Learn how environmental issues are impacting business strategy, operations and entity valuation, and what companies can do to align their management of environmental exposures with their strategic decision making.

1. Growth strategy and M&A
Environmental issues impacting strategic
decisions
Deloitte Forensic Center

2. Environmental challenges: The new paradigm
Business concerns over operational and financial risks are
As companies develop their plans for growth in becoming more tangible as access to emerging markets, key
raw material inputs, operating permits, and capital loans are
an unsettled economy, environmental issues are being influenced by environmental and social performance.
Over the past several years, momentum has been building due
playing a bigger role in determining strategic in part to:
growth options, capital allocation decisions, and • Global trends associated with population growth,
consumption, emerging markets, and local infrastructure
the ability to carve-out or sell an entire business development requirements
• Recognition of natural resource constraints that are driving
or its assets. In this article, we discuss how supply and demand imbalances, such as energy, water, and
regulatory and enforcement trends are evolving, agricultural commodities
• Increasing regulatory activity including new regulations,
their potential impact on business strategy, stringent conditions for granting permits, alignment of
regulatory agencies to increase coverage of inspections,
operations and entity valuation, and what and taxes
• Catastrophic events resulting in unprecedented
companies can do to align their management of environmental and economic damages
• The financial and economic crisis and its implications on the
environmental exposures with their strategic drive for transparency and governance by environmental
decision making. and financial regulators, investor groups, and shareholders
Corporate boards and senior management are being
challenged to better identify, understand, assess, price, and
manage the risks associated with their companies’ operations.
Given the developing regulatory environment and global
dynamics, it is difficult to predict or control how environmental
performance expectations will evolve amongst regulators and
stakeholders. However, companies should be positioning
themselves to anticipate the drivers of regulatory and
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and even company valuations.
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3. Regulatory and enforcement trends
Regulatory activity may be broadly described as responsive to Regulators are also using the permit approval process, for both
stakeholder demands in the areas of natural resource scarcity, new developments and renewals, to achieve environmental
producer responsibility and transparency, and governance. In performance objectives. In recent years, certain companies
response to investor coalitions that were concerned that have been precluded from entering into geographic markets
disclosures of environmental risk were inadequate, the U.S. or have been unable to pursue new project development due
Securities and Exchange Commission (SEC) and the U.S. to increased stringency in agencies’ processes for granting
Congress have issued mandates directed at more rigorous permits.
corporate governance practices. These have resulted in
expanded disclosure obligations and new measurement A company’s environmental strategy should not be merely a
requirements, which have evolved from historical costs to fair reactive response to financial or regulatory threats. As
market values, including those associated with environmental environmental expectations and performance requirements
liabilities. develop, companies can move from short-term risk avoidance
and regulation compliance to long-term development of
This regulatory activity may have operational implications, brand, and competitive and operational advantage. Proactive
some with lead times longer than product development cycles. environmental management presents an opportunity for
Examples include requiring companies to: companies to differentiate themselves as leaders in the
industry, the environment, and society, supporting long-term
• Eliminate or substitute for harmful or toxic materials used in business success.
products and services
• Manage production waste or the collection and recycling of
products at the end of their life
• Install pollution control equipment so costly that some
entities have decided to retire assets rather than invest to
meet the compliance requirements
Additionally, regulators have stepped up enforcement activity
and stringency. Historically, there were circumstances where
the cost of noncompliance was not significant, reducing the
incentive for compliance. Now, regulators are focusing on
sectors and companies with a history of noncompliance,
issuing significant penalties, and taking injunctive measures.
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4. Strategic shift and the macro landscape
Many of the elements that drive environmental risk — such as
regulation, public sentiment, and resource constraints — are
usually outside the entity’s control. Companies are increasingly
questioning whether their infrastructure is sufficient to
manage environmental risks and opportunities, both inside
and outside of their four walls. Major incidents have
demonstrated that liabilities associated with environmental
performance may not be limited to the actions of company
employees, but may extend across the supply chain and
encompass the activities of business partners as well. When
assessing the applicability of their environmental
infrastructures, companies should consider if they have the
right roles, responsibilities, policies, and procedures in place to
manage environmental risk internally and externally — across
the value chain.
The regulatory environment and determining potential liability
are two common concerns for executives. Boards and
management should consider the efficacy and desirability of
their current environmental practices. This involves weighing
the force of these drivers against their impact on the
company’s business priorities, its environmental footprint,
operational considerations, and the cost of compliance.
Specific considerations include whether outsourcing certain
activities remains a useful practice or presents excessive risk if
management may ultimately be held accountable for the
results.
