Amendments to a standard early stage shareholders’ agreement which allow investors to hold the company to account on climate issues and oblige all shareholders to support Net Zero.
Why use this?
This clause enables shareholders to embed environmental, social and governance matters at the highest level of the company, prioritised over fast growth to create better performance and long term value, obliging the company to operate consistently with Paris Agreement goals and the shareholders to engage in climate change mitigation or relinquish their benefits.
How to use this clause
(A) The Shareholders wish to align the operation and management of the Company with various Climate Change and Sustainability Goals.
(B) [Insert Eddie’s Recitals (Climate Recitals) here and adapt so that references to the ‘parties’ are replaced with the ‘Shareholders’.]
1. Additional Definitions
Capital Purpose means to preserve the value of the Shareholders’ capital as invested in the Company.
Carbon Dioxide Equivalent (CO2e or CO2eq) means the standard metric measure used by the UN’s Intergovernmental Panel on Climate Change to compare the emissions from various GHGs on the basis of their global warming potential over a specified timescale to express a Carbon Footprint that consists of different GHGs as a single number.
Carbon Footprint means the Company’s total annual GHG Emissions, measured in accordance with Carbon Footprint Standards.
Carbon Footprint Standards means internationally recognised standards to measure, manage and demonstrate carbon credentials covering:
(i) organisations (including but not limited to the BEIS Voluntary Reporting Guidelines and the GHG Protocol); [and]
(ii) projects, product and services (including but not limited to PAS 2050:2011, ISO 14001 and the GHG Protocol Product Life Cycle Accounting and Reporting Standard)[.][; and
(iii) events (including but not limited to PAS2060/ISO 20121)].
Chief Sustainability Officer (CSO) means a director either 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.
Defaulting Shareholder has the meaning given to it in clause 11.
Fair Value has the meaning given to it in clause 10.
Greenhouse Gases (GHGs) 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).]
GHG Emissions means emissions of GHGs from all sources, categorised as scope 1, 2 and 3 emissions by the GHG Protocol, each expressed as a total in units of Carbon Dioxide Equivalent (CO2e). [Drafting note: Scope 1, 2 and 3 emissions are defined on page 27 of the GHG Protocol.]
GHG Protocol means The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, Revised Edition 2015 as updated from time to time.
Material Climate Breach means a breach of any terms of this Agreement which is material with regard to all relevant circumstances, including, without limitation:
(i) increasing the Carbon Footprint;
(ii) missing the Net Zero Target Date; or
(iii) taking any action that is contrary to achieving the Sustainability Goals or Net Zero Transition Plan.
Net Negative means that the aggregate of the Company’s actions to reduce its GHG Emissions and remove GHGs from the atmosphere exceeds its unabated GHG Emissions. [Drafting note: On a global scale, removals of Greenhouse Gases 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, Summary for Policymakers, Part C Emission Pathways and System Transitions Consistent with 1.5°C Global Warming.]
Net Zero means a state of balance by [2050/ insert other date] between all the Company’s sources and sinks of emissions of GHGs in each calendar year achieved by both an overall reduction of its GHG Emissions and a removal of GHGs to achieve Paris Agreement Goals.
Net Zero Target Date means the date set by the Board for the Company to achieve Net Zero, which should be no later than [2035/2050].
Net Zero Transition Plan means a plan to achieve Net Zero [by the Net Zero Target Date] and to remain Net Negative thereafter that:
(i) includes an Offsetting Strategy;
(ii) sets interim reduction targets for the Parties’ GHG Emissions that are aligned with Paris Agreement Goals;
(iii) links executive remuneration to achieving the interim targets;
(iv) is updated in line with developments in science and technology;
(v) is reviewed and approved annually by the Board; and
(iv) promotes a just transition to a low carbon economy.
Offset or Offsetting means the purchase of carbon credits from an Offset Provider:
(i) where the emissions of GHGs avoided, reduced or removed by the project are additional;
(ii) that, in relation to GHG removals, employs long-lived storage methods that have a low risk of reversal [over millennia]; and
(iv) that prioritises the removal of GHGs from the atmosphere rather than avoids or reduces third party emissions of GHG.
Offset Provider means a provider of carbon credits or voluntary emission reduction credits that relate to:
(i) a project that has been verified in accordance with [insert name of voluntary standard]; or
(ii) a United Nations Framework Convention on Climate Change (UNFCCC) clean development mechanism (CDM) [or [successor/ equivalent] UNFCCC mechanism] project.
