INSIGHTS: How to Successfully Evaluate Environmental Risks During a Pandemic

The Covid-19 pandemic is challenging private equity firms, strategic buyers, and other investors seeking to assess environmental risks inherent in their deals. Investors typically evaluate potentially costly environmental issues, such as obligations to remediate contamination or address third-party environmental claims.

However, restrictions imposed in response to the pandemic have limited the ability of environmental consultants to inspect target company facilities, hampering a proper examination of these risks.

As governmental authorities warn of a second wave of Covid-19 cases, and public health experts caution about future pandemics, investors should consider lessons learned from deals being done in the context of Covid-19 to evaluate how to effectively assess environmental risks during pandemics. The following guidance can help investors navigate these challenges.

Seek Creative Solutions for Site Visits

“Phase I environmental site assessments” are the cornerstone of environmental due diligence. Phase I assessments require that an environmental engineer visit a target company’s facility and, based in part on visual inspections and discussions with on-site personnel, identify potential environmental concerns, such as contamination resulting from historical operations.

Yet, as learned during Covid-19, an engineer’s site visit may not be feasible during a pandemic due to facility closures, shelter-in-place orders, travel restrictions and social distancing requirements.

How can engineers obtain information needed given pandemic-related restrictions? Some engineers use FaceTime, Skype or other technology to communicate with on-site personnel who conduct the site tour. The engineers ask facility personnel to access areas of the site and report on environmental conditions, such as the presence of stained soil or other evidence of contamination.

Other engineers use drones to inspect sites, though the inability to access restricted airspace and other constraints may limit their effectiveness. Engineers also obtain site information from Google Earth, satellite images and similar technology. Though these approaches are no substitute for an engineer’s site visit, they may provide sufficient information for investors to green-light their investments.

Virtual site visits, drones, and satellite images may yield useful information but may not constitute true Phase I assessments that can help investors avail themselves of certain affirmative defenses to liability under the federal Superfund law. These defenses require prospective purchasers of assets to conduct “all appropriate inquiries” of a property’s environmental conditions and may require an actual site visit by an environmental engineer. Investors should consult with counsel on the availability of these defenses.

Get the Information You Need, No Site Visit Required

By reviewing relevant target company documentation, an investor can learn much about the target’s environmental issues. Pertinent documents should be available even if a facility is closed due to a pandemic. For example:

• Existing Phase I assessments and subsurface investigations can provide valuable information on contamination issues even if the reports were not recently prepared.
• Communications with governmental authorities can shed light on noncompliance issues and environmental claims.
• Compliance audits can provide valuable insight on a company’s environmental management systems and culture of compliance.

Publicly available information can also identify the target’s principal environmental risks. Any available SEC filings should be an investor’s first source of information. In addition, environmental databases, such as those maintained by the EPA, can provide valuable information about facility noncompliance and liability issues. And a search of news stories may reveal high-profile environmental concerns.

Investors and their advisers should also discuss environmental risks with knowledgeable target company personnel. Contamination concerns, noncompliance issues, third-party claims and reputational risk are among the topics that should be examined.

In Uncertain Times, Use the Contract to Protect Interests

Investors unable to conduct site visits prior to signing purchase agreements can seek protection in such agreements. Investors can include contractual provisions allowing for site visits to be conducted between signing and closing, when shelter-in-place orders are lifted or facilities reopen. The parties will need to consider the investors’ recourse if the post-signing inspection identifies potentially significant environmental concerns.

An investor that cannot conduct site visits prior to signing may also propose a seller indemnity for liabilities associated with pre-closing environmental conditions; such indemnity could be subject to a deductible, cap and limited survival period. However, seller indemnities may not be suitable in many deals, particularly if the seller is in financial distress.

To limit its potential exposure to environmental risk, an investor could seek to obtain an environmental insurance policy. However, the investor’s inability to conduct environmental site visits may result in limited insurance coverage. Similarly, a representations and warranties insurance policy may not cover environmental issues where an investor has not adequately evaluated environmental risks.

Looking Ahead

The Covid-19 pandemic continues to pose challenges for investors evaluating environmental risks. Adapting to the rapidly changing circumstances surrounding this pandemic—and any future pandemics—will require creativity and flexibility. These approaches will help investors adjust to what may become our new normal.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Stuart Hammer is the head of Debevoise & Plimpton LLP’s Environmental Practice Group. For more than two decades, he has advised prominent corporations, private equity firms and other entities on environmental matters in mergers and acquisitions, financings, securities offerings and other transactions. Hammer has counseled clients on the environmental risks associated with hundreds of transactions involving facilities in the U.S. and overseas.