Published: 02-Apr- 2007 | Product Category: Environmental
| Comments: 0
Environmental Risk Review
Prior to putting any type of product or service in place, environmental practice members conduct a thorough risk review of clients’ business operations (including transportation and disposal activities as well as financial assurance requirements), liabilities assumed or discharged through transactions, liabilities imposed via federal and state regulations and liabilities that are part of known cleanup activities. This risk review typically results in a discussion of the best option to minimize the environmental, financial and reputational outcomes of potential environmental exposures that we have found typically occur on a sector by sector basis.
Today's corporations face significant opportunities and challenges in managing idle or surplus properties. They must navigate issues that range from changing regulations and lack of market knowledge, to financial uncertainty and community concerns, in order to realize the full value of their assets. To meet these challenges and facilitate deal flow, successful divestiture strategies often call for well defined goals, effective work processes, a unified analysis perspective, shared property information, and a plan that facilitates execution.
Marsh, the world's leading risk and insurance services firm, and RTI International, a leading research institute, have established a new service to help public and private corporations better manage their real estate portfolios, optimize holdings, and develop divestiture strategies for surplus properties, including environmentally stressed properties or "Brownfield's."
Mergers and Acquisitions
Environmental risks in corporate mergers and acquisitions (M & A) typically include statutory clean-up and third-party liabilities stemming from a target company's current or historic ownership of contaminated sites, and its past or ongoing operations. But these concerns are only the beginning of the impact that environmental liabilities can have on transactions. Environmental uncertainties can lead to stalled negotiations, reductions in forecasting returns from unseen environmental liabilities, delayed distribution of transaction proceeds and — in the worst cases — damage to a company's reputation.
Deal facilitation, long-term financial protection and cleaner exit strategies are just some of the reasons why clients seek the expertise of the Marsh Environmental Practice when entering into mergers and acquisitions.
At Marsh, we have specialized claims personnel that are experienced in helping our clients identify, analyze and reduce their exposures, while they help them analyze their cost of risk. What this means is that our clients receive the special environmental expertise needed to resolve environmental claims.
The Marsh Environmental Practice and Construction practices work together to address the various environmental risks that our construction clients may encounter such as:
- A contractor working on what he thinks is a clean piece of property suddenly encounters unwanted pollutants in buried drums.
- An owner, contractor and subcontractor are fined thousands of dollars for surface water discharges to protected wetlands during construction activities.
Construction projects can be seriously derailed as a result of such environmental issues — not only from spills as a result of substances brought onto a worksite — but also from demolition activities, unearthing known contaminants or exacerbating an already "known" pollution condition.
In addition, access to capital and the ever increasing cost of borrowing has always been a concern for large construction project owners and managers. Environmental insurance products have been designed to alleviate the environmental aspects of these concerns and may, in some instances, offer a means to obtaining preferential credit rates.
Environmental risks are an important factor to manage for:
- companies entering bankruptcy and contemplating emergence;
- companies seeking to avoid bankruptcy;
- business partners who may have contractual counterparty risk from past merger & acquisition transactions; and
- lending and joint ventures with companies in bankruptcy.
It is possible to successfully navigate through bankruptcy to minimize financial impacts, and to be optimally positioned for emergence. There are three elements that must be considered as part of any successful process and consideration around bankruptcy and environmental liabilities:
- understanding risks and exposures;
- alternatives for environmental liability disposition; and
- solutions for managing environmental liabilities.
Bankruptcy creates significant uncertainty and financial risk for companies and business partners, particularly involving environmental obligations. Marsh can apply its expertise to help conduct a thorough analysis of risk and thoughtful use of environmental risk management vehicles that can help enable positive outcomes around cash generation and minimize risk to third parties.
Reuse and redevelopment of the nation's abandoned, idled, or underutilized industrial and commercial sites, also known as Brownfields, is both a challenge and an opportunity. Putting these sites back into productive use can serve as a catalyst for local economic revitalization. Complex and potentially catastrophic legal, financial and environmental risks and uncertainty are some of the primary obstacles.
In addition, access to capital and the ever increasing cost of borrowing has always been a concern for large Brownfields projects. Environmental products have been designed to alleviate the environmental aspects of these concerns and may, in some instances, offer a means to obtaining preferential credit rates. Marsh has helped clients navigate through the myriad of environmental insurance products that are available for Brownfields projects.
For business partners, reliance on contractual mechanisms such as indemnifications or prior insurance programs may not be adequate in the current environment. Environmental insurance can often be used as a "back-stop" to indemnification agreements and ensure that, in the event indemnitors cannot fulfill their contractual obligations, there is independent protection to respond to unforeseen pollution events. Marsh has helped clients reduce their exposures under contractual obligations through the use of environmental insurance products.