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5. Implications for business strategies
The significance of the above changes may require boards and Today, leading companies are tackling this dilemma by
management to explore some thought-provoking questions employing dynamic modeling to support decision making and
including a rethink on their core strategy, assessing the to assess the effectiveness of operations. This method can
effectiveness of established accountability, determining enable companies to consider multiple projects in light of
whether their current environmental risk management alternative scenarios and strategic responses. It can also
infrastructure is sufficient to manage the business, and if there provide the ability to capture risk factors and
is an effective platform for assessing and valuing interdependencies across several projects and time horizons.
environmental risks and opportunities.
Strategic flexibility may be required to incorporate health,
safety and environment (HS&E) not only into the context of
risk mitigation and management, but also into a company’s
Targets of environmental
evaluation of its economic imperatives. For instance, some oil
and gas companies may need to reassess the scope and
enforcement activities may be
viability of their U.S. offshore operations, as it may become
uneconomic for some companies to operate there given the
increasingly disadvantaged in the
potential for increased insurance and regulatory costs. Others, marketplace.
however, may find opportunities to buy assets from those with
less substantial balance sheets.
It is also important to develop protocols and decision points to
identify and respond to changes in the risk profile or the
environment. It is imperative for HS&E processes and
procedures to be dynamic, with a mechanism for noting
changes during operations that are indicative of an increasing
likelihood of an operational incident occurring.
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6. Financial implications M&A strategy
From the financial and capital planning perspective, challenges Environmental issues can have a significant impact on strategic
emanating from environmental exposure include potential growth options and the ability to carve-out or sell an entire
asset impairment and shortened economic lives. Expected business or its assets. Companies looking for acquisitions
profitability may be lowered by unforeseen costs or cash flow should be aware that environmental value opportunities will
risks such as the cost of additional capital equipment to reduce vary by sector, geography, and business. Also, before going on
pollution, volatile commodity prices, and potentially increased an acquisition drive, an evaluation of priority markets and
operating costs arising from new mandatory procedures. strategic assets can help determine specified rate of return
Companies may want to revisit their funding mechanisms to requirements and where environmental performance may
assess their financial flexibility in case of an unanticipated influence deal multiples and create performance synergies.
obligation because of regulatory or enforcement actions.
Those looking to make divestitures may want to address issues
Companies should also consider bringing enhanced related to environmental exposures that can have a significant
transparency in reporting environmental liabilities and impact on positioning a business for sale. Companies can
disclosing their environmental objectives and performance to mitigate these risks by enhancing the management of
their stakeholders; not doing so may have significant impact exposures, segmenting products, services, operations, and
on share price and market value. facilities within their portfolio by risk profile, creating processes
designed to monitor and mitigate risk and future exposures for
On the other hand, companies that choose to address the each site, and engaging in proactive stewardship of key assets.
environmental opportunity through a disciplined and Such an approach can equip companies with more readily
structured approach may reap the rewards of increased accessible information relating to risk management efforts and
returns (such as energy and water operational efficiencies) and help resolve issues identified during the prospective buyer’s
tax incentives. due diligence.
An important question companies should be asking today more than
ever is how do environmental risks and opportunities impact key
valuation metrics and deal structure?
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7. Assessing environmental risks
Applying an enterprise-wide perspective to the assessment and Today, the markets are increasingly demonstrating a similar
monitoring of the HS&E control framework and performance approach to environmental exposures — where contaminated
allows systemic or intangible issues — such as managerial property, exposure to increased operating costs due to
tone and operating culture, or issues associated with reporting regulatory requirements, and dependency on natural resources
structure and information flow — to be more easily identified. are increasing the cost of capital or are being factored into the
Integration of environmental and financial controls framework attractiveness of investment opportunities. Such an approach
provides for common risk assessment and management may significantly increase the focus on those sustainability
approaches. activities that create a higher return on invested capital or
create more value.
For many companies, this is likely to be a complex
undertaking. Merely determining the factors that shape HS&E
risks and performance requires assessing the influence of
multiple constituencies. These constituencies can include
shareholders, regulators, vendors, customers, joint venture
partners, employees, and the general public, among others. A
broad perspective is necessary to understand the far-reaching
effects of environmental risks and performance across a
business or over the entire lifecycle of an investment. Once
these impacts are identified, companies can consider how their
strategic priorities and operating models may need to change
in light of them. In particular, they might want to take a
lifecycle view to environmental exposures and valuing them
according to their true lifecycle costs.
