A set of sustainability linked clauses to be incorporated into Facility Agreements: including covenants, representations and a ratcheted interest rate linked to emissions reduction performance.Skip to clause
Why use this?
This clause seeks to take advantage of UK cement companies’ large debt profiles and reliance on revolving credit facilities and incentivise them to engage in climate action strategies through sustainability-linked loans.
The new set of clauses operates as a sustainability-linked Facility Agreement framework within which lenders and borrowers acting within the cement industry can operate. There are three core elements:
(i) A covenant from the borrower to meet GHG Reduction Targets by meeting the agreed ERMs. The suggested ERMs offer a list of GHG Reduction Target options to be narrowed down to, for example, two to be agreed between the parties.
(ii) Performance of the selected ERM is to be independently verified by an independent third party.
(iii) A covenant to produce Emissions Reduction Measures Reports and Emission Reports throughout the life of the loan.
The concept and drafting have been focused on the cement industry and incurrence of debt under a facility agreement, but the clause could equally be adapted and applied in other sectors and to other financing scenarios, including investments.
How it promotes a net zero future
The introduction of Larissa’s Clause within Facility Agreements will promote the adoption of climate action strategies to reduce emissions in the cement industry. The clause will incentivise both lenders and borrowers to deliver on climate strategies, as tailored and adopted by each stakeholder.
The precedent framework provides a space within which key stakeholders can operate, which can be tailored to specific climate action strategies. Sustainability-linked loans ought to be common-place in the Finance Sector and should be promoted by both lenders and borrowers as part of the global strive towards Net-Zero targets.
Disclaimer - please read
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.
Actual Total Emissions means the total GHG Emissions caused directly or indirectly [by [the Borrower]][in connection with [insert details of cement plant]] over the relevant Emissions Reporting Period expressed as a Carbon Dioxide Equivalent (CO2e), as verified by a Climate Professional.
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 Greenhouse Gases (GHGs) on the basis of their global warming potential over a specified timescale in order to express Actual Total Emissions that consist of different GHGs as a single number.
Climate Professional means an independent, unconnected third party with no conflict of interest that is an appropriately qualified [environmental, sustainability / net zero] consultant or climate scholar / scientist who has the fundamental skills and experience to diligently, competently and professionally, perform an audit of Actual Total Emissions, as approved by the Lender.
Emissions Reduction Measures or ERM means the emissions reduction measures set out in Schedule [ ] to this Agreement.
Emissions Reduction Measures Programme means the programme for implementing the Emissions Reductions Measures, including milestones, related milestone dates and respective interest rates.
Emissions Reduction Measures Report means a yearly report provided by the Borrower to the Lender containing information in respect of the Borrower’s performance in meeting the ERMs for the preceding Emissions Reporting Period, as well as the Borrower’s forecast and plans for progressing and meeting the ERMs in the next Emissions Reporting Period, as verified by an Climate Professional.
Emissions Report means a written report setting out the Actual Total Emissions for the relevant Emissions Reporting Period, the Projected Total Emissions for the next Emissions Reporting Period, and the emissions forecasted to be produced [per annum] [over the lifecycle of the Project] [by [insert details of cement plant] over the next [ ] years], as verified by a Climate Professional.
Emissions Reporting Period means each period of twelve months commencing on the date of this Agreement and each anniversary of that date throughout the [term of the Loan].
GHG Emissions means emissions of Greenhouse Gases, each expressed as a total in units of carbon dioxide equivalent (CO2e).
Greenhouse Gases (GHGs) means the natural and anthropogenic gases which trap thermal radiation in the earth’s atmosphere and 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 (N2 O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6 ), and nitrogen trifluoride (NF3 ).]
Projected Total Emissions means an estimate of total emissions in respect of the relevant Emissions Reporting Period.
GHG Reduction Target means reducing or off-setting the emission of the greenhouse gas emissions, as reported in the Emissions Report, by [●]%.
1. Conditions Precedent
1.1 The Borrower shall have provided to the Lender the Emissions Report on or before the date falling 3 (three) months prior to the Commencement Date of this Agreement. [Note: Also to be included in the heads of terms.]
2. Representations and Warranties
2.1 The information set out in the Emissions Report and the Emissions Reduction Measures Report are accurate to the best of the Borrower’s knowledge as at the date of the relevant report.
2.2 The Borrower is on target to meet the agreed GHG Reduction Target and the Emissions Reduction Measures in accordance with the Emissions Reduction Measures Programme.
2.3.1 the Borrower repeats the representations in clause [2.1 – 2.2] on:
(a) the date of each Drawdown Request;
(b) each Drawdown Date; and
(c) the first day of each Interest Period.
3.1. Calculation of interest
3.1.1 The interest rate shall be [x%], provided that if the Borrower is deemed to be in compliance with the Emissions Reduction Measures Programme following each review in accordance with clause [4.4] and provided that no Default is outstanding at such time, then the interest rate shall be reduced by [ ]% to a minimum rate of [ ]%.
4.1. The Borrower shall achieve the GHG Reduction Target by [date to be inserted] in accordance with the Emissions Reduction Measures Programme.
4.2 The Borrower shall implement the following Emissions Reduction Measures in accordance with the Emissions Reduction Measures Programme:
4.2.1 ERM 1 [Insert details of ERM]; and
4.2.2 ERM 2 [Insert details of ERM].
4.3. On or before the last day of the Emissions Reporting Period, the Borrower shall provide the Lender with the following:
4.3.1 an Emissions Report; and
4.3.2. an Emissions Reduction Measures Report.
[Drafting Note: Details of ERMs to be inserted, including which ERM and details as to what the Borrower is required to implement in order to meet that ERM.]
4.4.1 The Borrower’s performance against its selected Emissions Reduction Measures shall be independently verified on an [annual basis] by a Climate Professional, at the Borrower’s cost.
4.4.2. Within [ ] days of receipt by the Lender of the Emissions Report and the Emissions Reduction Measures Report, the Lender shall:
(a) notify the Borrower of any further information reasonably required by the Lender for the purpose of carrying out a review of the same, in which case the Borrower shall provide such further information to the Lender within 7 days of receipt of such request for further information;
(b) evaluate the Borrower’s performance in respect of the ERMs against the agreed Emissions Reduction Measures Programme and the GHG Reduction Target; and
(c) within [ ] days of receipt of the further information (if required) or the Emissions Report and the Emissions Reduction Measures Report if no further information is required, confirm to the Borrower (i) whether, in the Lender’s opinion, the Borrower has complied with the Emissions Reduction Measures Programme, and (ii) the interest rate applicable until [insert date]. [Drafting Note: parties to consider and include effect on interest rate depending on the level or progress, including inverse progress.]
Schedule 1: Sustainable Performance Target
[Drafting Note: Parties to agree, expand upon and set out in [the Agreement][this Schedule] further details of the ERMs to be achieved.]
In order to meet the GHG Reduction Targets, the Borrower shall select at least [two] of the Emissions Reduction Measures as set out at paragraph 1.1 below, provided that if the Borrower wishes to select ERM6 they must have selected at least [two] other Emissions Reduction Measures to be achieved in priority to ERM6.
1. Emissions Reduction Measures [Drafting Note: ERMs and parameters to be agreed between the Borrower and Lender and set out in Clause 4.2 and the table below.]
1.1. The Borrower shall implement the following ERMs in accordance with Clause 4.2 and this Schedule [ ] of the Agreement.
|ERM2||Products greenhouse gas emissions||
|ERM4||Direct installation and use of on-site green energy||
|ERM5||Investment in green technology||
|ERM6||Offsetting / Insetting Emissions||