Net Zero Convertible Loan Note
Makes the qualifying criteria for receiving finance conditional on setting a net zero target and reflects this obligation in a convertible loan note instrument that incentivises net zero performance.
What this clause does
Mobilises “green finance” and allows investment managers to demonstrate how they are cascading ESG strategies into deal paperwork. This clause is for a standard unsecured convertible loan note that is in advance of or a bridge to an equity investment round.
Clauses
1. Conditions
The Notes shall be subject to the passing of all directors’ and shareholders’ resolutions of the Company to set and publicly announce a Net Zero Target Date.
2. Undertakings
The Company undertakes to:
2.1 [publicly] set a Net Zero Target Date within one month of the date of this instrument;
2.2 provide the Noteholders with the Net Zero Transition Plan within [six [6] months] of the date of this instrument; and
2.3 inform the Noteholders as soon as reasonably practicable following the Company’s achievement of each of its Key Interim Targets and the Net Zero Target, [each of] such achievements to be independently verified and confirmed in a written report by the Net Zero Professional.
3. Interest
Until the Notes are repaid by the Company or converted into Shares, interest shall accrue on any outstanding Notes (so far as not converted) at the following rates:
3.1 Default Interest Rate until the Environmental Targets are achieved; and
3.2 Climate Coupon Discount Rate after the Environmental Targets are achieved and the Company’s achievement of [each/ the] Environmental Target(s) [is/ are] independently verified and confirmed in a written report by the Net Zero Professional.
4. Events resulting in immediate redemption
The Notes then in issue shall be immediately redeemed at the principal amount, together with interest on the Notes outstanding at the Default Interest Rate, if:
4.1 the Company does not set a Net Zero Target Date in accordance with the undertaking set out in clause [2]; or
4.2 the Company does or omits to do anything which could reasonably be expected to contribute to the Company not achieving the Environmental Targets.
5. Conversion
All outstanding Notes shall automatically convert into fully paid Shares on the occurrence of a Relevant Event with the following discounts:
5.1 Default Conversion Discount if the Environmental Targets have not been achieved; and
5.2 Climate Conversion Discount if the Environmental Targets have been achieved and the Company’s achievement of [each/ the] achieved Environmental Target(s) [is/ are] independently verified and confirmed in a written report by the Net Zero Professional.
Schedule A
Environmental Targets
[Drafting note: the environmental targets listed below range from low (light green) to high (dark green) net zero ambition. Users of this clause can select such of the targets that align with their requirements and the level of their net zero ambition, and configure the list as required. Note that the Company receives the Default Interest Rate and Default Conversion Discount until these are achieved, and therefore a balance should be struck between ambition and achievability. Users of the clause may want to refer to TCLP’s Net Zero Dashboard and Drafting Checklist - tools available in our Net Zero Implementation Toolkit.]
Environmental Targets means the Company:
(a) within [one] month of entering into this instrument, publicly [setting a Net Zero Target/ having its existing Net Zero Target] [validated by the Science Based Targets Initiative][and signing up to Race to Zero];
(b) within [one] month of entering into this instrument, agreeing the Net Zero Transition Plan;
(c) achieving each of the Key Interim Targets by their due date as specified in the Net Zero Transition Plan;
(c) within [●] month(s) of entering into this instrument, setting up a process for assessing and verifying its Carbon Footprint in accordance with one of the Carbon Footprint Standards and carrying out such assessment and verification [insert frequency] until the Net Zero Target is achieved;
(d) within [●] month(s) of entering into this instrument, 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;
(e) within [●] month(s) of entering into this instrument, purchasing electricity for its offices [and other premises] on a green tariff that uses 100% renewable energy;
(f) within [●] months of entering into this instrument, using web hosts and cloud service providers that run their servers on 100% renewable energy or have their own net zero target;
(g) within [●] month(s) of entering into this instrument, establishing and implementing a training programme for all employees on the environmental targets, the need for the 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;
(h) within [●] month(s) of entering into this instrument, [agreeing a plan to donate [●]% of its annual net profits to entities whose aims are to mitigate the impact of Climate Change];
(i) within [●] month(s) of entering into this instrument, using contract clauses (for example using drafting published by The Chancery Lane Project) to align the Group’s activities and relationships, including its supply chain contracts with its Net Zero Target and providing any support (financial or otherwise) required by its contract partners to assist them in fulfilling those obligations[; and][.]
