Conditions that incentivise performance by linking executive directors’ and other key employees’ share-based remuneration awards to achieving climate targets.
These provisions make remuneration awards conditional upon achieving ESG targets and so incentivise and reward long-term decision-making that is required to deliver sustainable, climate-aligned action.
Performance Conditions
[Capitalised terms which are not defined in these Performance Conditions have the meanings given in the rules of the [insert plan name].]
[Drafting note: include this sentence where definitions such as 'Plan', 'Rules', 'Vesting', 'Award', 'Shares', 'Board', 'Remuneration Committee' and so on are contained in the plan rules, rather than below.]
In accordance with Rule[s] [●] of the Plan, the Remuneration Committee has determined that the Vesting of the Award is subject to the following Performance Conditions. [Drafting note: consider whether the plan is for a listed company or a private company. It will typically be the Remuneration Committee of the Board granting awards for a listed company and the Board granting awards for a private company.]
The decision of the Remuneration Committee as to whether, and to what extent, the Performance Conditions have been satisfied shall be final and binding on the Participant and the Company. [Drafting note: consider whether achievement of the Environmental Targets needs to be independently verified.]
This Award has been granted subject to the Remuneration Committee's discretion to make such adjustments as it sees fit to the number of Shares subject to the Award in the event that the formulaic outcomes from applying the Performance Conditions do not accurately reflect the performance of the Company and the wider shareholder experience.
Where any calculations result in a fractional number of Shares subject to the Award, the number of Shares will be rounded down to the nearest whole number.
1. Financial Performance Condition
1.1 [●] percent of the Award is subject to the Financial Performance Condition.
1.2 The Financial Performance Condition is that [insert [absolute][relative] TSR or EPS or EBITDA or ROIC or other financial performance condition as appropriate].
2. ESG Performance Condition
2.1 [●] percent of the Award is subject to the ESG Performance Condition.*
2.2 The Remuneration Committee will assess the ESG Performance Condition based on the Group meeting the following criteria by [date]:**
| Criteria | Weighting |
| Environmental Targets | [●] percent |
| Social Targets | [●] percent |
| Governance Targets | [●] percent |
*[Drafting note: although the weighting will vary depending on the company, non-financial performance conditions are normally weighted in the range of 10 (ten) to 25 (twenty-five) percent. A majority of investors expect that between 10 (ten) and 30 (thirty) percent of executive incentives should be weighted to ESG targets and a best-practice weighting would be 25 (twenty-five) percent or above.]
**[Drafting note: these targets and weightings should be adjusted depending on the individual being awarded the options and their ability to influence the achievement of the ESG targets.]
Schedule A: ESG targets
Environmental Targets means the Group:
a. within [insert time period] of entering into this [agreement][deed] publicly [setting a Net Zero Target] OR [having its existing Net Zero Target] [validated by the Science Based Targets initiative][and signing up to Race to Zero];
b. [meeting its public commitment to reduce Scope 1 and Scope 2 [and Scope 3] emissions by [●] percent by [●]] OR [reducing its Scope 1 and Scope 2 [and Scope 3] emissions by [●] percent versus a [baseline financial year]];
c. [achieving and maintaining the Net Zero Target] OR [achieving [●] of the interim targets set out in its Net Zero Transition Plan];
d. assessing and verifying the Group’s Carbon Footprint in accordance with one of the Carbon Footprint Standards;
e. establishing a sustainability committee as a committee of the Board to oversee the development, implementation and review of the Net Zero Transition Plan, either chaired by a non-executive director with experience of improving sustainability and mitigating carbon footprints or advised by an appropriately qualified climate, sustainability or environmental consultant who has the skills and experience to diligently, competently and professionally advise on improving sustainability and mitigating the Carbon Footprint;
f. purchasing electricity for its offices [and other premises] on a green tariff that uses 100 (one hundred) percent renewable energy;
g. [making investment decisions for carbon capture, utilisation and storage projects [insert other specific type of relevant low-carbon fuel technology, if relevant]] OR [proactively advocating for supportive government policy and technology development in the field of [low-carbon fuel technology] [carbon capture, utilisation and storage projects]];
h. using web hosts and cloud service providers that run their servers on 100 (one hundred) percent renewable energy or have their own net zero target;
i. establishing and implementing a training programme for all employees on the actions taken by the Group to achieve its Net Zero Target, the need for the transition to net zero to be a just transition and, in particular, how employees can help to reduce the Group's Scope 3 emissions[;][; and][.]
