Climate clause

Environmental Targets for a Limited Partnership Agreement

Stella & Flora's Clause

Amendments and additions to the ILPA standard form Limited Partnership Agreement allowing ESG issues to be investigated, raised and incorporated in investment and pricing decisions.

This is a climate clause

This clause brings climate considerations to your drafting. It is not yet net zero aligned. To align this clause with net zero, use our toolkit or join one of our events.

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Why use this?

By bringing best practice UNEP PRI wording out of side letters and into the main agreement, this clause puts asset managers (including those less informed on ESG) on an equal footing, enabling informed investment decisions that assist in minimising exposure to environmental risk and achieving net zero targets.

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The clauses on this website (and published in our Climate Contract Playbook) have been prepared in good faith on a pro bono basis and are free to download and use. The clauses have been drafted and edited by a variety of lawyers and, as such, the approaches to drafting may not conform to any particular drafting norms. We acknowledge this as a consequence of the collaborative drafting process.

The clauses on this website (and published in our Climate Contract Playbook) are provided on an ‘as is’ basis and without any representation or warranty as to accuracy or that the clauses will achieve the relevant climate goal or any other outcome.

This website (and the Climate Contract Playbook) does not comprise, constitute or provide personal, specific or individual recommendations or advice of any kind, and does not contain legal or financial advice. The clauses are precedents for legal professionals to use, amend and negotiate using their professional skill and judgement and at their own risk.

While care has been taken in the drafting of these clauses, neither The Chancery Lane Project nor any of its contributors owe a duty of care to any party in relation to their preparation and do not accept any liability for any errors or omissions, nor for any loss incurred by any person relying on or using these clauses or any other person. Users should use their own professional judgement in the application of these clauses to any particular circumstance or jurisdiction or seek independent legal advice.

At present, all the clauses are based on the laws of England and Wales. We encourage the conversion of these precedent clauses for use in other jurisdictions.

The clause

Additional/ Amended Recital:

[Name of Fund] (the Fund) is made on [insert date] between and among [name of general partner], (the General Partner); [name of fund manager], (the AIFM [in UK and EU domiciled funds, otherwise refer throughout to Fund Manager]); and the Initial Limited Partner (as such term is hereinafter defined). 

[Drafting note: In the UK, the separate manager (external AIFM) is rarely a party to the Agreement, see BVCA model LPA explanatory notes. Therefore, as some obligations relate to the AIFM, ensure that the AIFM is a party to this Agreement.]

 

Additional Definitions

Advisory Committee means the committee referred to in Section [13] [consisting of members appointed by Limited Partners from time to time [and independent environmental experts [to be appointed by Limited Partners from time to time but which may include representative(s) of an external professional services firm which is qualified to verify and is regularly engaged in assessing sustainability performance reporting]]]. [Drafting note: The selection of experts has been left deliberately flexible, particularly as the committee members will likely change depending on the level of commitment required (i.e. the frequency of involvement with the Fund).]

Agreed Remediation Measures has the meaning given to it in Section 13.2.7.

Asset (or Assets) means all present and future assets, properties, revenues, benefits and interests (including real estate and real assets, financial instruments and intellectual property) of every description that form part of the Investments.

Carbon Dioxide Equivalent (CO2e or CO2eq) means the standard metric measure used by the UN’s Intergovernmental Panel on Climate Change (IPCC) to compare the emissions from various Greenhouse Gases on the basis of their global warming potential over a specified timescale.

Carbon Footprint means the total annual GHG Emissions caused directly or indirectly by the [Group Companies]/[Fund]/[Companies]/[Assets].

Carbon Footprint Standards means internationally recognised standards to measure, manage and demonstrate carbon credentials covering organisations (including but not limited to WRI Greenhouse Gas Reporting, BEIS Voluntary Reporting Guidelines, GHG Protocol Corporate Accounting and Reporting Standard), projects, products and services (including but not limited to PAS 2050:2011, ISO 1400 and GHG Protocol Product Life Cycle Accounting and Reporting Standard) and events (including but not limited to PAS2060/ ISO 20121) [and others as applicable to the business, industry, Investment or Asset (e.g. for shipping assets, consider the Poseidon Principles)].

Company means [insert as applicable] [any companies or entities, including holding companies, that form part of the Investments from time to time].

