21 st Century Climate Change Due Diligence Focus on Operational - - PowerPoint PPT Presentation

21st 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

• f 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

• 20th 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

• Unprecedented changes in climate
• Recent increases in extreme and damaging events are projected to continue

We’re in new territory

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

• 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

Climate Related Opportunities

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 is exposed to near-term hazards

from

• Coastal flooding at East Coast and Gulf

production sites (chronic and acute)

• Hurricane impacts
• Wildfire impacts to Pacific Northwest logging
• perations

BullsEye US Asset Climate Change Hazard Summary

Current Coastline

Sea Level Rise at BullsEye New York Area Facility

How high will sea levels rise and when?

NOAA Flood Mapping and Sea Level Rise Projections: Sweet et al. (2017)

Sea Level Rise: 2 Feet Sea Level Rise: 4 Feet

What water level causes flooding?

BullsEye New York Facility Assessment 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

Climate Hazard Timing Summary

• Site has moderate

present-day site-specific wildfire hazard

• Past wildfire burn zones

in the region indicate regional hazard

Current Wildfire Risk for BullsEye’s Logging Operations

Present-Day Wildfire Hazard Potential for Bullseye’s Northern California Site Regional Wildfire Burn Perimeters from the Previous 20 Years

Future Wildfire Risk for BullsEye’s Logging Operations

Projected Change in “Very High Fire Danger” Days by 2050: Business-As-Usual Scenario BullsEye Sites

Projections based on statistical downscaling from the NW Climate Toolbox

• Rising temperatures increase

wildfire risk across the Pacific Northwest

BullsEye US Portfolio Summary

• BullsEye is exposed to near-term hazards

from

• Coastal flooding at East Coast and Gulf

production sites (chronic and acute)

• Hurricane impacts
• Wildfire impacts to Pacific Northwest logging
• perations

BullsEye US Asset Climate Change Hazard Summary

BullsEye Supply Chain Exposure to Climate Change

• BEI derives the bulk of its consumer

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 and sea level that are projected to become more severe with time

• Intensity of tropical cyclones is

projected to increase

Climate Central Flood Hazard Map Mumbai 2030 Annual Coastal Flood

Mumbai Port Facilities

• Thorough life cycle analysis to develop quality metrics and risk

and opportunity analysis.

• Product Resilience
• Service Resilience
• Location Risk – redundancies?

You Acquired Bullseye – Now What - Developing Supply Chain Resilience

Discussion