How Environmental Risk
Affects Property Plans
by Motoko Rich
From The Wall Street Journal Online
October 30, 2002
Increased concerns about government regulation and financial scrutiny are driving companies to reject real-estate deals that they fear may carry an environmental risk, a new survey found.
A poll of more than 140 companies across a range of industries including chemicals, manufacturing and retail distribution found that 50% had declined to purchase property with environmental damage. The survey was conducted by CFO Research Services on behalf of Chubb Environmental Solutions, a unit of Chubb Corp., Warren, N.J.
More than a third of the chief financial officers and other senior finance personnel surveyed said a business transaction -- including corporate mergers or acquisitions -- had failed because of environmental issues. Among heavy manufacturers, 60% said a deal had failed for environmental reasons.
"We were a little surprised at the survey results," said Michael J. Murphy, president of Chubb Environmental, which sells environmental insurance products to real-estate buyers, lenders, and manufacturers operating sites where there may be ongoing environmental liabilities associated with production. "It underscores the level of importance that people still put on environmental issues."
Mr. Murphy said that in the wake of recent financial scandals involving Enron Corp. and WorldCom Inc., companies are scrutinizing all potential liabilities, including environmental ones.
Reflecting those concerns, 55% of chief financial officers who responded to the poll said they participate in meetings to discuss environmental risks "frequently."
Those companies that are refusing to buy properties with potential contamination problems "are seeking to simply avoid the risks altogether," said Mr. Murphy.
In the case of failed transactions, the survey found that 59% of the deals hadn't been completed because either the buyer or the seller refused to cover the cost of cleaning up the contaminated property. Nearly 30% of the deals that didn't close were stymied by a failure to disclose the level of contamination. In about 10% of the cases, the deal failed because neither the buyer nor the seller could secure environmental insurance.
Many of the companies had reason to be concerned about environmental problems: 35% of those polled said they had been investigated by a state or federal environmental agency, and 76% of those investigated had been fined.
Mr. Murphy said that many companies simply aren't aware of insurance products that could protect them from liabilities or cap their financial obligations in the event of a cleanup order by a government agency.
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