Contracts for Climate Change (June21) Investment and M&A cl…

Contracts for Climate Change (June21) Investment and M&A cl…

Contracts for Climate Change Investment and M&A clauses 1

Each of the precedents has a child’s name chosen by the drafting team. This is to encourage long-term thinking and to focus on the next generation as they will be most affected by the serious consequences if we fail to effectively respond to the climate crisis.

GREEN INVESTMENT OBLIGATIONS — FRANK’S CLAUSE #greenfinance #greeninvestment #climaterisk Issue Investors often hold significant control over an investee company but are not currently using this influence to mitigate climate risks or manage climate impacts. Solution Frank’s Clause is an amendment to standard non-leveraged investment documents which would focus the investee company and its founders on Climate Change by placing on them various obligations in relation to climate risk and sustainability reporting (for example by requiring investor approval for amending Net Zero targets). Impact The clause would ensure environmental obligations cascade through investment documentation so that investors could assess climate risks and impacts, andwould put such issues at the centre of the investee company’s business.

CLIMATE EQUITY RATCHET — BELLA’S CLAUSE #greeninvestment #greenbusiness #incentive Issue Management teams are typically incentivised to achieve the business’ growth objectives using incentive schemes the value of which is not dependent on the contribution made by business in the fight against Climate Change. Solution Bella’s Clause would provide a template designed as an “equity ratchet” for inclusion in investment documents to financially incentivise management teams to meet targets which are linked to Climate Change.

Impact The clause would put environmental and Climate Change objectives on a par with other business growth drivers.

GREEN ACQUISITION OBLIGATIONS — SIENNA’S CLAUSE #greencompany #sustainableinvestment #acquisition Issue

NET ZERO CONVERTIBLE LOAN NOTE — NOZOMI’S CLAUSE #netzero #greenloans #greenfinance

Issue Private-public co-investment often does not explicitly align with UK government’s Net Zero target. Therefore, finance is mobilised to achieve business growth without reference to long-term policy on Climate Change.

Purchasers of ‘green’ companies may have no direct incentive to maintain the company’s green credentials or behaviours post-acquisition.

Solution Sienna’s Clause would insert a requirement into a Share or Asset Purchase Agreement that the purchaser maintains/ improves the target company’s green credentials post- acquisition, linked to payment from escrow if successful. Impact The clause would encourage and financially incentivise the purchaser to invest in the sustainability of the target company post-acquisition.

Solution Nozomi’s Clause would incentivise Net Zero performance by lowering conversion discount in a convertible loan note instrument where Net Zero targets are set.

Impact The clause would incorporate government policy into finance agreements and incentivise businesses to give the same weight to Climate Change objectives as to other business drivers.

GREEN SHAREHOLDERS’ AGREEMENT — LAUREN’S CLAUSE #shareholder #strategy #responsibility Issue

Business strategies often disregard ESG issues in favour of prioritising strong capital returns and rapid growth.

Solution Lauren’s Clause would amend the standard shareholders’ agreement to grant rights and place obligations on all shareholders to mould their behaviour and values around prioritising climate goals. Impact Aligning shareholders’ rights to environmental outcomes would foster a more holistic approach to Climate Change and position climate goals at the core of company strategy.