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By: Annemargaret Connolly and Thomas Goslin, Weil Gotshal & Manges LLP
CLIMATE CHANGE IS ARGUABLY THE MOST HIGH-PROFILE and rapidly evolving environmental issue facing the global business community today. Governments of nearly every nation have acknowledged the risks posed by a warming climate and taken some action either to combat those risks, to mitigate the physical effects of climate change, or both. In addition, many corporations have publicly announced efforts to reduce emissions of greenhouse gasses (GHGs) associated with their operations and to otherwise take steps to combat climate change. Companies involved in certain mergers and acquisitions need to be aware of the risks related to climate change that may arise in the transactional context. While not every deal will involve climate change-related diligence, more and more industries are becoming subject to regulations and legal actions aimed at combatting climate change. Others have found that a changing climate may present direct risks to property and supply chains. In addition, many companies have taken to marketing themselves as climate-friendly organizations in an effort to attract businesses and investment, therefore creating a risk that failure to live up to those claims may prove off-putting to customers and investors and possibly result in legal liability. In order to properly assess and value corporate assets in M&A transactions, buyers and sellers of regulated assets need to understand the potential impact of climate change on business and successfully anticipate developments in this rapidly evolving area of law and policy.
There is no set formula for assessing climate risk in the transactional context. Due diligence will need to be tailored to the target and will vary substantially depending on the industry and the location of the target’s operations. That said, risks associated with climate change generally fall into one of four categories: physical risks, customer and investor considerations, compliance risks, and litigation risks, each of which is discussed in more detail below. Given the potential enormity of the issues presented by climate change, and the wideranging efforts taken in response, climate change diligence is no longer limited to deals involving power plants and heavy industry. At a minimum, parties in nearly every M&A transaction should conduct a preliminary assessment to determine whether any or all of these categories of risk are present with respect to a target.
While perhaps the most difficult to assess, climate change’s most obvious risks relate to disruptions to a company’s business or damage to a company’s assets (e.g., facilities, infrastructure, land, or resources) due to physical impacts, such as rising sea levels, more extreme storms, floods, fires, and drought. The 2017 hurricane season and the forest fires that blazed across the western United States serve as a reminder of the devastation that can be caused by natural disasters, the prevalence and intensity of which some are attributing to climate change. Although it can be argued that virtually every sector of the U.S. economy faces risks for the short- and long-term physical effects of climate change, it appears likely that certain sectors will be disproportionately impacted. For example, the agriculture sector faces greater risks associated with water scarcity and droughts, as well as increased exposure to new pests and diseases.
Likewise, due to climate change, the tourism industry is vulnerable to increased weather extremes, rising temperatures, coastal erosion, droughts, and changes in precipitation patterns and snow reliability. The insurance industry, perhaps more than any other, faces increased risks from virtually all physical impacts of climate change. At meetings at the United Nations in 2015, top insurers called on governments to step up global efforts to build resilience against natural disasters exacerbated by climate change and highlighted that average economic losses from disasters in the last decade amounted to around $190 billion annually, while average insured losses were about $60 billion.
Certainly not all of these risks will be present in every M&A deal; however, where they do materialize, they can be material to the transaction. As such, it is key for those involved in M&A deals to understand the risks and think creatively about how they can be assessed and, if possible, managed in the transactional context.
To read the full practice note in Lexis Practice Advisor, follow this link.
Annemargaret Connolly is a partner based in the Washington D.C. office of Weil, Gotshal & Manges LLP. She is the head of Weil’s Environmental practice, a leader of Weil’s Climate Change Practice Group, and a member of the firm’s hydraulic fracturing task force. She advises clients on a wide range of global environmental compliance and liability issues, most notably in the context of mergers & acquisitions, real estate transfers, financing transactions, and infrastructure projects. Thomas Goslin is counsel based in the Washington D.C. office of Weil, Gotshal & Manges LLP. He focuses on a wide range of environmental, energy, and other regulatory concerns in the context of mergers and acquisitions, private equity investments, financing transactions, infrastructure projects and corporate restructurings.
For a general discussion on the environmental risks that arise in corporate transactions and defenses that may be obtained through due diligence, see
> ENVIRONMENTAL DUE DILIGENCE IN M&A TRANSACTIONS
RESEARCH PATH: Corporate and M&A > Specialist Issues in M&A > Environmental > Practice Notes
For an explanation about the most important contractual provisions for allocating environmental liabilities in an M&A agreement, see
> ALLOCATING ENVIRONMENTAL RISKS IN THE TRANSACTION AGREEMENT
For information on environmental concerns that must be considered during and after closing an M&A transaction, see
> CLOSING AND POST-CLOSING ENVIRONMENTAL LAW CONSIDERATIONS
To explore the role that environmental insurance can play in M&A transactions by allowing the parties to transfer environmental risks to an insurer, see
> ENVIRONMENTAL INSURANCE AS M&A RISK MANAGEMENT TOOL
For a review of topics that counsel should consider in a due diligence investigation for an M&A transaction, see
> COMMON TOPICS OF REVIEW IN M&A DUE DILIGENCE
RESEARCH PATH: Corporate and M&A > Due Diligence > Due Diligence in M&A Deals > Practice Notes
For a checklist of considerations for the M&A practitioner when addressing environmental issues in a purchase or merger agreement, see
> ENVIRONMENTAL PROVISIONS IN ACQUISITION AGREEMENTS CHECKLIST
RESEARCH PATH: Corporate and M&A > Specialist Issues in M&A > Environmental > Checklists
For a list of the of the resources available on Lexis Practice Advisor relating to the M&A due diligence process, see
> DUE DILIGENCE RESOURCE KIT: SUMMARY CHART
For an overview of the due diligence process to be undertaken before the potential acquisition of a public company, see
> DUE DILIGENCE CHECKLIST (PUBLIC DEALS)
RESEARCH PATH: Corporate and M&A > Due Diligence > Due Diligence in M&A Deals > Checklists