DDQ Requirements means asking due diligence questions as set out in Schedule [Q] (Due Diligence Questionnaire), analysing and considering the responses and if necessary asking further questions before taking a decision to invest in or dispose of the Investments, which decision shall be commercially reasonable, taking account of the General Partner’s and AIFM’s obligations under this Agreement including (without limitation) in respect of furthering the achievement of the Paris Agreement Goals, the UNPRI, the Investment Objectives, the Investment Policy, the ESG Policy, the investment restrictions set forth in Section 7.1 (Investment Restrictions) and the standard of care set forth in Section 20.5 (Standard of Care).

Environmental Targets means:

[Drafting notes: (i) The targets should be tailored, ambitious but achievable. It may be appropriate to set interim targets that are achievable each year or shorter intervals. Consider aligning the timing of the targets with determining the relevant fee reward/ reduction, e.g. annual targets for an annual management fee. (ii) Consider if it is appropriate for the General Partner/ Manager or their Group to be included in the targets.  A Manager may have multiple funds and investors may not be happy to award multiple times.]

(a) the Group Companies, Fund and Companies each either setting and publicly disclosing a  Net Zero Target (excluding the Investments, Companies and Assets) validated by the Science Based Targets Initiative or signing up to Race to Zero and [meeting [all]/[[●]% of] the interim targets that it has identified as part of its plan to achieve that Net Zero Target (excluding the Companies and Assets)]; [Drafting note: If the requirement to align with SBTi or Race to Zero is not included then some further drafting will be required here to ensure that the Net Zero Target is appropriately ambitious, aligned with a 1.5℃ pathway, does not rely too heavily on problematic forms of offsetting and incorporates appropriate governance and transparency. Please see TCLP’s Net Zero Drafting Checklist for further explanation.]

(b) the Investments, Companies and Assets [each] either setting and publicly disclosing a Net Zero Target validated by the Science Based Targets Initiative or signing up to Race to Zero and [meeting [all]/[[●]% of] the interim targets that it has identified as part of its plan to achieve that Net Zero Target]; [Drafting note: This separation between the Fund and GP companies and the investments/ companies/ assets recognises that the GP will have more control over, and be able to direct, net zero targets in respect of itself, and the partners may wish to impose less stringent (but still ambitious) targets when also bearing in mind the Investments]

(c) the [Group Companies]/[Fund]/[Companies]/[Assets] achieving at least a [7%]* reduction in their Carbon Footprint annually as independently verified against one of the Carbon Footprint Standards;

* [Drafting note: This percentage should ideally be no lower than 7% and if possible, higher, to meet the target of halving absolute emissions every decade. See The ‘Carbon Law; and  J. Rockström et al., ‘A roadmap for rapid decarbonisation’, Science 355.6331, 1269-1271 (2017); Summary Report: Race to Zero criteria consultations; TEG final report on EU climate benchmarks and benchmark ESG disclosures – 30 September 2019.]

(d) the [Group Companies]/[Fund]/[Companies]/[Assets] each reporting [annually] to the General Partner:

(i) the climate risks and opportunities to the [Group Companies]/[Fund]/[Companies]/[Assets] and their business in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures;

(ii) the effects on key stakeholders (including [but not limited to] employees, clients, end customers and supply chain partners) of the measures taken by the [Group Companies]/[Fund]/[Companies]/[Assets] to mitigate [its]/[their] GHG Emissions and how these measures can address a just transition to net zero;

(iii) all climate policy engagement, climate leadership, lobbying activities, trade association memberships and public policy positions that directly or indirectly relate to the UNFCCC’s Paris Agreement; 

(e) the establishment and continuation by the [[General Partner and AIFM] of a Sustainability Committee [in respect of the Investment (including Companies and Assets)] governed by the terms of reference set out at Schedule [X] (Sustainability Committee Terms of Reference), which is a committee of the Board chaired by a non-executive director with experience of improving sustainability and mitigating carbon footprint or other relevant environmental experience [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]; [Drafting note: Consider whether the Limited Partners should be required to approve the appointees]

(f) the purchase by the [[General Partner and AIFM and their Group Companies]/[Companies] of electricity for [its]/[their] offices [and factory] [and equipment] on a green tariff that uses 100% renewable energy, in accordance with the RE100 initiative and [meeting [all]/[[●]% of] the interim targets that it has identified as part of its plan to achieve that target];

(g) the use by the [[General Partner and AIFM and their Group Companies]/[Companies]/[Assets] of web hosts and cloud service providers which run their servers on 100% renewable energy in accordance with the RE100 initiative and [meeting [all]/[[●%] of] the interim targets that it has identified as part of its plan to achieve that target;] or have their own Net Zero Target[; and] [Drafting note: Environmental Targets can be reframed/ amended to include more asset class specific targets]

[(h) others as applicable to the [[General Partner and AIFM and their Group Companies] Companies or Asset].