j. [donating [●] percent of its net profits to entities whose aims are to mitigate the impact of climate change[;][; and][.]]
k. [using climate contract clauses (for example published by The Chancery Lane Project) to align the Group’s activities and relationships, including its supply chain contracts within its Net Zero Target and providing any support (financial or otherwise) required by its contract partners to assist them in fulfilling those obligations[; and][.]]
l. [insert others as applicable to the business.]
[Drafting note: the environmental targets listed above cover low to high net zero ambition. Select such of the targets that align with the company’s requirements and net zero ambition, taking into account the company’s industry, for example, looking at the UN Principles for Responsible Banking, if the company is in the finance industry.]
Governance Targets means the Group:
a. publishing a Gender Pay Gap Report and an Ethnicity Pay Gap Report and implementing measures to ensure any pay gap identified in such reports is [reduced by [●] percent] OR [eliminated] by 20[●]].
b. establishing a diversity, equity and inclusion committee as a committee of the Board chaired by a non-executive director with experience of improving diversity, equity and inclusion;
c. preparing and providing to the [investors] an annual sustainability report which, without limitation, demonstrates the activities undertaken by the Group to further the Environmental Targets, Social Targets and Governance Targets;
d. complying with the [UK Corporate Governance Code, as amended from time to time][the QCA Corporate Governance Code, as amended from time to time][;][; and][.]
e. [making [public] disclosures [to] OR [in [●]] on governance, strategy, risk management and metrics and targets aligned with the recommendations of the International Financial Reporting Standards Foundation (IFRS)[;][; and][.]]
f. [conducting an annual [analysis OR report] of the extent to which any lobbying activities, trade association memberships and public policy positions of the Group [and its contractual partners] are aligned with the Environmental Targets, Social Targets and Governance Targets[; and][.]]
g. [insert others as applicable to the business, for example, board diversity, employee engagement].
Social Targets means the Group:
a. actively recruiting through organisations that serve individuals from Underrepresented Groups and putting in place programmes to provide mentorship, apprenticeships and/or internships for individuals from Underrepresented Groups;
b. ensuring all job descriptions include language and requirements that are inclusive and equitable;
c. ensuring that its facilities are designed to meet accessibility requirements for individuals with disabilities;
d. putting in place formal targets with respect to purchasing from local suppliers;
e. reporting annually in its annual report and accounts on the steps taken to ensure that Modern Slavery is not taking place in the Group or the Group's supply chains [and [creating a][reporting on the impact of the existing] supplier charter and disclosing this in the Group’s [annual report][on its website];
f. [reporting annually in its annual report and accounts on] OR [conducting an annual analysis of] how stakeholders (including employees, clients, end customers, local communities, supply chain partners and their stakeholders) are affected by climate risk and the net zero transition (including as a result of the Group’s activities) and how such analysis is incorporated into the Group’s adaptation and risk mitigation plans;
g. at least [●] percent of [the executive committee] [direct reports to the Chief Executive Officer] are female;
h. [the executive committee] [direct reports to the Chief Executive Officer] have diverse representation[; and][.]
i. [conducting a double materiality assessment [at a CSRD standard] for at least [[insert number] OR [[●] percent of]] relevant sustainability matters in its annual report [conducted by a professional services organisation][; and][.]
j. [obtaining limited assurance from a third-party assurance provider for [at least [●] OR [all] disclosures made as a result of the double materiality assessment][; and][.]
k. [insert others as applicable to the business, for example, pro bono work, community engagement, staff wellbeing and mental health, staff training and development or social mobility initiatives, health and safety records].