(j) within [●] month(s) of entering into this instrument, setting up a regular reporting regime to report [annually] [and publicly] to shareholders [and investors] until the Net Zero Target is achieved:
(i) the climate risks and opportunities to the Company in accordance with the recommendations of the International Financial Reporting Standards Foundation (IFRS),
(ii) sustainability information in accordance with [the standards set out by the Sustainability Accounting Standards Board (SASB)]/[disclosures required by the CDP];
(iii) how the effects on key stakeholders (including but not limited to employees, clients, end customers and supply chain partners) of the measures taken by the Company to mitigate its GHG Emissions align with a just transition to net zero; [and]
(iv) on all lobbying activities, trade association memberships and public policy positions that that directly or indirectly relate to the UNFCCC’s Paris Agreement [and any strategy or procedures to align such activities with the Paris Agreement][.][; and]
(k) [insert others as applicable to the business].
[Drafting note: this could include a wider sustainability policy, to: (i) consider the impact of resourcing choices (e.g. local, low carbon materials and labour, giving surplus materials to the community, investing in or training on low carbon product manufacturing or helping underrepresented groups to access green job opportunities), (ii) consider food procurement and waste, circular economy, reduction of single use plastics, risk/resilience and adaptation, waste reduction, water conservation, biodiversity or other environmental matters and (iii) to map how wider local and global stakeholders (including employees, clients, end customers and supply chain partners) are affected by climate risk and transition and how the company can help to improve their resilience.]
Definitions
Carbon Dioxide Equivalent (CO2e or CO2eq) means the standard metric measure used by [the UN’s Intergovernmental Panel on Climate Change (IPCC)] [in industry] to compare the emissions from various GHGs on the basis of their global warming potential over a specified timescale to express a Carbon Footprint that consists of different GHGs as a single number.
Carbon Footprint means the Company’s total annual GHG Emissions.
Carbon Footprint Standards means international 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).
Climate Coupon Discount Rate means a rate of [6] percent simple interest per annum.
Climate Conversion Discount means a price per Share being [10]% lower than that offered to investors on a Relevant Fund Raising.
Default Conversion Discount means a price per Share being [20]% lower than that offered to investors on a Relevant Fund Raising.
Default Interest Rate means [12]% per annum, compounding monthly.
Environmental Targets means the environmental targets in Schedule A.
Greenhouse Gas (GHG) Emissions means emissions of GHGs from all sources (including value and supply chains), categorised as scope 1, 2 and 3 emissions by The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, Revised Edition 2015 as updated from time to time. [Drafting note: Scope 1, 2 and 3 emissions are defined on page 27 of the GHG Protocol.]
Greenhouse Gases (GHGs) means the natural and anthropogenic gases which trap thermal radiation in the earth’s atmosphere and are specified in Annex A to the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) [or otherwise specified by the UNFCCC at the date of this instrument], as may be amended from time to time[, which include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6), and nitrogen trifluoride (NF3),] each expressed as a total in units of Carbon Dioxide Equivalent (CO2e). [Drafting note: see TCLP Glossary: Greenhouse Gases (GHGs) for definition options and explanatory notes.]
Key Interim Targets means [three to six]* targets towards meeting the Net Zero Target, each with a specified date for the target to be met.**
* [Drafting note: adjust depending on length of agreement and how many of these targets are required per year.]
** [Drafting note: these targets will be subject to the reporting and verification requirements in clause 1.3, which doesn’t preclude having a wider number of smaller interim targets as required in the definition of Net Zero Transition Plan but makes the obligations in clause 1.3 manageable and not excessive.]