ESG Breach means, at any time, a breach of the ESG Policy that has not been remedied in accordance with Section [13.2.7].

ESG Policy means the standards regarding the integration of environmental, social and governance considerations (including health and safety, employees, human rights, consumer and community issues) into the management of the Fund attached as Schedule [Y] (ESG Policy)  as amended among the General Partneghgr [and the Advisory Committee] from time to time but which shall include, as a minimum, the continued maintenance of any performance related to environmental, social and governance considerations that the [Fund and Investments (including Companies and Assets)] [and the General Partner and Manager and their Group Companies] have achieved to date and ensuring there is no backtracking. 

Extra Carry Percentage has the meaning given to it in Section 14.3.

GHG Emissions means the [Group Companies’]/[Fund’s]/[Companies’]/[Asset’s] emissions of Greenhouse Gases 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 from time to time. [Drafting note: Scope 1, 2 and 3 emissions are defined on page 27 of the GHG Protocol.]

Greenhouse Gases 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 Agreement, 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).

Group Companies means the group companies of the [AIFM] and the General Partner. [Drafting note: Insert standard wording for group.]

Impact Calculation means a determination by [the Advisory Committee] as to which Environmental Targets have been met as at the Impact Calculation Date. [Drafting note: The suggested structure (see below) is that the ‘test date’ is year end and, following that date, the General Partner provides to the Advisory Committee details as to whether the Environmental Targets have been satisfied and the Advisory Committee analyses that information (all assuming that it will be the Advisory Committee that makes the final determination as to whether the targets have been met or not). Then, the management fee will be adjusted for the next Payment Dates.]

Impact Calculation Date means [insert date] of each year.

Increased Preferred Return means an increase by [1%][2%] in the Preferred Return which would apply if there is an ESG Breach at any time, until such ESG Breach is remedied in accordance with Section [13.2.7].

Investment means any investment by the Fund including via a holding company or directly in an underlying asset.

Investment Objectives has the meaning given to it in Section [2.2.3].

Key Person Event means at any time during the Commitment Period (i) [●] ceases to devote time and attention for any reason, including death, disability or retirement, as required under Section 9.2 (Time and Attention) to the Fund[, the Prior Funds] and any Successor Fund permitted in accordance with this Agreement; (ii) there is a Change of Control; or (iii) there is a material and persistent ESG Breach [as determined by the Advisory Committee]. [Drafting note: A Key Person Event that is not resolved may also result in a removal or cause event.]

Management Fee has the meaning given to it in Section [8.2.1].

Net Zero Target means both a reduction of GHG Emissions overall and a removal of Greenhouse Gases associated with Offsets acquired to address Residual Emissions of the [Group Companies]/[Fund]/[Companies]/[Asset] by [insert date/ 2050 or sooner] to achieve a balance between the [Group Companies’]/[Fund’s]/[Companies’]/[Assets’] sources and sinks of GHGs in a calendar year and for each subsequent year thereafter and to achieve the Paris Agreement Goals.

Offset means carbon credits purchased from a project:

(a) 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];

(b) where the emissions of Greenhouse Gases* avoided, reduced or removed by the project are additional;

(c) that, in relation to Greenhouse Gas removals, employs long-lived storage methods that have a low risk of reversal over millennia;  

(d) that prioritises the removal of Greenhouse Gases from the atmosphere rather than avoids or reduces third party emissions of Greenhouse Gases; and

(e) that takes account of a just transition and addresses wider social and ecological goals. 

* [Drafting note: The reference to emissions here is to greenhouse gas emissions generally. The defined term GHG Emissions is not used because it relates to the emissions of a party.]

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.

Payment Date has the meaning given to it in Section [8.2.1].

