21 st Century Climate Change Due Diligence Focus on Operational Risk, Not Just Legacy Liabilities
Client Question BCLP’s long-standing client ExpandCo wants to acquire BullsEye Industries (“BEI”), a highly diversified company engaged in the production and sale of cement, lumber and other heavy construction materials, as well as the sale of consumer food products such as coffee and chocolate. It also provides palm oil to other food industry companies for use in a wide range of consumer food products. BEI’s heavy materials production facilities are located in coastal areas of the U.S. (including New York) and forested areas in the Pacific Northwest; it derives the bulk of its consumer product raw materials from India.
Client Question (Continued) ExpandCo is proud of its environmental record, and is excited to acquire BEI, which markets itself as the “Greenest Company on Earth” in its annual sustainability reports and does have a track record of waste minimization and energy efficiency: in its due diligence effort so far Expand Co. could find no allegation of any material failure to comply with environmental laws, or any litigation relating to BEI’s operations or the operations of its supply chain. ExpandCo’s consultant has completed an environmental assessment of BEI’s facilities, and has found no serious problems with respect to hazardous substances. The General Counsel of ExpandCo has asked for our advice on whether we see any need for further environmental due diligence and, if so, how we would suggest it go about it.
Legacy Issue Focus Inadequate • 20 th Century environmental due diligence looks backward • Significant climate change risks can only be identified by looking forward • Just because due diligence shows no legacy environmental issues does not mean that BullsEye Industries (BEI) has no enterprise risk related to the environment • Climate risks could be looming
Why ExpandCo’s GC Should Care • Business Judgment Rule • Climate Change = Elephant in the Room • Reputational risk
Business Judgment Rule • Presumption – management decisions are well informed, made in good faith, and are for benefit of the corporation • Rebuttable – if directors or officers are grossly negligent by ignoring readily available information in their decision making
The Climate is Changing Changes in Northern Hemisphere Temperature We’re in new territory • Unprecedented changes in climate • Recent increases in extreme and damaging events are projected to continue
Acute Physical Risks • Coastal storms and storm surges • Inland flooding • Wildfires • Droughts • Disaster-related disruption
Risk Mitigation Assess risks using available tools ; inquire into BEI’s planning: • Has it hardened facilities? • Procured insurance? • Engaged in disaster planning?
Chronic Physical Risks Supply Chain • Coffee, tea, cocoa, etc. • Water • Impacts to labor force • Socioeconomic disruption
Chronic Physical Risks - Mitigation • Supply chain diversification • Allocation of contract risk and recall insurance
Climate Related Opportunities • Resource Efficiency – traditional sustainability goals: reduced energy, raw material and water consumption • Energy Source – many companies setting renewable power targets • Products and Services – shifting consumer preferences, transparency, accuracy, diversification • Markets – increased globalization, underwriting green bonds and infrastructure • Compliance – is that sufficient? What about the perception of being “green” by other entities? • Resilience
Litigation/Shareholder Risk • Shareholder activism: • Cement industry issues • Palm Oil issues • Greenwashing (“Greenest company on earth” and palm oil) • Risk mitigation: review sustainability reports, SEC filings, shareholder resolutions, etc.
Regulatory Risks • Current and future regulation of GHGs • 80 X 50 • Case in point: New York • Risk Mitigation: Assess GHG emissions and review current and impending regulations in operating jurisdictions
Climate Assessment Presented by Ramboll
Climate Change Is a Serious But Manageable Risk • Climate change risks are quantifiable • Uncertainty can be managed with a scenario analysis approach • Identify opportunities to add value during hold period • A 2017 report by the National Institute of Building Sciences estimated that, on average, every $1 invested in mitigation prevents $6 in damage
BullsEye US Portfolio Summary BullsEye US Asset Climate Change Hazard • BullsEye is exposed to near-term hazards Summary from • Coastal flooding at East Coast and Gulf production sites (chronic and acute) • Hurricane impacts • Wildfire impacts to Pacific Northwest logging operations
Sea Level Rise at BullsEye New York Area Facility What water level causes flooding? How high will sea levels rise and when? Current Coastline Sea Level Rise: 2 Feet Sea Level Rise: 4 Feet NOAA Flood Mapping and Sea Level Rise Projections: Sweet et al. (2017)
BullsEye New York Facility Assessment Summary Climate Hazard Timing Summary • Red: present-day hazards likely to increase in severity with climate change • Adaptation measures should be evaluated and developed as needed • Orange: adaptation measures may be needed in the near future • Yellow: hazards should be monitored but may not require action now • Green: hazards projected to occur after planning horizon or not for this site
Current Wildfire Risk for BullsEye’s Logging Operations Regional Wildfire Burn Perimeters from the Present-Day Wildfire Hazard Potential for Previous 20 Years Bullseye’s Northern California Site • Site has moderate present-day site-specific wildfire hazard • Past wildfire burn zones in the region indicate regional hazard
Future Wildfire Risk for BullsEye’s Logging Operations • Rising temperatures increase Projected Change in “Very High Fire Danger ” wildfire risk across the Pacific Days by 2050: Business-As-Usual Scenario Northwest BullsEye Sites Projections based on statistical downscaling from the NW Climate Toolbox
BullsEye US Portfolio Summary BullsEye US Asset Climate Change Hazard • BullsEye is exposed to near-term hazards Summary from • Coastal flooding at East Coast and Gulf production sites (chronic and acute) • Hurricane impacts • Wildfire impacts to Pacific Northwest logging operations
BullsEye Supply Chain Exposure to Climate Change Climate Central Flood Hazard Map • BEI derives the bulk of its consumer Mumbai 2030 Annual Coastal Flood product raw materials from India • Long supply chain with exposure to extreme weather • 70% of the exported materials are shipped through Mumbai • Mumbai port and rail facilities are exposed to extremes in heat, rainfall Mumbai Port Facilities and sea level that are projected to become more severe with time • Intensity of tropical cyclones is projected to increase
You Acquired Bullseye – Now What - Developing Supply Chain Resilience • Thorough life cycle analysis to develop quality metrics and risk and opportunity analysis. • Product Resilience • Service Resilience • Location Risk – redundancies?
Discussion
Recommend
More recommend
