Many governments have set targets to reach net zero by, or before, 2050 in line with the goal of the Paris Agreement. In order to reach this target, the power of private finance must be mobilised. In tandem with this target, there is widespread recognition that investors are growingly exposed to climate risks.
Many investors are starting to take on the mantle of promoting climate change as well as taking steps to mitigate their climate risks. Some investors have chosen to redirect their investment decisions to favour companies and projects that will accelerate the move towards net zero targets, with BlackRock’s Chairman, Larry Fink, penning an open letter to CEOs encouraging the building of more enduring and sustainable portfolios, while others are using their influence to effect policy at target company level – for example, the Investment Association, which represents 250 members with £7.7tn under management, has set a three-year deadline for companies to comply with the standards set by the Task Force on Climate-related Financial Disclosure (TCFD).
Investors also have a powerful opportunity to effect behaviour change and diversification in all of the companies in which they invest. To do so, investors can take a range of actions to actively incentivise and promote the climate and environmental credentials of their investee companies.
The Green Investment Obligations Clause adds wording to standard non-leveraged investment documents which focuses the founders and investee company on climate change issues and places on them certain green obligations (e.g. to submit a TCFD-compliant annual report to investors). The Green Shareholders’ Agreement (Early Stage) also allows investor shareholders to place certain green obligations on the company and other shareholders (requiring the implementation of Company Sustainability Goals and a Carbon Footprint Management Plan). The Management Equity Rachet Terms financially incentivises an investee company’s management team to meet certain climate and environmental linked targets. Green Acquisition Obligations adds wording to a SPA which incentivises a purchaser (through the payment of a Repayable Consideration) to maintain or improve an investee company’s green credentials post acquisition.
Alternatively, the Net Zero Convertible Loan Note requires a company to set, and publicly announce, a Net Zero target as a condition to receiving finance and to provide the noteholder with a plan to deliver said target.
Clyde & Co is proud to be assisting clients interested in adopting these clauses into their contracts. Please reach out to me or one of our climate change experts if these, or similar, clauses are of interest.
This post is part of a series of short updates summarising the precedent clauses drafted in the course of collaborative hackathons organised by The Chancery Lane Project. Clyde & Co held its own hackathon in partnership with The Chancery Lane Project in July 2020, and has taken a leading role in the Big Hack, another hackathon organised centrally by The Chancery Lane Project throughout autumn 2020.