Preferred Return means, with respect to each Partner (other than an Affiliated Partner), as of any date of determination, such amount as is equal to an annual rate of return of [8]%, compounded annually and calculated daily on the Capital Contributions made by such Limited Partner, calculated from the date of receipt of each such Capital Contribution by the Fund* and accrual of the Preferred Return, and ceasing on the date of distribution or deemed distribution by the Fund to such Limited Partner.

* [Drafting note: If the Fund uses a subscription line of credit, the preferred return should be calculated from the date on which the subscription line of credit was drawn. Please refer to ILPA’s Subscription Lines of Credit and Alignment of Interest: Considerations and Best Practices for Limited and General Partners.]

Residual Emissions means the GHG Emissions that are emitted after all reasonable efforts have been made by [Group Companies]/[Fund]/[Companies]/[Assets] to reduce GHG Emissions.

UNPRI means the Principles for Responsible Investment instituted by the United Nations.

 

Additional/ Amended Sections/ Articles:

Operative Provisions:

Integration with purpose and Investment strategy

2.2 Purposes.  

The purposes of the Fund are to:

2.2.1 carry on the business of investment activities in line with the Investment Strategy, which shall include meeting the Environmental Targets; 

2.2.2 [●]; and

2.2.3 engage in such other activities as are necessary, advisable, lawful and consistent with the foregoing, (the Investment Objectives), in all cases in accordance with the Investment Policy, the ESG Policy, the UNPRI, Section 7.1 (Investment Restrictions) and the other provisions of this Agreement.

Management Fee Ratchet

8. MANAGEMENT

8.1 Management of the Fund.

8.1.1 The General Partner and the AIFM shall, and shall cause the Fund to, at all times comply with the UNPRI and this Agreement, including the Investment Objectives, the Investment Policy, the ESG Policy, the investment restrictions set forth in Section 7.1 (Investment Restrictions) and the standard of care set forth in Section 20.5 (Standard of Care).  

8.1.2 The General Partner and the AIFM shall at all times comply with the DDQ Requirements when making Investments [and, to the extent that the Fund invests as a secondary fund of funds and that due diligence operations with respect to the underlying portfolio companies are limited as a result of the nature of the Fund and the information available to it,]*  the General Partner and the AIFM shall use reasonable endeavours to ensure that any fund in which the Fund invests complies with the DDQ Requirements when making investments.

* [Drafting note: If the Fund solely invests as a secondary fund, it may be appropriate to include only the reasonable endeavours obligation as the GP will not have control over the DD process.]

8.2 Management Fee.

8.2.1 The Fund shall pay the [General Partner/AIFM] an annual management fee with respect to each Limited Partner (Management Fee) calculated with respect to such Limited Partner in accordance with Section 8.2.2 below, beginning as of the Initial Investment Date and continuing until the earlier of (i) the last day of the initial Term (excluding, for the avoidance of doubt and notwithstanding Section 18.1 (Term), any extension thereto), and (ii) the appointment of a liquidator other than the General Partner. The Management Fee shall be payable in quarterly instalments in advance commencing on the Initial Investment Date and on each of January 1, April 1, July 1 and October 1 thereafter (each a Payment Date). Any payment for a period of less than a calendar quarter shall be adjusted on a pro rata basis according to the actual number of days during such period.

8.2.2 [Subject to Section 8.3 (Management Fee Offset) below, t][T]he Management Fee payable with respect to each Limited Partner shall be an amount equal to:

8.2.2.1 until the termination of the Commitment Period, or, if earlier, the effective date on which a management fee begins to accrue with respect to a Successor Fund, 

(i) where none of the Environmental Targets have been met on the Impact Calculation Date that precedes the Payment Date, []% per annum of the Commitment of such Limited Partner;

(ii) where one of the Environmental Targets has been met on the Impact Calculation Date that precedes the Payment Date, []% per annum of the Commitment of such Limited Partner;

(iii) where two of the Environmental Targets have been met on the Impact Calculation Date that precedes the Payment Date, []%* per annum of the Commitment of such Limited Partner**; and 

* [Drafting note: This figure would be negotiated between the parties on a case by case basis, but an indication should be provided as to the level of the adjustment that should occur if the target has not been met. Further, the figures in (i), (ii) and (iii) should differ.]

