KPMG reveals impact of HSSE issues on business
social and environmental (HSSE) issues following an M&A
transaction, according to a recent report. And when an
environmental issue is discovered post-deal, 42 per cent of those
interviewed said that it resulted in higher operating costs, while
21 per cent said that it led to direct financial liabilities.
The extent to which HSSE issues impact corporate deals is highlighted in KPMG's Impact - a survey of Environmental Due Diligence report. This is based on a survey carried out by an independent research company, TNS, of 105 companies from the top 500 quoted companies in Europe.
The report paints a picture whereby deals in many mainstream economic sectors are habitually revalued or restructured on account of HSSE factors, with many companies admitting to walking away from a deal, especially if it is thought that the HSSE impact will damage the acquirer's reputation.
"Corporate Social Responsibility (CSR) is increasingly recognised as key to sustainable commercial success," said Mark Baillache, head of food manufacturing at KPMG.
"Whilst environmental due diligence has been on the radar of deal doers for the past decade, there is variable understanding of the broader CSR issues impact transaction success. This is a significant factor in explaining why so many companies still fall foul of environmental risk."
A large majority of those conducting Environmental Due Diligence (EDD) found that the findings had altered the outcome of transactions. The survey found that seven out of ten companies had pulled out of, renegotiated or restructured a deal as a result of HSSE issues emerging from EDD, and that 67 per cent of Risk Category 1 companies - which includes food producers and processors - say that negative EDD findings had led them to pull out of a deal.
In addition, some 60 per cent of companies were hit by material issue despite conducting EDD.
"Environmental risks can have a huge impact on deals but the approach taken by companies to evaluate HSSE risk during transactions is variable, even within the same sector," said Baillache. "Some have detailed procedures updated annually to reflect the ever changing landscape of HSSE risk, others have no procedures.
"These variations mean the scope of EDD is no longer as uniform as it once was. Now two EDD exercises on the same target could prioritise quite different findings for action and negotiation - and one could miss material issues which the other identifies."
For example, virtually all respondents recognised the potential for reputation and brand damage from HSSE issues, and many companies said they had pulled out of deals when a significant risk of material impact to their reputation was identified. However, only a third of companies specifically scope their EDD to look for HSSE issues that could impact brand and reputation.
"Inadequate social and community standards were the most frequently quoted issues to present material brand and reputation risk on a deal - issues that are not normally included in the scope of many EDD investigations."
The research identified a number of critical success factors. Firstly, companies need to have a commercially-driven scoping and assessment approach, which focuses on understanding the business performance implications of HSSE issues.
In addition, EDD findings need to be integrated into the commercial, legal and financial due diligence assessments. The investigation should look beyond just the environmental agenda and adapt the scope to look at broader corporate social responsibility risks, especially when considering brand/ reputation risk.
And finally, the evolution of EDD cannot be at the expense of investigating the traditional areas of risk, such as contaminated land and regulatory compliance. Robust technical skills, says Baillache, remain critical.
"The companies which are incorporating the 'critical success factors' are the ones suffering the least from post deal problems - and in the long run more likely to be successful in their M&A transactions," he said.