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8. Potential actions to consider
To help accomplish their strategic growth objectives and align The importance of weighing environment-related risks and
management of environmental exposures with their opportunities in capital planning decisions is intensifying.
company’s overall strategy, executives should consider: Influencing factors include the changing global economic
environment and corresponding demand and supply
• Identifying the impact of environmental imbalances, as well as high-profile events — from product
performance on strategic growth, access to capital recalls to industrial accidents. A refreshed approach to
markets, and competitiveness (cost efficiency) capital budgeting decisions when investing in technologies
From an investor’s standpoint, the issues and opportunities and processes that reduce consumption and waste can
presented by environmental exposures are not only help improve overall return on investment in environmental
becoming a factor in strategy development and influencing policies.
buy/sell decisions transacting; they have become integral to
managing the day-to-day operations of the companies. • Factoring environmental issues into strategic
Applying a strategic, structured approach that balances buy/sell decisions
growth aspirations as well as sustainability considerations Forward-looking business leaders understand that
may help boards give appropriate priority to different environmental issues may present an opportunity for both
projects and assist management in allocating time risk management and value creation. They also know that
efficiently. It may also position the business to meet both there are infrastructure constraints that extend beyond the
public expectations and government requirements for scope of a company that is looking to restructure its
environmental exposure. Equally important, such an business by acquiring or carving off some of its assets.
approach may provide a foundation to use sustainability as Which environmental risks or opportunities can affect a
a business growth driver, where leading sustainability company’s value? Which should be targeted first? Where
practices are applied across various business units both are the early successes and differentiators, and where are
locally and globally. the significant risks that should be managed or mitigated?
Answering these questions can help companies not only
• Embedding environmental considerations in capital leverage the competencies, but redefine performance
planning and budgeting expectations of the new entity as a result of M&A. Certain
Business concerns over operational and financial risks are externalities may only be addressed through collaboration
mounting since environmental and social performance is with non-traditional business partners including the
impacting access to emerging markets, operating permits, government, supply chain partners, and even competitors.
and investment capital. Availability and price volatility Business sectors that are engaged in joint ventures that
associated with key raw material inputs such as natural gas seek to reduce contractor-related risks might consider
and water are presenting commodity risks, and businesses implementing environmental and social contractor
are achieving cost savings through reducing their outputs performance requirements in advance of formal regulatory
(such as wastes and by-products) as well as their requirements.
dependence on inputs.
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9. Conclusion
Environmental and the broader sustainability performance is Deloitte Forensic Center
an important business issue that is increasingly impacting The Deloitte Forensic Center is a think tank aimed at exploring
strategic business decisions. There is a compelling financial, new approaches for mitigating the costs, risks and effects of
regulatory, and marketplace opportunity to evolve a fraud, corruption, and other issues facing the global business
company’s business models to mitigate environmental risk and community.
enhance opportunity. Significant value can be attributed to
proactive and effective environmental performance and this is The Center aims to advance the state of thinking in areas such
likely to increase given the new price on risk. For companies, as fraud and corruption by exploring issues from the
there is a very real opportunity to seize a leadership position in perspective of forensic accountants, corporate leaders, and
environmental performance management that enhances other professionals involved in forensic matters.
overall business performance.
The Deloitte Forensic Center is sponsored by Deloitte Financial
Advisory Services LLP. For more information, scan the code
below or visit www.deloitte.com/forensiccenter.
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10. Deloitte Forensic Center
The following material is available on the Deloitte Forensic • Whistleblowing and the New Race to Report: The Impact of
Center website www.deloitte.com/forensiccenter or from the Dodd-Frank Act and 2010’s Changes to the U.S.
dfc@deloitte.com. Federal Sentencing Guidelines
• Technology Fraud: The Lure of Private Companies
• E-discovery: Mitigating Risk Through Better Communication
Deloitte Forensic Center book:
• White-Collar Crime: Preparing for Enhanced Enforcement
• Corporate Resiliency: Managing the Growing Risk of Fraud
• The Cost of Fraud: Strategies for Managing a Growing
and Corruption
Expense
– Chapter 1 available for download
• Compliance and Integrity Risk: Getting M&A Pricing Right
• Procurement Fraud and Corruption: Sourcing from Asia
ForThoughts newsletters: • Ten Things about Financial Statement Fraud - Third edition
• International Business Partner Due Diligence: How Much • The Expanded False Claims Act: FERA Creates New Risks
is Enough? • Avoiding Fraud: It’s Not Always Easy Being Green
• Internal Investigation Costs: Securing Elusive Insurance • Foreign Corrupt Practices Act (FCPA) Due Diligence in M&A
Coverage • The Fraud Enforcement and Recovery Act “FERA”
• The Tone at the Top: Ten Ways to Measure Effectiveness • Ten Things About Bankruptcy and Fraud
• Visual Analytics: Revealing Corruption, Fraud, Waste, • Applying Six Degrees of Separation to Preventing Fraud
and Abuse • India and the FCPA
• Anti-Corruption Practices Survey 2011: Cloudy with a • Helping to Prevent University Fraud
Chance of Prosecution? • Avoiding FCPA Risk While Doing Business in China
• Fraud, Bribery and Corruption: Protecting Reputation • The Shifting Landscape of Health Care Fraud and
and Value Regulatory Compliance
• Ten Things to Improve Your Next Internal Investigation: • Some of the Leading Practices in FCPA Compliance
Investigators Share Experiences • Monitoring Hospital-Physician Contractual Arrangements to
• Sustainability Reporting: Managing Risks and Opportunities Comply with Changing Regulations
• The Inside Story: The Changing Role of Internal Audit in • Managing Fraud Risk: Being Prepared
Dealing with Financial Fraud • Ten Things about Fraud Control
• Major Embezzlements: How Can they Get So Big?