8.2.2.2 thereafter, or during such time as the Commitment Period is suspended in accordance with Article 11 (Key Person Event; Suspension), []% per annum, paid quarterly on each Payment Date, of the Capital Contributions made by such Limited Partner to fund the Acquisition Cost of Portfolio Investments other than Temporary Investments, less an amount equal to the Acquisition Cost of Portfolio Investments, other than Temporary Investments, that have been realised (in whole or in part), written off or Permanently Written Down as of the end of the most recent financial quarter[, and reduced by: 

(i) where none of the Environmental Targets have been met on the Impact Calculation Date that precedes the Payment Date, [●]% per annum; and

(ii) where one [or more] of the Environmental Targets have been met on the Impact Calculation Date that precedes the Payment Date, [●]% per annum].**

** [Drafting note: Management Fee uplift can continue for each Environmental Target met.]

Oversight and Remedies

13. Advisory Committee

[Drafting note: Consider making the targets objective so that no determination of the advisory committee is required, unless in case of dispute, in which case an independent expert can be consulted. The problem with the advisory committee making this determination is that the General Partner/ Manager selects the investors who nominate those individuals, and it is usually the General Partner who constitutes the advisory committee. There is a fairly clear conflict of interest if Limited Partner representatives, as members of the advisory committee, determine whether targets have been met.  General Partners would likely be uncomfortable with the advisory committee having the power to set targets that directly affect fund economics. In addition, the advisory committee and its members typically do not owe fiduciary duties to the fund or to the partners as a whole, and so are not subject to any requirements to act in the best interests of the fund.]

13.2 Scope of Authority

13.2.5 The General Partner shall:

13.2.5.1 give the Advisory Committee a [quarterly/bi-annual]* ESG progress report [in accordance with the template agreed with the General Partner in Schedule [Z] (Template for ESG Progress Report); and 

* [Drafting note: Drafters should determine whether quarterly or semi-annually would be the appropriate frequency, bearing in mind that the management fee is adjusted annually and that the frequency depends on the scope of the progress report and the level of ongoing scrutiny the Advisory Committee will apply.]

13.2.5.2 no later than [●] days after any Impact Calculation Date, give the Advisory Committee a statement as to whether, and which of, the Environmental Targets have been made in respect the year ending on the most recent Impact Calculation Date and provide evidence thereof, and shall promptly provide any information reasonably requested by the Advisory Committee to facilitate the Impact Calculation.

13.2.6 [By no later than [●] days after any Impact Calculation Date, the [Advisory Committee] shall make and inform the General Partner of the results of the Impact Calculation.] 

13.2.7 Following any ESG Breach:

13.2.7.1 the General Partner shall promptly notify the Advisory Committee of such ESG Breach;

13.2.7.2 the General Partner shall, as soon as practicable, provide the Advisory Committee with a corrective action plan containing proposed remediation measures to resolve the ESG Breach, including a reasonable and practicable timeframe for the implementation of such measures; 

13.2.7.3 the Advisory Committee shall promptly review the proposed corrective action plan and, acting reasonably with a view to resolving the ESG Breach, promptly and in a commercially reasonable manner either approve such plan or work with the General Partner to agree amendments to the corrective action plan (and the General Partner shall work with the Advisory Committee to do so) (the Agreed Remediation Measures); and

13.2.7.4 the General Partner shall implement the Agreed Remediation Measures and shall provide regular updates on the progress of the Agreed Remediation Measures that are not more than one month apart, with such updates to continue until the ESG Breach has been resolved to the reasonable satisfaction of the Advisory Committee[.]

Carried Interest Ratchet

OPTION 1

14.3 Distributions of Distributable Proceeds

Option 1 Version A (Extra Carry Percentage and Negative Extra Carry Percentage

Subject to 6.5 (Use of Distributable Proceeds to Fund Drawdowns), Distributable Proceeds (other than Temporary Investment Income) from any Portfolio Investment shall be initially apportioned among the Partners in proportion to their Sharing Percentages with respect to the applicable Portfolio Investment. The amount so apportioned to any Affiliated Partner shall be distributed to such Person and, except as otherwise provided in this Article 14 (Distributions; Allocations) and Section 6.6 (Defaulting Partners), the amount so apportioned to each other Partner shall be distributed between the General Partner and such Partner as follows:

14.3.1 First, 100% to such Partner until such Partner has received cumulative distributions pursuant to this Section 14.3.1 equal to such Partner’s aggregate Capital Contributions;

