Paul Davies is a partner in the London office of Latham & Watkins. His practice focuses on advising on the environmental aspects of corporate transactions, in addition to a wide variety of other work, including the management of contaminated land, the insurance of environmental risk and issues regarding climate change, health and safety, asbestos and waste management.
In this lw.com interview, Davies discusses the role environmental compliance plays in a company’s global supply chain, and how Latham’s global platform is helping clients navigate the environmental aspects of their international business operations.
How does Latham help companies ensure their global supply chains are environmentally compliant?
Davies: Here is a classic example of a supply chain issue: The tape dispenser on your desk. It is manufactured in China, from raw materials that have been sourced from other countries. If you are located in the United States, it was likely acquired from a US distributor. But what happened to the environmental by-products generated when the tape dispenser was manufactured? Were the chemicals used in making it discharged legally or illegally? Where were they discharged? The tape dispenser has to get from China to your desk and when you are finished with it and throw it in the waste bin, what happens to it?
The environmental concerns extend beyond the dispenser on your desk to the entire lifecycle of the product — the global supply chain. Where did that product come from, and what will happen to it when you’re finished with it? When you look at the supply chain, you are also looking at the legal issues associated with compliance and the reputational risk. Environmental issues are global issues. At Latham, we meet our client’s global needs with a global platform of environmental services.
What are some of the environmental issues that need to be addressed in the context of a cross-border merger and acquisition (M&A) transaction?
Davies: When component parts are sourced from different jurisdictions, those components might be legal in the source countries, but illegal in others. When you look at supply chains, you’re looking at both the legal issues with compliance and the reputational risk of the company. You cannot look at climate change issues and say they are limited to one country or another, because what you do in one country will have an impact in other parts of the globe. For example, air quality: pollutants don’t stay in one country, they move and migrate over borders and affect other countries as well.
If you are looking to buy a business with multiple operations in different jurisdictions, first you need to look at which jurisdictions the assets are in and how the business is structured. Depending on which countries you are looking at and the way the business is structured — whether it’s assets or shares — you could trigger the need for environmental investigations. Then you would look at the scope of the due diligence required. If it is a manufacturing business, as opposed to an insurance or services industry business, the level of due diligence you will be considering will differ significantly — each transaction is different.
You also need to look at the former, current and future operations to assess liabilities. If it’s a manufacturing business, you are looking at environmental compliance and liabilities associated with current manufacturing, whether it has all the environmental permits, if there is a need for capital expenditure, whether there is any environmental litigation and whether there have been any health and safety claims. Additionally, as discussed above, you need to look at product life-related issues, such as where the materials in the manufacturing process are sourced from and the supply chain, and what the business does with the materials when it is finished with them.
Then you evaluate whether to negotiate any reps and warranties as part of the deal, whether there are going to be any indemnities, and whether there are price chips. Then you help address the other points of the deal — such as information generated by environmental consultants and whether or not the information in the consultant’s report is also included in the disclosure letter.
What role does environmental compliance play in the financing of a large-scale project?
Davies: Depending on the type and size of a project, the Equator Principles may come into play. The Equator Principles are a set of criteria that banks and other financial institutions have agreed to adhere to when making particular loans. Like M&A transactions, you would expect to be working alongside consultants. There are also a host of other provisions, such as OECD guidelines, that you may need to consider in relation to a particular project.
What are some of the emerging environmental issues for companies operating on a global scale in Africa?
Davies: Multinationals tend to develop and apply their own group environmental standards, and issues arise in ensuring that those standards are complied with on a global basis. If you have a high threshold to meet, it’s easier to achieve if you’re operating in the US, because you have the appropriate infrastructure to allow you to, for example, send your hazardous waste to a hazardous waste facility. If you’re operating in Africa, however, the process isn’t necessarily as straightforward because a hazardous waste facility may not exist. You may then transport your hazardous material back to the US, but this might trigger other legal issues such as the trans-boundary movement of waste.
What services is Latham providing to companies operating in Africa to help them address environmental issues or resolve environmental problems?
Davies: We provide a broad spectrum of services ranging from transactional to regulatory and litigation support. In particular, Latham has been involved in some of the most significant environmental litigation in Africa in recent years.
Are there unique environmental challenges for companies operating in Asia that are different from Africa?
Davies: Yes. In Africa the focus has been more on national resources. In Asia, the focus is instead on manufacturing and helping multinationals determine how best to police their supply chains.