Environmental, health, and safety (EHS) due diligence has traditionally been regarded as a risk identification exercise to flag potential liabilities in industrial and manufacturing transactions. However, this conventional approach to EHS often overlooks one critical question: How can EHS opportunities create or unlock value? 

As the economy has slowed in recent years, stalling mergers and acquisitions (M&A) activity and traditional growth methods, dealmakers have had to seek value creation elsewhere. However, they often neglect EHS matters as an opportunity driver due to a lack of perspective. Forward-thinking private  equity firms  and industrial operators are beginning to recognize EHS as not just a box to check during transactions, but also as a strategic lever to improve operations, boost EBITDA, and enhance sustainability leadership.[1]  

EHS issues have been shown to impact valuation, deal certainty, and post-close performance. Financially focused EHS due diligence can protect, optimize, and create value, unlocking hidden potential across the transaction lifecycle and providing a path to sustainable value creation.

From Risk Mitigation to Strategic Value Protection, Optimization, and Creation

Value creation is the goal of every transaction, but it is difficult to identify and realize when tied to non-balance sheet items like sustainability, operational compliance, and health and safety. This is especially true when compared to efforts with a direct financial impact like optimizing the workforce, manufacturing footprint, and back-office operations.  

However, the industrial and manufacturing sectors represent a unique opportunity for EHS-driven value creation precisely because they face significant EHS challenges. These challenges include: 

• Legacy Liabilities: Aging infrastructure presents hidden risks. 
• Contamination Liabilities: Potential environmental risks could affect deal value.
• Workplace Safety: Evaluating whether the company has the right measures in place to protect employees and mitigate risks is critical.
• CapEx and OpEx: EHS-related requirements may impact financial projections.
• Regulatory Complexity: Stringent requirements related to process safety, air, water, and waste compliance are constantly evolving. 
• Reputational Risk: Stakeholder and community expectations for sustainable operations influence reputation. 

Identifying EHS-related liabilities and maintaining regulatory compliance remain essential tasks in the sector, and tying EHS findings to measurable business value improvement can elevate due diligence to a competitive advantage. 

This reoriented strategy assesses EHS risks and opportunities in the context of core financial metrics including EBITDA, purchase price, and operational efficiency. For instance, instead of merely flagging noncompliance issues, this approach quantifies their business value impact while also identifying cost savings, revenue growth opportunities, and operational enhancements.

Pre-Close Value Maintenance

When conducting M&A due diligence, EHS consultants typically take a standardized approach and focus on identifying only environmental risks associated with an acquisition. This often results in long deliverables without financial context or a clear discussion of the issue’s business impact, conservative recommendations that reduce the client’s competitiveness, and post-close uncertainty that could potentially lead to unexpected risk and the degradation of business value. But by evaluating the impacts of EHS risk on business value, EBITDA, and purchase price, buyers can position themselves to not only maintain value but prioritize risk mitigation post-close. 

With more insight into the cost of risk pre-signing, purchasers are better able to mitigate risk pre-close through commercial mechanisms such as indemnities, insurance, escrows, or even purchase price adjustment and develop a plan to address issues post-close through 100-day action plans. 

If a buyer fails to reduce identified EHS risk post-close and during their ownership of a portfolio company, the exit value of the asset will likely be reduced once again. As such, EHS-related value mitigation, optimization, and creation must continue even after deal close.

Post-Close Value Optimization

If viewed through the correct lens, EHS insights gained through the due diligence process can offer opportunities post-close to reduce risk and cost and improve business performance while creating business value . 
Some key areas for post-close improvements include: 

• Resource Efficiency: Reduce energy and water consumption through process upgrades and optimization. 
• Waste Minimization: Implement systems to lower disposal costs while improving sustainability metrics. 
• Safety Enhancements: Reduce injury rates and ensure compliance to improve insurance scores and minimize downtime. 

To realize true value, companies and investors must integrate EHS opportunities into post-close operations. Businesses can ensure long-term cost savings, operational resilience, and increased enterprise value by identifying how EHS initiatives intersect with operations and by making them central to the integration process. This can be done through:

• 100-Day Action Plans: Deploy detailed road maps prioritizing EHS issues for resolution. 
• Hot Topic Lists: Identify emerging regulatory risks and compliance requirements to anticipate challenges. 
• Digital Dashboards: Utilize interactive tools to monitor progress and track operational key performance indicators in real time. 

Failure to fix EHS issues, even perception-based issues such as housekeeping, during the hold period can negatively affect business value and impact purchase price at divestiture, making rectification of identified issues a critical step to protect and improve business value.

Value From EHS: An Underutilized Opportunity

Reframing EHS due diligence as a strategic lever for value creation transforms it from a check-the-box exercise into a means of achieving long-term competitive advantage. By addressing risks proactively, optimizing operations, and tying initiatives back to financial impacts, businesses can not only protect their investments but can also unlock hidden EBITDA potential.

For industrial and manufacturing firms tasked with balancing regulatory complexities, operational challenges, and stakeholder expectations, an advanced EHS strategy offers a clear path to sustainable value creation. 

We help organizations create business value by:

• Providing the financial context needed to understand EHS risk as it relates to asset value pre-close to support purchase price agreements 
• Developing a plan to mitigate identified EHS risks and capitalize on opportunities post-close
• Optimizing OpEx and CapEx during the hold period
• Supplying the right perspective on EHS risk and opportunity at exit  

Why A&M

Alvarez & Marsal’s Environmental, Technical, and Sustainability Group works to quantify the financial impact of Environmental, Health, and Safety matters on business value, helping investors identify acquisition risk, maximize divestiture value, or protect post-acquisition investment value. We provide senior-led teams that deliver concise insights into the cost of risk and the value of opportunity, along with tools and strategies to protect and enhance business value post-close. With access to wider A&M resources, we can help clients identify and address significant issues relevant to their business.

Unlock the full potential of your business. Contact us today to learn how our EHS due diligence solutions can drive sustainable value for your organization.

[1] Milena Prisco, “ESG’s impact on private equity and venture capital transactions,” International Bar Association, April 3, 2023, https://www.ibanet.org/esgs-impact-on-private-equity-and-venture-capital-transactions