14.3.2 Second, 100% to such Partner until the cumulative amount distributed to such Partner pursuant to this Section 14.3.2 is equal to the Preferred Return for such Partner;

14.3.3 Third, [80]% to the General Partner and [20]% to such Partner until the General Partner has received cumulative distributions with respect to such Partner pursuant to this Section 14.3.3 equal to [20]% [plus any Extra Carry Percentage]* of the cumulative amount of distributions made or being made to (i) such Partner pursuant to Section 14.3.2 and this Section 14.3.3 and (ii) the General Partner with respect to such Partner pursuant to this Section 14.3.3; and 

14.3.4 Fourth, thereafter, (i) [20]% plus any Extra Carry Percentage to the General Partner and (ii) [80]% minus any Extra Carry Percentage to such Partner.

* [Drafting note: Consider excluding this to be picked up by 14.3.4 below as whether the Extra Carry Percentage applies may change over time.]

For the purposes of this clause, Extra Carry Percentage shall mean [●]%, where at least [3] of the Environmental Targets have been met on the Impact Calculation Date that precedes the date on which Distributable Proceeds are initially apportioned. An ESG Breach at any time during the most recent period from the previous date on which Distributable Proceeds were apportioned until the next date on which Distributable Proceeds are to be apportioned will cause the Extra Carry Percentage to be deemed to be [zero/negative %] in respect of such Distributable Proceeds.

Option 1 Version B (Extra Carry Percentage and Increased Preferred Return) 

Subject to 6.5 (Use of Distributable Proceeds to Fund Drawdowns), Distributable Proceeds (other than Temporary Investment Income) from any Portfolio Investment shall be initially apportioned among the Partners in proportion to their Sharing Percentages with respect to the applicable Portfolio Investment. The amount so apportioned to any Affiliated Partner shall be distributed to such Person and, except as otherwise provided in this Article 14 (Distributions; Allocations) and Section 6.6 (Defaulting Partners), the amount so apportioned to each other Partner shall be distributed between the General Partner and such Partner as follows:

14.3.1 First, 100% to such Partner until such Partner has received cumulative distributions pursuant to this Section 14.3.1 equal to such Partner’s aggregate Capital Contributions;

14.3.2 Second, 100% to such Partner until the cumulative amount distributed to such Partner pursuant to this Section 14.3.2 is equal to the Preferred Return for such Partner, or if there has been an ESG Breach during the period from the most recent date on which Distributable Proceeds were apportioned until the next date on which Distributable Proceeds are to be apportioned, the Increased Preferred Return for such Partner[, plus any Extra Carry Percentage of the cumulative amount of distributions made or being made to (i) such Partner pursuant to Section 14.3.2 and Section 14.3.3 and (ii) the General Partner with respect to such Partner pursuant to Section 14.3.3];

14.3.3 Third, [80]% to the General Partner and [20]% to such Partner until the General Partner has received cumulative distributions with respect to such Partner equal to [20]% of the cumulative amount of distributions made or being made to (i) such Partner pursuant to Section 14.3.2 and this Section 14.3.3 and (ii) the General Partner with respect to such Partner pursuant to this Section 14.3.3; and

14.3.4 Fourth, thereafter, (i) [20]% plus any Extra Carry Percentage to the General Partner and (ii) [80]% minus any Extra Carry Percentage to such Partner.

For the purposes of this Section, Extra Carry Percentage shall mean [●]%, where at least [3] of the Environmental Targets have been met on the Impact Calculation Date that precedes the date on which Distributable Proceeds are initially apportioned. 

OPTION 2

[Drafting note: The carried interest ratchet in Option 1 may be problematic for a number of reasons, including:

  • There is no link between the targets (calculated annually), and the timing of the sale of an asset which would cause distributable proceeds to be distributed. A manager could have achieved the targets for 5/10 years, but once assets start to be realised and money distributed, could miss the targets in the period before the distribution and therefore not be rewarded for previous efforts. Similarly, a manager could have failed to meet targets until the period immediately prior to the distributions and then get rewarded, having met targets in the period immediately prior.
  • A re-calculation of carry percentages before every distribution and the fluctuation in that percentage could cause serious administrative difficulties in calculating carry clawback (where at the end of the life of the fund, a calculation is performed in order to ensure that the Limited Partners (LPs) and the carry recipients have received the correct amounts over the course of the life of the fund).

