3-12. EHS Due Diligence in M&A: Practicalities and Management Impact

In M&A (mergers and acquisitions), EHS (Environment, Health, Safety) due diligence is a crucial area for consideration, alongside financial and legal reviews. Overlooking environmental liabilities or occupational safety and health risks in the target company can lead to unexpected costs, lawsuits, and brand damage after the integration. Proper EHS due diligence enhances the quality of management decisions and can determine the success or failure of an M&A deal.

1. Purpose of EHS Due Diligence

The primary purpose of EHS due diligence is to clarify whether the target company is in legal compliance and whether it holds any past or future environmental contamination or workplace safety risks. In particular, soil contamination, asbestos, improper waste disposal, and chemical substance management violations are highly likely to result in huge cleanup costs or fines after the M&A, so these points must always be checked.

2. Practical Process

EHS due diligence typically proceeds in the following steps:

• Information Gathering: Thoroughly examine permits and licenses, audit reports, environmental impact assessment reports, and accident records.

• On-site Inspection: Conduct a physical inspection of factories and facilities to identify potential environmental contamination and safety issues.

• Interviews: Interview environmental and labor management personnel to confirm the compliance status at the operational level.

• Risk Assessment: Identify non-conformities and present information useful for management decisions by quantifying the cost of remediation and future legal risks.

3. Impact on Management

If EHS due diligence is neglected, there are cases where the costs for environmental cleanup or dealing with workplace accidents can balloon to billions of yen after an acquisition. Conversely, by thoroughly investigating and understanding potential risks beforehand, you can hedge against them by adjusting the acquisition price or setting guarantee clauses. Additionally, strengthening the occupational safety and health system after integration can boost employee engagement and productivity, which can enhance M&A synergies.

4. The Perspective of Investors and Stakeholders

With the recent expansion of ESG investing, investors also place a high value on EHS risks during M&A. If environmental liabilities or labor risks come to light, it can lead to a loss of investor trust and a drop in stock price. Conducting transparent due diligence and disclosing the results appropriately is directly linked to building trust with stakeholders.

5. Summary

EHS due diligence in M&A is not just about identifying risks; it is a strategic process for enhancing corporate value after the integration. Through thorough investigation and sound management decisions, it is possible to minimize risks while seizing new growth opportunities.