Environmental concerns are now a crucial factor in M&A deals

Environmental liabilities are no longer just a legal formality in mergers and acquisitions. They have evolved into deal-breakers that can result in significant financial consequences post-close. Parties involved in M&A deals are now realizing the importance of properly assessing and managing environmental exposure to avoid valuation write-downs, shareholder litigation, and breach of fiduciary duty suits.

The conditions that contribute to environmental risk in M&A transactions have intensified over the past 18 months. Regulatory changes, such as the federal PFAS designation under CERCLA, have increased the potential liabilities that acquirers may face. Additionally, insurance markets are tightening coverage terms and raising premiums for environmental exposure. Surveys indicate that sustainability credentials are now influencing deal pricing more explicitly than they did in previous years.

Executives tasked with overseeing corporate development must shift their focus from whether environmental due diligence is essential to whether the current processes and governance structures are sufficient to uncover potential liabilities before they become post-close issues. The consequences of overlooking environmental liabilities, as highlighted by Woodruff Sawyer in July 2025, can be severe, leading to decreased valuations and legal action against directors and officers.

The EPA’s designation of PFAS substances as hazardous under CERCLA has significantly impacted environmental diligence in M&A transactions. The strict, retroactive, and joint and several liability associated with CERCLA means that acquirers may inherit the responsibility for contamination they did not cause. Recent multi-billion dollar settlements involving PFAS contamination demonstrate the financial risks associated with environmental liabilities.

To address these risks, acquirers must conduct more thorough due diligence that explicitly includes PFAS pathways. Transaction structure plays a crucial role in managing legacy environmental liability, with asset purchases allowing buyers to select which liabilities to assume and isolate issues within the seller’s entity. Sellers who proactively address environmental issues through pre-prepared assessments gain a negotiating advantage.

Pricing sensitivity to environmental factors is becoming increasingly evident in M&A transactions. Buyers are willing to pay a premium for companies with strong ESG credentials, while sustainability weaknesses may lead to price reductions. Environmental risk is now a key consideration for insurance underwriters, with exclusions and sublimits becoming more common. Despite this, a significant percentage of insurance buyers do not purchase specialized environmental policies, highlighting the need for heightened awareness of environmental risk in deal-making.

Ultimately, board members involved in M&A transactions must be aware of the evolving regulatory and litigation landscape surrounding environmental liabilities. Engaging environmental subject matter experts early in the deal process is essential for informed decision-making on pricing and transaction structure. By understanding and addressing environmental risk proactively, parties involved in M&A deals can mitigate the potential negative consequences of overlooking environmental liabilities.