SESSION #8 DUE DILIGENCE Presented by Monkey Forest Consulting
OBJECTIVE AND OUTLINE The aim of this module is to share our experiences in due diligence and interactively discuss some key considerations. Specifically we will focus on: What Due Diligence is (aims, elements to consider, who calls for it and why) Specializations in Due Diligence Assessing Regulatory Compliance Issues and/or Materiality Issues
WHAT IS DUE DILIGENCE? Ø Assessment Ø Appraisal Ø Review
AIMS OF OVERALL PROJECT APPRAISAL (DD) ü To identify the major risks, liabilities and capital / operational expenditures related to a project. ü For project to demonstrate compliance with legislation, Lender requirements, and project commitments.
EHSS DD HELPS THE EBRD ANSWER Ø Should the project be financed? Ø How should environmental and social risks and impacts be addressed in project planning, implementation and operation? Ø What gaps exist between project design and implementation, practice, policies, etc. and the PRs and how those will be met? (for existing projects, those under construction and/or already permitted) Ø What mitigation measures or Action Plans are required to fill project gaps? Ø What is the scope of the project monitoring required
IN OTHER WORDS Ø Can the project can be implemented in accordance with the EBRD E&S Policy? Ø What are the potential financial, legal, and reputational risks? Ø What are the potential environmental or social opportunities?
REPUTATIONAL, PERMITTING, FINANCIAL, & LEGAL Tailings dam collapse DEATHS Regulatory Delays Gas pipeline explodes RISKS HIGH CLEANUP COSTS Ground water contamin a3on Evic3ons of Roma communi 3es HEADLINE NEWS Community Protests Project Delays
KEY ELEMENTS CONSIDERED Ø EHS risks and impacts Ø Capacity and commitment to implement the project in accordance with the relevant PRs Ø Red flag go/no-go issues Ø Facilities and activities that are associated with the project, but are not financed by the EBRD (to the extent appropriate).
WHO CALLS FOR THE EHS DUE DILIGENCE? Ø Why would these different parties call for an appraisal? Ø Would this affect how you approach the assignment as a consultant? If so, how? Lender Investor / Buyer Project Owner Seller
DIFFERENT REASONS FOR EHS DUE DILIGENCE Ø Financial deals buying, selling, mergers, investing Ø Provides the parties with data relating to major liabilities, capital and operating expenditures, and legislative compliance Ø Cost of additional EHS mitigation measures (and related schedule delays) can be leveraged at the time of financial negotiations Ø Provides data to support investing decisions Ø Reputational and project risk management
EHS: DISTINCT BUT RELATED SPECIALISATIONS Ø Health and Safety ü Occupational ü Community Ø Environment ü Air ü Water ü Waste ü Biodiversity Ø Social ü Engagement/Consultation ü Supply Chain/Contracting ü Labour/Human Resources ü Land access / Resettlement ü Cultural heritage / Indigenous peoples ü Vulnerable groups / Gender
APPRAISAL METHODS Ø Data room (document) reviews Ø Background research (company, country/political, social) Ø Screening and selection of audit sites from a large portfolio Ø Site visits, site walkovers, community visits Ø Interviews with key personnel - corporate, site, regulators Ø Interviews with community members and key external stakeholders Ø Observation of management/staff interaction Ø Observation of company/community interaction Ø Combination of checklists and open questions
REPRESENTATIVE APPRAISAL
HEALTH & SAFETY ASPECTS Regulatory compliance as indicated by such data as: prosecutions, fines, warnings or other communications from regulatory authorities; injury and industrial disease claims (past or present); inspection records (e.g. pressure vessels, cranes, hoists); workplace monitoring test results (e.g. dust, fumes, mists and vapours, noise, lighting, heat, vibration); company records (e.g. accident and incident records, environmental incidents, risk assessments, safety data sheet records, EHS committee meeting minutes); interviews with site operational personnel as to their knowledge of practices and procedures, look at training records etc.; reports by third parties (e.g. accidents, contaminated land investigations, audits by regulatory authorities and consultants).
ENVIRONMENTAL ASPECTS New Projects Exis3ng/Expansion Projects Review available assessment documentation (e.g. ESIA) Environmental baseline conditions and sensitivity Sensitive habitats, species, and biodiversity conditions and impacts Community use of ecosystem services Land conversion impacts and risks Identify existing environmental liabilities and contamination On-site and offsite land use impacts Emissions and effluent monitoring data Regulatory and project standard compliance Review assessment documentation for expansion projects
SOCIAL ASPECTS Review of baseline studies, impact assessments and relevant corporate documentation Review of national legislation Review of social management system and processes (including organization, human and budgetary resourcing, grievance mechanism, stakeholder engagement and social investment) Interviews with corporate officers, project affected people, key stakeholders Observation of conditions on the ground through site visit
TRIANGULATION & SAMPLING: KEY CHALLENGES OF SOCIAL DUE DILIGENCE Document review identifies key issues Who to interview Attend along or with social staff Formal or informal Observe meetings Culture & language Distortions created by the reviewer s presence
HOW DO WE DETERMINE? Ø the quality of the EHS management system Ø the training and awareness of employees Ø the competency of existing management
MATERIALITY A key issue for commercial lenders, but not a focus of EBRD s Environmental and Social Policy. For commercial lenders/acquisitions: EHS DD is conducted to identify and quantify material EHSS liabilities, impaired assets or regulated conduct The materiality threshold, agreed prior to the start of EHS DD, will reflect not only the value of the target but also the amount of risk the client is willing to take (e.g. USD50,000 per liability) Allows to see the wood from the trees and focus on what are the important EHS issues However, even if not an EBRD focus if there is a material issue then there is likely to be a compliance or other issue underlying it which is of interest to EBRD
TAKE AWAY MESSAGES All projects undergo environmental and social appraisal to help the EBRD decide if the project should be financed and, if so, the way in which environmental and social issues should be addressed in its planning, implementation and operation The appraisal will be appropriate to the nature and scale of the project, commensurate with the level of environmental and social impacts and issues, and with due regard to the mitigation hierarchy Depending upon the scope of the appraisal, experts in a variety of fields are required to undertake a proper appraisal. While there are overlaps between these areas of specialty, the focus of the appraiser is different Very complex projects may require several different environmental, health and safety, and social experts
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