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).

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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.

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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.

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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 Definitions

Carbon Dioxide Equivalent (CO2e or CO2eq) means a unit of measurement that is used to standardise the climate effects of various Greenhouse Gases.

Carbon Footprint means the total annual Greenhouse Gas Emissions caused directly or indirectly by the Group, expressed as a Carbon Dioxide Equivalent (CO2e).

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).

Carbon Insetting means a carbon reduction project, verified by a carbon offset standard, which occurs within the Group’s supply chain or supply chain communities.

Carbon Offsetting means the purchase of a quantity of carbon credits equal to the amount of the Group’s Residual Emissions from a project that has been verified in accordance with [insert name of voluntary standard] or from a United Nations Framework Convention on Climate Change (UNFCCC) clean development mechanism (CDM) [or [successor/ equivalent] UNFCCC mechanism] project.

Climate Change means an identifiable change in the state of the global climate which (a) persists for an extended period of time and  (b) is[, in the Company’s opinion,]  caused directly or indirectly by human activity that alters the composition of the global atmosphere or the Earth’s natural processes, including volcanic eruptions and changes of solar cycles.

Climate Change Mitigation Measures means the measures taken by the Group to reduce its Greenhouse Gas Emissions and to meet the Net Zero Target in its environmental policy.

Environmental Targets means:

(a) the Group [achieving the Net Zero Target/ making meaningful progress towards achieving the Net Zero Target by [date]];

(b) the Group adopting one of the Carbon Footprint Standards;

(c) the establishment by the Group of a sustainability committee as a committee of the Board, chaired by a non-executive director with experience of improving sustainability and mitigating carbon footprints;

(d) the purchase by the Group of electricity for its offices [and factory] on a green tariff that uses 100% renewable energy;

(e) the use by the Group of web hosts and cloud service providers which run their servers on 100% renewable energy or have their own Net Zero Target;

(f) the Group establishing and implementing a training programme for all employees on the Group’s Climate Change Mitigation Measures and in particular the ways in which employees can help to reduce the Group’s Scope 3 Emissions;

(g) the Group donating [●]% of its net profits to entities whose aims are to mitigate the impact of Climate Change;

(h) the Company’s Carbon Footprint (as determined by the Company) being reduced by [  ]% over a period of [     ]. 

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

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 means:

(a) the Group publishing a Gender Pay Gap Report and an Ethnicity Pay Gap Report, and implementing measures to ensure that any pay gap identified in such reports is [reduced by [●]%/eliminated] by 20[●].

(b) the establishment by the Group of 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 in furtherance of the Environmental Targets, Social Targets and Governance Targets;

(d) the Company complying with the [UK Corporate Governance Code][the QCA Corporate Governance Code];   

(e) [others as applicable to the business e.g. board diversity, employee engagement].

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]. [These GHGs are currently: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6) and nitrogen trifluoride (NF3).]

Greenhouse Gas Emissions means emissions of the greenhouse gases listed at Annex A of the 1998 Kyoto Protocol to The United Nations Framework Convention on Climate Change, as may be amended from time to time, 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 Zero Target means that the net balance between (a) Greenhouse Gas Emissions from all the Group’s operations and (b) Greenhouse Gas removals, accounted for by credits from either Carbon Insetting or Carbon Offsetting projects, is zero by [specify date].

Residual emissions means the Greenhouse Gas Emissions that are emitted after all reasonable efforts have been made by the Group to reduce its Carbon Footprint.

Scope 1 Emissions means all direct emissions from the activities of the Group or under its control, including on site 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 means:

(a) the Group 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) the Group ensuring all job descriptions include language and requirements that are inclusive and equitable;

(c) the Group ensuring that its facilities are designed to meet accessibility requirements for individuals with physical disabilities;

(d) the Group putting in place formal targets with respect to purchasing from local suppliers;

(e) the Group 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;

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

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

Underrepresented Groups means [groups who 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. [Consider whether the Environmental Targets need 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 [●]%

 

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