Carbon Dioxide Equivalent (CO2e or CO2eq) means the standard metric measure to compare the global warming potential of various GHGs over a specified timescale.* It allows a Carbon Footprint consisting of different GHGs to be expressed as a single number.
*[Drafting note: see also TCLP Glossary: Carbon Dioxide Equivalent.]
Carbon Footprint means the total annual GHG Emissions of the Group.
Carbon Footprint Standards means internationally recognised standards to measure, manage and demonstrate carbon credentials covering organisations (WRI Greenhouse Gas Reporting, BEIS Voluntary Reporting Guidelines, GHG Protocol Corporate Accounting and Reporting Standard), projects, product and services (PAS 2050:2011, ISO 14001, GHG Protocol Product Life Cycle Accounting and Reporting Standard) and events (PAS2060/ ISO 20121).
CSRD means the Corporate Sustainability Reporting Directive (Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting).
Environmental Targets [is defined OR has the meaning given] in Schedule A.
Ethnicity Pay Gap Report means a report setting out the difference between the average earnings of employees from ethnic minorities and white employees, either as one pay gap figure comparing average hourly earnings of ethnic minority employees as a percentage of white employees and/or several pay gap figures comparing average hourly earnings of different groups of ethnic minority employees as a percentage of white employees.
Gender Pay Gap Report means a report setting out the difference between the average earnings of men and women as described in the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017.
Governance Targets [is defined OR has the meaning given] in Schedule A.
GHG Emissions means emissions of GHGs from all sources, categorised as Scope 1, 2 and 3 emissions by The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, Revised Edition 2015 as updated periodically.
Greenhouse Gases (GHGs) means the gases that trap thermal radiation in the Earth’s atmosphere. They are specified by the UNFCCC in Annex A to the Kyoto Protocol and may be updated periodically.
Modern Slavery means slavery, human trafficking, forced or compulsory labour and other forms of human exploitation, such terms to be construed in accordance with the Modern Slavery Act 2015.
Net Negative means that the GHGs removed from the atmosphere by the Group are greater than the Group’s GHG emissions.
Net Zero Target means a balance between the Group’s sources and sinks of GHGs by [2050 OR insert earlier date]. This is achieved by removing GHGs and reducing the Group’s GHG emissions [to meet the goals of the Paris Agreement].
Net Zero Transition Plan means a plan to deliver the Net Zero Target that includes:
(a) interim GHG emissions-reduction targets* for the Group that are Paris Aligned;
(b) short-, medium- and long-term actions to achieve the Group’s GHG emissions-reduction targets, and a plan for how they will be financed;
(c) a strategy specifying the verified credits from a recognised offset provider that may be used by [the Group] to offset its Residual Emissions;
(d) governance and accountability mechanisms to support the plan, including annual reporting and linking executive remuneration to achieving the interim targets;
(e) measures to address risks to, and leverage opportunities for, stakeholders (such as workforce, supply chains, communities and customers) and the environment; and
(f) promoting a just transition to a low-carbon economy.
*[Drafting note: if the Net Zero Target will be validated by the Science Based Targets initiative, consider replacing ‘interim reduction targets’ with the defined term Near-Term Science-Based Targets. See TCLP’s Glossary: Near-Term Science-Based Targets.]
Paris Agreement means the UNFCCC’s legally binding international treaty on climate change adopted at the UN Climate Change Conference (COP21) in Paris, France, on 12 December 2015, which came into force on 4 November 2016.
Paris Aligned means aligning with the goals in Articles 2.1 and 4.1 of the Paris Agreement[.], in particular limiting global temperature increase to 1.5 Celsius (1.5C) above pre-industrial levels.
Residual Emissions means the Group’s GHG Emissions that are emitted after all reasonable efforts have been made by the Group to reduce its GHG Emissions.
Social Targets [is defined OR has the meaning given] in Schedule A.
Underrepresented Groups means [groups of people that have [historically not had equal access to economic opportunities because of discrimination or other societal barriers].
UNFCCC means the United Nations Framework Convention on Climate Change.
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