Presented by Monkey Forest Consulting

DUE DILIGENCE

SESSION #8

OBJECTIVE AND OUTLINE

•  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

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 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

RISKS  

Tailings  dam  

collapse  

Gas  pipeline  explodes  

Evic3ons  of  Roma  communi

3es  

Community  Protests    

Ground  water  

contamina3on  

Regulatory  Delays  

DEATHS  

HEADLINE  NEWS  

Project  Delays  

HIGH  CLEANUP  COSTS  

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).

Lender   Project  Owner  

Investor  /  Buyer   Seller  

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?

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

1 800 491 0274 info@monkeyforestconsulting.com www.monkeyforestconsulting.com