9

11. Deloitte Forensic Center
Notable material in other publications: • Follow the Money: Worldcom to ‘Whitey,’ CFOworld,
• How to Perform Due Diligence on International Business July 2011
Partners, WSJ Professional, April 2012 • Whistleblower Rules Could Set Off a Rash of Internal
• More Clues on SEC Whistleblower Office, Compliance Investigations, Compliance Week, June 2011
Week, February 2012 • Whistleblowing After Dodd-Frank: New Risks, New
• Anti-Corruption Practices Survey Highlights Challenges Responses, WSJ Professional, May 2011
Facing Companies, Business Crimes Bulletin, January 2012 • The Government Will Pay You Big Bucks to Find the Next
• Execs Not Confident In Corporate Anti-Corruption Madoff, Forbes.com, May 2011
Programs, FinancialFraudLaw.com, January 2012 • Major Embezzlements: When Minor Risks Become Strategic
• 10 Ways to Measure the Tone at the Top, WSJ Threats, Business Crimes Bulletin, May 2011
Professional, January 2012 • As Bulging Client Data Heads for the Cloud, Law Firms
• So You Want to be a Multinational?, ChiefExecutive.net, Ready for a Storm, and More Discovery Woes from
December 2011 Web 2.0, ABA Journal, April 2011
• Execs Lack Confidence in Anti-Graft Programs, Compliance • The Dodd-Frank Act’s Robust Whistleblowing Incentives,
Reporter, November 2011 Forbes.com, April 2011
• Bounty Hunting: Will New Regulations Create a New • Where There’s Smoke, There’s Fraud, CFO magazine,
Incentive for Whistleblowers?, Perspectives (University of March 2011
Illinois), November 2011 • Will New Regulations Deter Corporate Fraud? Financial
• The Hidden Risks of Doing Business in Brazil, Agenda, Executive, January 2011
October 2011 • The Countdown to a Whistleblower Bounty Begins,
• Use of Third Parties’ Seen as Leading Source of Corruption Compliance Week, November 2010
Risk, Ethikos, Sept/Oct 2011 • Deploying Countermeasures to the SEC’s Dodd-Frank
• Smaller Companies Lag Behind in Anti-Corruption Programs Whistleblower Awards, Business Crimes Bulletin,
Despite Escalating Enforcement Activity, October 2010
EmploymentLawDaily.com, September 2011 • Temptation to Defraud, Internal Auditor magazine,
• High Tide: From Paying For Transparency To ‘I Did Not Pay October 2010
A Bribe’, WSJ.com, September 2011 • Shop Talk: Compliance Risks in New Data Technologies,
• Executives Worry About Corruption Risks: Survey, Reuters, Compliance Week, July 2010
September 2011 • Many Companies Ill-Equipped to Handle Social Media
• Whistleblowing After Dodd-Frank — Timely Actions for e-discovery, BoardMember.com, June 2010
Compliance Executives to Consider, Corporate Compliance • Mapping Your Fraud Risks, Harvard Business Review,
Insights, September 2011 October 2009
• Corporate Criminals Face Tougher Penalties, Inside Counsel, • Use Heat Maps to Expose Rare but Dangerous Frauds,
August 2011 HBR NOW, June 2009
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12. This article is published as part of ForThoughts, the Deloitte Authors
Forensic Center’s newsletter series edited by Toby Bishop, the Kathryn Pavlovsky is a principal in the Forensic & Dispute
Services practice of Deloitte Financial Advisory Services LLP. Ms.
director of the Deloitte Forensic Center. ForThoughts
Pavlovsky may be reached at kpavlovsky@deloitte.com.
highlights trends and issues in fraud, corruption and other
complex business issues. To subscribe to ForThoughts, visit Tron Allen is a senior vice president with Deloitte Corporate
www.deloitte.com/forensiccenter or send an email to Finance LLC. Mr. Allen may be reached at
dfc@deloitte.com. trallen@deloitte.com.
Charles Alsdorf is a director in the the Business Valuation
practice of Deloitte Financial Advisory Services LLP. Mr. Alsdorf
may be reached at calsdorf@deloitte.com.
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