Offsetting Strategy means a plan specifying:
(i) the verified credits and Offset Provider that may be used by the Company to Offset its Residual Emissions;
(ii) [how/ that] the emissions of GHGs avoided, reduced or removed by the project are additional;
(iii) how the Company will transition from using credits resulting from Offsetting projects that avoid or reduce emissions of GHG to those from projects that remove emissions of GHGs and involve long-term storage methods that have a low risk of reversal;
(iv) how the Company will [use best endeavours to] reduce its use of credits by reducing its Residual Emissions [to zero/ by [x]%] by 2050; and
(v) the impact of the relevant Offsetting projects on a just transition and wider social and ecological goals.
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.
Portion has the meaning given to it in clause 3.
Residual Emissions means GHG Emissions that are emitted after all reasonable efforts have been made by [an organisation/ the Company]* to reduce GHG Emissions from all operations.
* [Drafting note: Tailor as appropriate depending on whether Residual Emissions is only used in relation to the Company or also its shareholders.]
Sustainability Alignment means the operation of the Business in a manner which supports achieving (i) Paris Agreement Goals and (ii) one or more of the United Nations Sustainable Development Goals as set out in the 2030 Agenda for Sustainable Development.*
* [Drafting note: Consider tailoring this to refer to particular SDGs or areas of sustainability that are particularly applicable or of interest, for example SDG12 (responsible consumption and production) in relation to circular economy objectives, SDGs 14 and 15 (life below water and life on land) in relation to promoting biodiversity and nature and SDGs 8 (decent work and economic growth), 9 (industry, innovation and infrastructure), 10 (reduced inequality) and 11 (sustainable cities and communities) in relation to just transition and climate justice.]
Sustainability Goals means the Company’s goals and objectives for achieving and maintaining Sustainability Alignment as set by the Board from time to time in accordance with clause [●] including without limitation setting a Net Zero Target Date and any interim targets for achieving the Net Zero Target Date in the Net Zero Transition Plan.
Sustainability Management Standards has the meaning given to it in clause 5.1(ii).
Sustainability Review Meeting has the meaning given to it in clause 5.2.
2. SHARE OPTION SCHEME
The Founders undertake to include terms in the Share Option Scheme (which shall include the relevant share award agreement for the purpose of this clause [●]) that make the vesting of Shares under the Share Option Scheme conditional upon the Company having achieved its Sustainability Goals that are due on or before the agreed vesting date.
3. DIVIDEND POLICY
Where a Shareholder has failed to comply with the obligations under clause 6.3, it shall not be permitted to receive any portion of the dividend distributed under clause [●]* and the amount of the dividend paid to shareholders as a whole shall be reduced proportionate to such Shareholder’s pro-rata allocation of the dividend (a Portion). Such Portion of the dividend will be retained by the Company [and used to [achieve the Company’s Sustainability Goals]] [unless the relevant Shareholder complies with clause 6.3 within [●] days of the dividend being distributed to the other shareholders, in which case it will be distributed to the defaulting Shareholder in accordance with clause [●]**].
* [Drafting note: Insert reference to the dividend distribution clause in the main agreement in which Lauren’s Clause sits.]
** [Drafting note: Insert reference to the dividend distribution clause in the main agreement in which Lauren’s Clause sits.]
4. BUSINESS OF THE COMPANY
The Shareholders will each act in good faith to promote the best interests of the Company and ensure that the Business is conducted and developed in accordance with good business practice and any business plan for the Company that is adopted from time to time to further (in equal emphasis):
(i) the Capital Purpose;
(ii) the Net Zero Transition Plan; and
(iii) the Sustainability Goals.
5. COMPANY SUSTAINABILITY GOALS
5.1 Within 30 Business Days from the date of [execution of] this Agreement the Board shall meet and resolve to:
(i) adopt the Company’s Sustainability Goals and Net Zero Transition Plan;
(ii) adopt a framework sustainability management standard by reference to [insert specific standard] (the Sustainability Management Standards) that shall include details of the Net Zero Transition Plan; and
(iii) designate a member of the Board to be the CSO.
As soon as reasonably possible following the date of such meeting the Board shall provide a copy of the meeting minutes to the Shareholders detailing the adopted Sustainability Goals along with a copy of the Company’s Sustainability Management Standards.