Instead of the carried interest ratchet, consider these alternatives for Section 14.3: 

  • A separate ‘environmental performance fee’ in respect of environmental targets rather than a carry ratchet, which can be paid in the style of a “General Partner’s Share”/ “Priority Profit Share” and allocated annually (or as frequently as the targets are calculated) as a priority share of profits before allocation of profits to LPs. This would work also to reverse the profit share if the targets are missed. For example, if the General Partner (GP) meets the target in a given year, it gets a profit allocation equal to [0.5]% of commitments. However, if the GP misses the target, the allocation is either: a) reversed and investors get an extra profit allocation equal to [0.5]% of their commitments, or b) this amount gets allocated to an environmental charity.
  • A ‘true up’ concept at the end of the life of the fund where if, for example, at least [3] of the Environmental Targets have been met in [6] years out of the [10] year life of the fund, or there have been less than [●] ESG Breaches over the life of the Fund, then the extra carry percentage shall be awarded. This removes the arbitrary timing of the distributions and the award of carry. It also ensures that there are no additional complications in respect of carry clawback. To make the true up concept work in practice, consider allocating the extra carry during the life of the fund to an “ESG escrow account” or similar. If the targets are met at the end of the fund’s life, the cash is released from escrow to the GP. If they are not met, the cash is released from escrow and paid to the investors, or alternatively is paid to an environmental charity, so that the investors don’t profit from poor environmental performance. Using an escrow means the GP will not need to ask investors to return distributions to the fund to then distribute to the GP as extra carry.
  • A true deal by deal carry. Environmental targets would be applied to the asset which is realised to fund the carry.  True deal by deal is fairly rare, so may not be taken up by many managers.]

Schedule [Q] (Due Diligence Questionnaire)

[Insert Lola & Harry’s DDQ , adapted to the circumstances.]


Schedule [X] (Sustainability Committee Terms of Reference)

The definitions in the [name of Agreement] apply in these Terms of Reference.

Additional Definitions 

Net Negative means that the aggregate of a party’s actions to reduce its GHG Emissions and remove Greenhouse Gases from the atmosphere exceeds its unabated GHG Emissions.

Net Zero Target Plan means a plan to deliver the Net Zero Target and to remain Net Negative thereafter that:

(a) includes an Offsetting Strategy;

(b) sets interim reduction targets for GHG Emissions that are aligned with Paris Agreement Goals;

(c) links executive remuneration to achievement of the interim targets; and

(d) promotes a just transition to a low carbon economy.

Offsetting Strategy means a plan specifying:

(a) the verified credits that may be used by the [Group Companies]/[Fund]/[Companies]/[Assets] to offset Residual Emissions;

(b) how the [Group Companies]/[Fund]/[Companies]/[Assets] will transition from using credits resulting from offsetting projects that avoid or reduce emissions of Greenhouse Gases to those from projects that remove emissions of Greenhouse Gases and involve long-term storage methods that have a low risk of reversal[; and

(c) how the [Group Companies]/[Fund]/[Companies]/[Assets] will [use best endeavours to] reduce its use of credits by reducing its Residual Emissions [to zero/ by [●]%] by 2050][; and

[(d) the impact of the relevant offsetting projects on a just transition and wider social and ecological goals].

Terms of Reference

1. The Sustainability Committee shall oversee the development, implementation and review of a Net Zero Target Plan [for each of the [Group Companies]/[Fund]/[Companies]/[Assets]].
2. [●]
3. [●]

[Drafting note: Add further terms of reference to ensure that the Sustainability Committee fulfils a meaningful function and applies high climate ambition (see The Chancery Lane Project’s net zero implementation tools for further information), identifying a clear intersection between the proposed roles of the Sustainability Committee and the Advisory Committee.]


Schedule [Y] (ESG Policy)

[Insert ESG Policy.]


Schedule [Z] (Template for ESG Progress Report)

[Drafting note: It is expected that this template will include confirmation and detail of compliance with the DDQ Requirements and, to the extent there has been non-compliance, any reason for such non-compliance (noting that only in limited circumstances is non-compliance permitted under this Agreement). It is also expected that the template will include confirmation, as at the date of the relevant ESG progress report, that there is no ESG Breach.]

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