Climate clause

Green Investment Obligations

Frank's Clause

Amendments to standard non-leveraged investment documents to focus the founders and investee company on climate change and environmental issues with their products, services, and operations.

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?

To impose obligations concerning climate risk and sustainability on a company and founder. This puts environmental and climate change issues front and centre of the investment and the development of the investee company’s business.

The clause

Additional definitions

Capital Purpose means to preserve the value of the Investor[‘s][s’] capital invested in the Company.

Commercial Purpose means to make the Company profitable so as to provide a return to shareholders whilst having regard to the Social Purpose and Capital Purpose.

Company means [insert name of Company that is being invested in].

Environmental and Sustainability Training Programme means a programme of training, provided on a regular basis (at least annually) for employees, personnel and contractors during their usual working hours (and online as required) that will cover, as a minimum:

(a) the latest climate science;

(b) climate change policy and relevant legal context (including core terms of the Paris Agreement and any national implementation measures);

(c) the economic and social (e.g. health) benefits to the Company in reducing the workplace’s environmental impact;

(d) sustainable lifestyle changes and issues relating to the workplace;

(e) details of the Company’s own public and contractual commitments, targets and governance in relation to climate change and sustainability; and

(f) other topical climate and sustainability issues.

Founders means the founders and senior Founders of the Company listed in schedule [●].

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 periodically. [Scope 1, 2 and 3 emissions are defined on page 27 of the GHG Protocol.]

Greenhouse Gases (GHGs) means the gases that trap thermal radiation in the earth’s atmosphere. They are specified by the United Nations Framework Convention on Climate Change (UNFCCC) in Annex A to the Kyoto Protocol and may be updated periodically. [See TCLP Glossary: Greenhouse Gases (GHGs) for further definition options and explanatory notes.]

Investor Consent means the consent of 75% of the Investors.

Net Negative means the GHGs removed from the atmosphere [by a party] are greater than [its] GHG Emissions.

[See also TCLP Glossary: Net Negative. On a global scale, removals of GHGs 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 (2018), Summary for Policymakers, Part C Emission Pathways and System Transitions Consistent with 1.5°C Global Warming and Working Group III Contribution to the IPCC Sixth Assessment Report (AR6), Climate Change 2022: Mitigation of climate change (4 April 2022).]

Net Zero Target means a target to: 

(a) reduce GHG Emissions from all operations of the Company including value and supply chains; and

(b) remove GHGs,

including by Offsetting Residual Emissions, to achieve a balance between the Company’s sources and sinks of GHGs. This must be achieved by [2050/ insert earlier date] and align with the  goals of the Paris Agreement.

Net Zero Transition Plan means a plan to deliver the Net Zero Target that includes:

(a) interim GHG Emission reduction targets* that are aligned with the Paris Agreement Goals;

(b) short, medium and long-term actions to achieve the emissions reduction targets, and a plan for how they will be financed; 

(c) a strategy specifying the verified credits from a recognised offset provider that may be used by [the Party] to offset its Residual Emissions;

(d) governance and accountability mechanisms to support the plan, including annual reporting and linking executive remuneration to achieving the interim targets

(e) measures to address risks to, and leverage opportunities for stakeholders (such as workforce, supply chains, communities and customers) and the environment; and

(f) promoting a just transition to a low carbon economy.

* [Drafting note: If the Net Zero Target will be validated by the Science Based Targets Initiative, consider replacing ‘interim reduction targets’ with the defined term Short Term Science Based Targets. See TCLP’s Glossary: Near-Term Science-Based Targets.]

Offset or Offsetting means buying carbon credits from a project:

(a) that has been verified by [insert name of voluntary standard] or the United Nations Framework Convention on Climate Change clean development mechanism) [or successor UNFCCC mechanism] [Drafting note: Article 6.4 of the Paris Agreement replaces the CDM by 2026. New rules implementing this were agreed at COP26. More detailed guidance will be released];

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

(c) [that prioritises removing GHGs from the atmosphere rather than avoiding or reducing third party emissions of GHG**;]  

(d) that, for GHG removals, uses storage methods with a low risk of reversal over millennia; and

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

* [Drafting note: The reference to “emissions of GHGs” here is to GHG emissions generally. We don’t use the defined term GHG Emissions because in TCLP’s glossary that defined term has a specific meaning and relates to either (i) the emissions of a party under a particular agreement or transaction (see GHG Emissions – Option 1); or (ii) an organisation’s scope 1, 2 and 3 emissions of GHG (see GHG Emissions – Option 2).]

** [The Oxford Principles for Net Zero Aligned Carbon Offsetting 2020 state that “an immediate transition to 100% carbon removals is not necessary, nor is it currently feasible, but organisations must commit to gradually increase the percentage of carbon removal offsets they procure with a view to exclusively sourcing carbon removals by mid-century. Most offsets available today are emission reductions, which are necessary but not sufficient to maintain net zero in the long run. Carbon removals scrub carbon directly from the atmosphere. This counteracts ongoing emissions after net zero is achieved and creates the possibility of net removal for actors choosing to remove more carbon than they emit.”]

Paris Agreement Goals means the goals in Articles 2.1 and 4.1 of the UNFCCC’s Paris Agreement[./, in particular limiting global temperature increase to 1.5 degrees Celsius above pre-industrial levels.] 

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

Resource Efficiency Information means the “information about resource efficiency” of a product as defined in UK Environment Act 2021. [Environment Act 2021, Schedule 6, Part 1.]