Net Negative means that the aggregate of the Company’s actions to reduce its GHG Emissions and remove GHGs from the atmosphere exceeds its unabated GHG Emissions.
[Drafting note: see TCLP Glossary: Net Negative for definition options and explanatory notes. On a global scale, removals of Greenhouse Gases should be consistent with the mitigation pathways that would limit global warming to 1.5°C, with little to no overshoot. See IPCC Special Report on Global Warming of 1.5 ºC, Summary for Policymakers, Part C Emission Pathways and System Transitions Consistent with 1.5°C Global Warming.]
Net Zero Professional means an independent environmental or net zero consultant that specialises in setting net zero targets.
Net Zero Target both a reduction of GHG Emissions overall and a removal of GHGs associated with the implementation of an Offsetting Strategy to address the Residual Emissions of the Company by [insert date/ 2050 or sooner] to achieve a balance between the Company’s sources and sinks of GHGs in a calendar year and for each subsequent year thereafter and to achieve Paris Agreement Goals.
Net Zero Target Date means the date by which the Net Zero Target will be met, such date being [2030/ no later than 2050].
Net Zero Transition Plan means a plan to deliver the Net Zero Target and to remain Net Negative thereafter that:
(a) includes an Offsetting Strategy;*
(b) sets short and medium term interim reduction targets for the Company’s GHG Emissions that are aligned with Paris Agreement Goals, including but not limited to the Key Interim Targets;
(c) links executive remuneration to achieving the interim targets;
(d) is updated in line with developments in science and technology;
(e) is reviewed and approved annually by the Board; and
(f) promotes a just transition to a low carbon economy.
* [Drafting note: when using certain combinations of definitions of Net Zero Target and Net Zero Transition Plan both definitions of Offset/Offsetting and Offsetting Strategy may be incorporated, creating duplication and overlap. This can be addressed by combining the definition of Offset(ting) and Offsetting Strategy into one definition of Offsetting Strategy, and amending the reference in Net Zero Target to read “associated with the implementation of an Offsetting Strategy” in place of “associated with Offsets acquired”, as demonstrated in Cassie’s Clause. Alternative ways of dealing with this overlap are demonstrated in Scarlett’s Performance Conditions, Bella’s Clause and Casper’s Clause.]
Offsetting Strategy means a plan specifying:
(a) the carbon credits that [may/ will] be purchased by the Company from a project that has been verified in accordance with [insert name of voluntary standard] or under the United Nations Framework Convention on Climate Change (UNFCCC) clean development mechanism (CDM) [or [successor/ equivalent] UNFCCC mechanism] to offset its Residual Emissions;
(b) [how/ that] the emissions of GHGs avoided, reduced or removed by the project are additional;
(c) how the Company will transition from using credits resulting from offsetting projects that avoid or reduce third party emissions of GHGs to those from projects that remove emissions of GHG and involve long-term storage methods that have a low risk of reversal [over millennia];
(d) how the Company will [use best endeavours to] reduce its use of credits by reducing its Residual Emissions [to zero/ by [x]%] by 2050; and
(e) the impact of the relevant offsetting projects on a just transition and wider social and ecological goals.
Paris Agreement Goals means the three goals set out in Articles 2.1 and 4.1 of the UNFCCC’s Paris Agreement[.][, in particular pursuing efforts to limit global temperature increase to 1.5 degrees Celsius above pre-industrial levels.]
Residual Emissions means the GHG Emissions from all operations (including value and supply chains) that are emitted after all reasonable efforts have been made by the Company to reduce the GHG Emissions from all operations (including value and supply chains].
[Drafting note: see TCLP Glossary: Residual Emissions. The language in square brackets “[from all operations (including value and supply chains)]” can be removed if using a definition of GHG Emissions that refers to Scope 1, 2 and 3 emissions as defined by the GHG Protocol.]
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