5.2 Independent of each formal Board meeting convened in accordance with clause [●], the impact of the Company’s Sustainability Goals, Net Zero status and Net Zero Transition Plan shall be reviewed and evaluated by the Board on a quarterly basis (a Sustainability Review Meeting), which evaluation shall include the Board considering, without limitation:
(a) the Carbon Footprint at the date of such meeting;
(b) the Company’s progress in achieving its current Sustainability Goals and Net Zero Transition Plan;
(c) whether any modifications should be made to the current Sustainability Goals or Net Zero Transition Plan;
(d) whether any modifications should be made to the Sustainability Management Standards;
(e) the effect of the current Sustainability Goals on the Capital Purpose; and
(f) any additional Sustainability Goals,
and minutes of such meetings shall be provided to all Shareholders which shall include, without limitation, a measurement of the Carbon Footprint at the date of such meeting.
5.3 The Board shall provide copies of the meeting minutes from all Sustainability Review Meetings to Shareholders within 14 Business Days of the meeting date and any material modifications to the Sustainability Goals shall be proposed to the Shareholders with such minutes.
5.4 The Board shall provide any further information reasonably requested by Shareholders in respect of the Sustainability Goals, provided that such request is made by a Shareholder within 30 Business Days of receipt of the minutes provided under clause 5.3.
6. CARBON FOOTPRINT MANAGEMENT
6.1 In addition to adopting the Sustainability Goals and Net Zero Transition Plan pursuant to clause 5.1, the Board shall provide any further information reasonably requested by Shareholders in relation to the Company’s Net Zero Transition Plan and Carbon Footprint, including but not limited to any information recommended to be disclosed by a company under the GHG Protocol, provided that such request is made by a Shareholder within 30 Business Days of receiving the minutes provided under clause 5.1.
6.2 At the end of the Company’s financial year the Board shall provide the Shareholders with details of the total Carbon Footprint for the year, which information must also be included in the Directors’ Report for that financial year.
(i) Align any such reporting requirements with any third party/ regulatory reporting requirements that the Company is already required to comply with.
(ii) Consider adding a requirement for the Carbon Footprint measurement to be externally verified/audited and published on the company’s website.]
6.3 During this Agreement, the Company and each of the Shareholders agree to Offset annually at the following levels:
(a) any Shareholder that is a body corporate[, partnership or other undertaking] shall Offset to compensate for not less than  metric tonnes of Carbon Dioxide Equivalent (CO2e) units in each of the Company’s financial years;*
(b) any Shareholder that is an individual shall Offset not less than  metric tonnes of Carbon Dioxide Equivalent (CO2e) units in each of the Company’s financial years; and
(c) the Company shall Offset its Residual Emissions[ in accordance with the Offsetting Strategy].
* [Drafting note: Consider making this a percentage of that organisation’s own Residual Emissions instead of a set figure.]
[Alternative clause 6.3:
6.3 During this Agreement, the Company and each of the Shareholders agree to Offset annually at the following levels:
(a) in each the Company’s financial years, each Shareholder shall Offset an amount of Carbon Dioxide Equivalent (CO2e) units equal to a Shareholder’s share of the total annual Carbon Footprint in the preceding year as determined in accordance with clause 6.2, where such Shareholder’s share is determined by reference to a Shareholder’s percentage holding of Shares in the Company; and
(b) the Company shall Offset its Residual Emissions [in accordance with the Offsetting Strategy].]
6.4 Evidence of each Shareholder’s compliance with clause 6.3 should be provided to the CSO by each Shareholder as soon as reasonably possible following the completion of each Company financial year, but in any event by no later than one month after the end of such financial year. Evidence of the Company’s compliance with clause 6.3 shall be provided with the minutes of the first Sustainability Review Meeting in each financial year.
6.5 Without affecting any other right available to the Company under this Agreement, where a Shareholder fails to submit evidence of compliance with clause 6.3 by the date due and remains in default after having been given 14 Business Days’ notice to comply, the Shareholder shall be considered to be in Material Breach of this Agreement and the provisions of clause 11 shall apply.
6.6 Notwithstanding clause 6.2, the obligations under clause 6.3 shall cease to apply in any financial year where the Company achieves Net Zero status for the preceding financial year. In this event, each Shareholder shall be obliged to Offset in the financial year but the quantum of carbon credits to be purchased by a Shareholder shall be at its own discretion. Each shareholder shall provide evidence of their Offsetting to its CSO for the financial year and the Board shall be permitted to share such information with all Shareholders.
