaterMigration

Inhalation ofIndoor Vapors

Ingestion,Absorption, &InhalationfromSurficial Soils

Inhalation ofAmbientVapors &

Particulates

SubsurfaceSource Vapor Intrusion

IngestionofPotable Water

FishLarvae Shellfish

Fish

Buried waste

2006 Business Integration Forum 15

How to determine the problems

2006 Business Integration Forum 16

EHS Assessment - Interactions

EHS Due EHS Due DiligenceDiligence

FinancialFinancial Contingent liabilitiesContingent liabilities Valuation inputsValuation inputs Cash flow sensitivity analysisCash flow sensitivity analysis Indemnification valuesIndemnification values Performance assurancePerformance assurance EH&SEH&S

Facility statusFacility status Liability validationLiability validation Forecasted budgetsForecasted budgets BenchmarkingBenchmarking Voluntary corporate Voluntary corporate

commitmentcommitment Program risksProgram risks Corrective actions plansCorrective actions plans Performance planningPerformance planning--actionsactions EH&S IntegrationEH&S Integration

LegalLegal Historical indemnityHistorical indemnity Deal indemnity termsDeal indemnity terms Corporate risk Corporate risk Insurance recoveryInsurance recovery

Executive Management/BoardExecutive Management/Board Strategic compatibilityStrategic compatibility Strategic risksStrategic risks Catastrophic riskCatastrophic risk

Plant ManagementPlant Management Operational constraintsOperational constraints Corrective actionsCorrective actions Performance assurancePerformance assurance

2006 Business Integration Forum 17

Levels of Assessment (Phased)

IntelligenceIntelligenceGatheringGathering

DatabaseDatabase Environmental Environmental

ReportsReports Aerial PhotosAerial Photos Agency File Agency File

ReviewsReviews Covert DriveCovert Drive--bysbys

and Inspectionand Inspection

Due DiligenceDue DiligenceScreeningScreening

Focused Focused questionnairesquestionnaires

Telephone Telephone InterviewsInterviews

File Room File Room ReviewsReviews

FullFullDue DiligenceDue Diligence

Site VisitsSite Visits ComplianceCompliance Operational Operational

CapacityCapacity

Level of EffortLevel of Effort

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2006 Business Integration Forum 18

Get you advisors involved early

Before: We are being called upon long before due diligence begins:Strategy for Vendor Due DiligenceInitial stages of planning acquisition approach (esp VCs)

During: We sit along side the other key advisors at the centre of dealsData room review & costing of potential liabilities at 1st and 2nd roundInitial Site Visits (esp for Financial sector)Full Phase 1 covering E, OHS, Process Safety, Business Integratio