Climate clause

Environmental, Social and Governance (ESG) Based Performance Conditions for Employee Incentive Awards

Scarlett's Performance Conditions

Sample performance conditions that provide for part of a share-based incentive award to vest dependent upon the meeting of ESG targets (specifically climate targets).

This is a net zero clause

This clause aligns with Paris Agreement goals, Race to Zero requirements and the Oxford Principles for Net Zero Aligned Carbon Offsetting. For tools and support to use this clause, use our toolkit or join one of our events.

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Why use this?

Making awards conditional upon achieving ESG targets incentivises and rewards long term decision-making that is required to deliver sustainable, climate aligned action to reduce company greenhouse gas emissions by 2050 or sooner, in line with Paris Agreement goals.

The clause

Additional Definitions 

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 (GHGs) on the basis of their global warming potential over a specified timescale.

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).

Environmental Targets [is defined/ 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/ has the meaning given] in Schedule A. 

Greenhouse Gas (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 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 as 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, including 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).

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 aggregate of the Group’s actions to reduce its GHG Emissions and remove GHGs from the atmosphere exceeds its unabated GHG Emissions. 

Net Zero Target means both a reduction of the Group’s GHG Emissions overall and a removal of GHGs associated with Offsets acquired to address the Residual Emissions of the Group by 2050 or sooner to achieve a balance between the Group’s sources and sinks of GHGs in a calendar year and for each subsequent year thereafter and the goals of the Paris Agreement.

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 interim reduction targets for the Group’s GHG Emissions that are aligned with the goals of the Paris Agreement;

(c) links executive remuneration to the achievement of 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 in two ways: (1) as exemplified in this clause (Scarlett’s  Performance Conditions), Bella’s Clause and Casper’s Clause; or (2) 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 and Nozomi’s Clause.]

Offset or Offsetting means the purchase of carbon credits 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 GHGs avoided, reduced or removed by the project are additional;

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

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

Offsetting Strategy means a plan specifying:

(a) the verified credits from a recognised offset provider that may be used by the Group to Offset its Residual Emissions;

(b) how the Group will transition from using credits resulting from offsetting projects that avoid or reduce emissions of GHGs to those from projects that remove emissions of GHGs; and

(c) how the Group will [use best endeavours to] reduce its use of Offsets by reducing its Residual Emissions [to zero/ by [x]%] by 2050.

Residual Emissions means the GHG Emissions that are emitted after all reasonable efforts have been made by the Group to reduce its GHG Emissions.

Scope 1 Emissions means all direct emissions from the activities of the Group or under its control, including onsite fuel combustion and emissions from chemical production in owned or controlled process equipment, refrigerant losses and company vehicles.

Scope 2 Emissions means all indirect emissions from electricity purchased and used by the Group where the emissions occur at sources owned or controlled by another company.

Scope 3 Emissions means all indirect emissions (other than Scope 2 Emissions) that are emitted as a consequence of the Group’s activities but occur from sources not owned or controlled by the Group, including business travel, procurement, waste and water.

Social Targets is defined/ has the meaning given in Schedule A.

Underrepresented Groups means [groups that have traditionally not had equal access to economic opportunities because of discrimination or other societal barriers].


Additional Clauses 

Performance Conditions

In accordance with the Rules of the Plan, the Remuneration Committee has determined that the Vesting of the Award is subject to the following Performance Conditions.

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. 

1. Financial Performance Condition

1.1 [●]% of the Award is subject to the Financial Performance Condition.

1.2 The Financial Performance Condition is that [insert TSR/ EPS/ EBITDA/ ROIC or other financial performance condition as appropriate]. 

2. ESG Performance Condition

2.1 [●]% of the Award is subject to the Group achieving 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 [●]%
Social Targets [●]%
Governance Targets [●]%

* [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 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) [achieving and maintaining the Net Zero Target/ achieving [] of the interim targets set out in its Net Zero Transition Plan];

(c) assessing and verifying the Group’s Carbon Footprint in accordance with one of the Carbon Footprint Standards;

(d) 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) purchasing electricity for its offices [and other premises] on a green tariff that uses 100% renewable energy;

(f) using web hosts and cloud service providers that run their servers on 100% renewable energy or have their own net zero target;

(g) 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][.]

(h) [donating [●]% of its net profits to entities whose aims are to mitigate the impact of climate change[;][; and][.]]

(i) [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 in 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) [others as applicable to the business.]

[Drafting note: The environmental targets listed above cover low (light green) to high (dark green) net zero ambition. Users of the Environmental Targets definition can select such of the targets that align with their requirements, the level of their net zero ambition and configure the list accordingly and as required. 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.]

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 [●]%]/[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][the QCA Corporate Governance Code][;][; and][.]

(e) [making [public] disclosures [to/ in [●]] on governance, strategy, risk management and metrics and targets aligned with the recommendations of the Task Force on Climate-related Financial Disclosures[;][; and][.]] 

(f) [conducting an annual [analysis/ 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) [others as applicable to the business e.g. 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 physical 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]

(f) [[reporting annually in its annual report and accounts on]/[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[;][; and]]

(g) at least [●]% of [the executive committee] [direct reports to the Chief Executive Officer] are female[; and][.]

(h) [others as applicable to the business e.g. pro bono work, community engagement, health and safety records].

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