Remediation — Site Cleanup
Cost overruns associated with environmental cleanups can have a serious negative financial impact on a company's earnings or the financial returns of real estate development projects. Uncertainties surrounding the ultimate cost of a cleanup can threaten mergers & acquisitions, disrupt divestitures of surplus properties, and impede Brownfield redevelopment. In these business contexts, bringing financial certainty to the cost of cleaning up an environmentally impaired property is often the key to success.
Whether the cleanup activities involve one property or a portfolio of properties, the Marsh Global Environmental Practice has the experience and tools to help ensure that the liabilities associated with site cleanups are addressed in an efficient, comprehensive, and cost-effective manner.
Legacy environmental liabilities can be both known and unknown. Known legacy liabilities can tie up capital that could be used for more productive organizational issues such as facility upgrades, modifications, or acquisitions.
Unknown liabilities, including those that entities have inherited via contractual indemnities, can impact the financial stability of companies. Although the first environmental regulations were developed almost 30 years ago and have been enforced since that time, companies are to this day \still encountering unknown environmental legacy liabilities that often leave them blindsided to the consequences of those discoveries.
Environmental legacy liabilities can bring a significant amount of financial risk to any company because they can be so difficult to predict and quantify. Marsh's Environmental practice has helped thousands of companies identify and manage their environmental legacy liabilities.
Environmental regulations, such as the Resource Conservation and Recovery Act (RCRA) require that companies have financial assurance mechanisms in place to address unknown pollution events and closure of facilities if they are engaged in certain site activities. Examples of these activities include owning or operating certain types of storage tanks or owning and operating waste facilities such as landfills, incinerators or transfer stations (for example).
RCRA allows these companies to use various financial assurance methods to exhibit financial assurance. Environmental insurance is one of the few methods which does not tie up capital costs, allowing these companies to utilize the money for other aspects of their business.
Investors around the world are linking company performance on environmental, social, and corporate government (or ESG) factors to investment performance. Tools and analyses are being applied to determine, from an investor’s perspective, which companies are best poised to deal with emerging environmental risks such as climate change, nanotechnology, unknown "green" building construction risks, coal ash, multiple chemical exposures to chemicals in consumer products, to name a few. The results of these analyses are being deployed as a means to determine which areas to apply resources and investments.
Members of the Marsh Global Environmental Practice actively monitor emerging environmental risk issues and bring in elements of those exposures as they put together environmental programs for their clients.
In order for carbon sequestration to attract the capital investment needed to complete projects in the private sector, the long-term liabilities associated with sequestration projects will need to be allocated. Regulatory agencies are in the process of developing these liability regimes. Although these issues are still being resolved, the environmental risks associated with these projects have the potential to be significant and very costly. Potential operators and investors in these projects have considered risk transfer alternatives to buffer themselves in the event of a pollution issue (i.e. gradual or sudden releases associated with CCS projects).
The environmental insurance market has already responded to the various risks associated with these facilities. Specialty environmental insurance has successfully been underwritten to insure the gradual pollution risks associated with pilot scale projects. In addition, a special policy form is available in the market for carbon sequestration projects that combines both gradual and sudden pollution coverage, control of wells and long-term financial assurance (for a period no greater than 10 years).
Environmental risk is a complex issue and even more so when contemplated in a global setting. Some of the primary drivers influencing environmental risk management issues abroad include regulatory liability, reputational risk, access to capital and supply chain risks. The following are recent developments in the global environmental insurance arena:
- Europe: Environmental regulations developed by the European Union (EU) for certain countries require that companies purchase environmental insurance or provide other means of financial security a requirement that may spread to all EU countries in the future.
- Asia-Pacific: Change in environmental regulatory legislation is very pronounced in China, where thousands of pieces of environmental, health and safety legislation have been created. Recognizing that enforcement on its own is not enough, Chinese environmental authorities have teamed up with their insurance, securities and trade & commerce counterparts to implement a series of economic measures designed to improve environmental protection. These measures include the development of "Green" insurance, which certain industries will be required by law to purchase.
- South America: Right on the heels of the EU Directives and insurance requirements coming out of the Asia-Pacific regions, South American countries are beginning to institute stricter environmental regulations. In fact, Argentina recently announced plans to require that companies involved in pollution-prone activities procure environmental restoration coverage.
Environmental Liability Directive (ELD)
Remedial measures required under the ELD are broader than those required under previous EU environmental legislation, potentially requiring the creation of new habitats to compensate for environmental damage caused. This applies not only to pollution incidents but also where damage occurs by other means, such as the physical disturbance or destruction of habitats.
The EU Environmental practice recently developed a fact sheet that provides a summary of the ELD, as well as variations to the legislation in each EU country. The document also highlights which countries require operators to hold insurance or other means of financial security in respect of liabilities under the ELD. Insurance coverage for such costs is typically not available under standard general liability insurance policies, however, over can be obtained from the specialist environmental insurance markets.
Rate this Article
Leave a Comment