Social Purpose means [insert relevant purpose for investee company which is likely to be linked to a UN Sustainable Development Goal].

[Drafting note: Capitalised terms relate to either a defined term in this clause or a defined term in the main agreement that this clause is designed to be inserted into.]

 

Additional clauses

1. Sustainable Promotion of the Company’s Business

1.1 The Founders and the Company shall promote the best interests of the Company and ensure that its Business is conducted responsibly, sustainably, ethically and in accordance with all applicable laws and good business practice.

1.2 The Founders and the Company shall run and manage the business:

1.2.1 primarily to advance the Social Purpose and deliver the Net Zero Transition Plan;

1.2.2 secondly to achieve the Capital Purpose; and

1.2.3 thirdly to achieve the Commercial Purpose.

1.3 The Founders and the Company undertake to procure, in so far as it is in their respective powers to do so, that the Company shall:

1.3.1 [publicly] set a Net Zero Target[ approved by the Science Based Targets initiative][, sign up to Race to Zero] and within six (6) months of Completion provide the Investors with the Net Zero Transition Plan;

1.3.2 as soon as reasonably practical and no later than 12 months after Completion:

1.3.2.1 purchase electricity for its offices [and factory] on a green tariff that uses a 100% renewable energy;

1.3.2.2 use web hosts and cloud service providers which run their servers on 100% renewable energy or have a net zero target;

1.3.2.3 source all consumables used by the Company from sustainable and ethical sources and include emissions reduction requirements in the Company’s procurement strategy and supply chain contracts;

1.3.2.4 create KPIs to measure the Company’s impact of its operations and goods and services it provides;

1.3.2.5 [ensure the [casing/ packaging] for the Company’s products are sourced from as much recycled material as possible and are themselves designed to reduce the amount of product or material that becomes waste;

1.3.2.6 [For online businesses][provide the Company’s customers the option to offset the carbon footprint of delivering the Company’s products at the point of sale on the Company’s website through a project that has been verified in accordance with [insert name of voluntary standard] [Drafting note: To raise net zero ambition, consider building the mitigation into the pricing plan as an alternative to the customer’s option to offset];

1.3.2.7 establish a sustainability committee as a committee of the board chaired by a non-executive director with experience of improving sustainability and mitigating carbon footprint;

1.3.2.8 establish the Company’s pension scheme with an ESG/ green investment fund as the default;

1.3.2.9 become a certified B Corporation [achieving the Planet Mark];

1.3.2.10 develop and implement an Environmental and Sustainability Training Programme; and

1.3.2.11 set targets to support the achievement on one or more United Nations Sustainable Development Goals that are relevant to the Business;

1.3.3 report [annually] [quarterly] [monthly] to the Investors; 

[Drafting note: To select reporting aligned with needs and goals of Investors.]

[Drafting note: To raise net zero ambition, consider adding CDP disclosure here: CDP: Home.]

1.3.3.1 the climate risks and opportunities to the Company and the Business in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD),

1.3.3.2 sustainability information in accordance with the standards set out by the Sustainability Accounting Standards Board (SASB); 

1.3.3.3. an analysis of how wider local and global stakeholders (including employees, clients, end customers and supply chain partners) are affected by both climate risk and the transition to a low carbon economy and how the Company can help to improve their resilience;

1.3.3.4 on all climate policy engagement, climate leadership, lobbying activities, trade association memberships and public policy positions that may support or undermine the goals of the UNFCCC’s Paris Agreement; and

1.3.3.5 other environmental, social and governance factors that are requested by the Investors from time to time.

1.3.3.6 Provide Resource Efficiency Information of the Company’s goods to demonstrate the impact of the goods on natural resources at any stage of their lifecycle. This includes information relating to the product’s expected life, durability, reparability, upgradeability and the ways in which it can be disposed of at the end of its life, whether the materials used in the products are recyclable, and the materials and techniques used in its manufacture.

1.3.4 prepare and provide to Investors an annual sustainability report which, without limitation, demonstrates the activities undertaken by the Company in furtherance of this clause; and

1.3.5 once profitable, donate 1% [or more, depending on revenue] of its net profits to environmental causes that are mitigating the impact of climate change.

2. Green Decisions Requiring the Consent of an Investor Majority

2.1 Each party shall use all the voting rights and powers of control deriving from their holding of Shares in order to procure that the Company shall not take any of the actions listed in clause 2.2 without first obtaining the approval of an Investor Majority.

2.2 The actions requiring the approval of a Investor Majority are:

2.2.1 the amendment or revocation of the Net Zero Target; and

2.2.2 the entry into any contract or arrangement that conflicts with its Net Zero Target.

3. Founder Green Covenants

3.1 To assure the Investors that the Founders are aligned with the Investor’s environmental aims and to enable the Investors to achieve the full benefit of the impact of their investment in the Company, each Founder hereby undertakes and covenants with the Investors and the Company that they shall not:

3.1.1 while they are a director or employee of, or a consultant to, the Company carry on or be directly concerned, engaged or interested in any trade or business that is:

3.1.1.1 not taking demonstratable steps to set and implement a net zero target equivalent to the Net Zero Target; or

3.1.1.2 operates in the following sectors [insert sectors or industries that the Investor does not want the Founders to be involved in/ conflict with their ESG aims];

3.1.2 do or omit to do anything which could reasonably be expected to cause the Company to not achieve the Net Zero Target, whether pursuant to this contract or otherwise.

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