Environmental Due Diligence

Environmental due diligence examines which environmental risks exist in a target company. This includes, for example, soil contamination, required permits, or compliance with environmental regulations. Buyers can thus identify whether expensive environmental problems may arise. A two-stage approach is customary: the first stage reviews documents, queries authority files and contamination registers, reconstructs site history and includes site visits. Where concrete indications emerge, a second stage follows with soil and groundwater sampling and a cost estimate for remediation.

The work helps identify risks arising from a site’s previous use. In Germany, the landowner and the party in actual control may be responsible for remediation alongside the polluter. A buyer may therefore face contamination dating back decades before the acquisition. Operating permits, emissions and the handling of waste and water also need review. Deficiencies can require upgrades, additional expenditure or an interruption of operations. The findings rarely lead to abandonment but rather to contractual instruments: a specific indemnity from the seller for named sites, a holdback or escrow equal to estimated remediation costs, an insurance solution or a price adjustment. In an asset deal it must additionally be settled which properties transfer at all.

The field also matters because of sustainability reporting duties, which can extend into the supply chain. Creditworthiness is decisive in handling the findings, because an indemnity is worth only as much as the obligor's ability to pay across the whole limitation period. For private individuals and for funds distributing their proceeds, security through escrow, guarantee or insurance is therefore customary. Who decides on carrying out remediation and to what standard also needs settling, since the cost difference between the solution demanded by the authorities and the economically sensible one can be considerable.