[Drafting note: Consider adding a clause with additional requirements here, such as climate risk disclosure, stakeholder just transition analysis, climate policy engagement and lobbying, employee training, use of climate clauses and choice of pensions scheme, as found in subclauses 1.6-1.9 of Sebastian’s Clause.]
7. FURTHER ISSUE OF SHARES – PRE-EMPTION
Notwithstanding the foregoing,* clause [●]** shall not apply to benefit any Shareholder who has failed to comply with clause 6.3 and the Company may disregard any such Shareholder’s Shares when computing the offer to be made under clause [●].***
* [Drafting note: This refers to the preceding sub-clauses from the main pre-emption clause.]
** [Drafting note: Insert reference to the relevant clauses containing pre-emption rights on further issues of shares in the main agreement in which Lauren’s Clause sits.]
*** [Drafting note: Insert reference to the relevant offer clause in the main agreement in which Lauren’s Clause sits.]
8. TRANSFER OF SHARES – PERMITTED TRANSFERS
Notwithstanding the foregoing,* clause [●]** shall not apply to benefit any Shareholder that has failed to comply with clause 6.3 and the provisions of clause [●]*** shall apply to any purported transfer by such a Shareholder.
* [Drafting note: This refers to the preceding sub-clauses from the main permitted transfers clause.]
** [Drafting note: Insert reference to the permitted transfers clause in the main agreement in which Lauren’s Clause sits.]
*** [Drafting note: Insert reference to the relevant clauses relating to how such a transfer should be treated.]
9. TRANSFER OF SHARES – PRE-EMPTION
Notwithstanding the foregoing,* any Shareholder that has failed to comply with clause 6.3 shall not be considered an Eligible Shareholder for the purpose of clause [●]** and the Board shall be under no obligation to offer any Sale Shares to such a Shareholder.
* [Drafting note: This refers to the preceding sub-clauses from the main pre-emption clause.]
** [Drafting note: This refers to the preceding sub-clauses from the main pre-emption clause.]
10. TRANSFER OF SHARES – VALUATION
Fair Value shall, in any case, be the price of the relevant Shares determined in writing by the Independent Accountant on the following bases and assumptions:
(a) [insert normal valuation provisions]; and
(b) reflect a discount proportionate to the Company’s [consumption of Natural Capital in the previous 12 months][time left to the Net Zero Target Date][insert other alignment to sustainability goals that have not been achieved].
11. COMPULSORY TRANSFERS – MATERIAL CLIMATE BREACH
In the event that a Shareholder is (in the opinion of the Board, acting reasonably) in Material Climate Breach of any of the provisions of this Agreement (a Defaulting Shareholder) the Board may, in its absolute discretion, serve a notice on that Shareholder notifying them that they have been deemed, with immediate effect, to have served a Transfer Notice in respect of their Shares (together with any Shares held by Permitted Transferees of the Defaulting Shareholder) and the provisions of clause 9 shall apply to any such transfer, save as provided by this clause 11. In such event, the Shareholder (together with their Permitted Transferees) shall be treated as a Bad Leaver, in accordance with clause [●], for the purposes of the valuation and transfer of their Shares[, provided that the Sale Price shall be at a 50% discount to Fair Value of the relevant Shares].
12. DRAG ALONG
Notwithstanding any other provision of this Agreement, a Shareholder may refuse to be dragged or otherwise sell or transfer any or all their Shares to the Drag Purchaser if acting reasonably and in [Good Faith] it believes that the Drag Purchaser, its group or affiliates are operating in a way that can reasonably considered a Material Climate Breach or otherwise contrary to the Sustainability Goals.
In addition to the restrictions set out in clause [●], each Shareholder undertakes to the other and separately to the Company that they will not at any time, without the prior consent of the Board, carry on or be employed, engaged, or interested in any business which has not publicly set a target of achieving Net Zero status or is not otherwise operating with or towards Sustainability Alignment.
The parties agree to:
(a) use recycled paper and non-solvent based ink when printing a notice;
(b) if a notice is being delivered by hand, use a courier service which operates zero or ultra-low emission vehicles only; and
(c) allow notices to be given electronically.
MATTERS REQUIRING SHAREHOLDER CONSENT
1. Entering into any contract, transaction or arrangement in relation to the Company that is likely to impede achievement of the Sustainability Goals, the Sustainability Management Plan or Net Zero Transition Plan.
2. Making any material modification to the Sustainability Goals.
3. Making any change to the Net Zero Target Date.