Model clause

Net Zero Completion Adjustment clause

Felix's Clause

A net zero/carbon budget adjustment clause included as part of a completion accounts mechanism to provide “Carbon Certainty”.

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Why use this?

Carbon footprints are not measured at completion, despite there being a cost of that carbon and corresponding ESG impact on the acquirer.

Once a business has achieved Net or Absolute Zero, it will be important for carbon budgeting to maintain and preserve that status.

A buyer who is Net Zero themselves will not want to acquire a business with an uncertain carbon footprint that will affect their overall Net Zero position. This is particularly the case if their finance is linked to ESG or Net Zero metrics.

In the same way completion accounts adjust for net assets, this clause adjusts for a net carbon position.

The drafting envisages that the buyer will use the overshoot amount adjustments to fund further offsetting or the transition to Net Zero.

How it promotes a net zero future

These clauses will ensure that carbon footprinting is embedded into a transaction and given equal importance with the net assets of the target.

The price adjustment mechanism will also incentivise companies to ensure their carbon position is optimised prior to completion as they would any other part of their business prior to a sale.

Purchasers will have ‘carbon certainty’ in their transaction, ensuring they keep within their carbon budget, emissions targets and ESG rules. This will help businesses in the race to zero.

The clauses will maintain the integrity of ‘transition capital’ used to finance the buyer, the fund or the transaction.

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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 

1. INTERPRETATION

Carbon Dioxide Equivalent 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 a Carbon Footprint that consists of different GHGs as a single number.

Carbon Footprint means the total annual Greenhouse Gas Emissions caused directly or indirectly by [the Target [and its Subsidiaries]], expressed as a Carbon Dioxide Equivalent (CO2e).

Carbon Insetting means a carbon reduction project, verified by a carbon offset standard, which occurs within the Target’s [(and / or any of its Subsidiaries’)] supply chain or supply chain communities.

Carbon Negative Amount means the amount to be paid by the Buyers where the Completion Net Carbon is less than [Net Zero OR the Target Net Carbon Budget], as calculated in accordance with clause 3.2 (b). 

Carbon Offsetting means the purchase of a quantity of carbon credits equal to the amount of [the Target’s [and its Subsidiaries’]] 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. 

Carbon Price means a price of [£] [AMOUNT] per tonne of Carbon Dioxide Equivalent.

Cash Consideration means [the sum of [£][AMOUNT] OR [insert calculation OR cross refer to relevant clause containing calculation of a sum in GBP or other relevant currency]].

Climate Professional means an [appropriately qualified] [environmental, sustainability consultant/ net zero consultant / analyst][or climate] scholar / [or climate] scientist] who has the fundamental skills and experience to diligently, competently and professionally [perform the expert determination of Completion Net Carbon], in accordance with this agreement. 

Completion Net Carbon means the aggregate Greenhouse Gas Emissions less the aggregate Carbon Insetting and Carbon Offsetting of the Target and the Subsidiaries at the Completion Date, as set out in the Net Zero Carbon Statement.     

GHG Protocol means the GHG Protocol Initiative Corporate Accounting and Reporting Standard at https://ghgprotocol.org/corporate-standard, as updated from time to time.

Greenhouse Gas (GHG) 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 (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6), and nitrogen trifluoride (NF3).]

Greenhouse Gas Emissions means emissions of Greenhouse Gases over a specified area and period of time, each expressed as a total in units of Carbon Dioxide Equivalent [and calculated in accordance with the GHG Protocol or such other equivalent and generally recognised greenhouse gas emission calculation methodology].

IPCC means the United Nation’s Intergovernmental Panel on Climate Change. 

Net Zero means where the balance between Greenhouse Gas Emissions from all operations and Greenhouse Gas removals, accounted for by credits from either Carbon Insetting or Carbon Offsetting projects, is zero when measured in tonnes of Carbon Dioxide Equivalent.

Net Zero Adjustment Date means the [tenth (10th)] Business Day following the date on which the Net Zero Carbon Statement are agreed or determined in accordance with [Schedule [1]].

Net Zero Carbon Statement means the statement setting out the amount of Greenhouse Gas Emissions emitted by the Target in tonnes of Carbon Dioxide Equivalent and the Completion Net Carbon prepared in accordance with the carbon footprinting principles, policies, standards, practices, evaluation rules and estimation techniques referred to in paragraph [2] of Schedule [1]. 

Net Zero Overshoot Amount means the amount to be paid by the Sellers where the Completion Net Carbon is greater than [Net Zero OR the Target Net Carbon Budget] calculated in accordance with clause 2.2 (c).     

Purchase Price has the meaning given to that term in clause [INSERT].    

Residual emissions means the Greenhouse Gas emissions that are emitted after all reasonable efforts have been made by [the Target [and its Subsidiaries] to reduce its Carbon Footprint.

Target Net Carbon Budget means [INSERT] tonnes of Carbon Dioxide Equivalent emitted by the Target [and its Subsidiaries] from [Scope 1 [,2] [and 3] activities in a 12-month period. 

 

Additional Clauses

2. Purchase Price

2.1. The Purchase Price is the Cash Consideration:

(a) [insert normal completion account adjustment provisions as required]; plus     

(b) the Carbon Negative Amount if any; minus     

(c) the Net Zero Overshoot Amount if any.     

3. Net Zero Carbon Statement and adjustment of the Purchase Price

3.1. The parties shall procure that the Net Zero Carbon Statement is prepared in accordance with Schedule [1] (Carbon Statement) within the period stipulated by paragraph 2 of that Schedule.     

3.2. Following agreement or determination of the Net Zero Carbon Statement, if the amount of the Completion Net Carbon:

(a) exceeds [Net Zero OR the Target Net Carbon Budget] (the Amount), the Seller[s] shall pay to the Buyer[s] on or before the Net Zero Adjustment Date an amount equal to the excess in tonnes of Carbon Dioxide Equivalent multiplied by:

(i) the Carbon Price, if the Amount is exceeded by 5% or less;

(ii) [1.5] x the Carbon Price, if the Amount is exceeded by [5-20%]; or

(iii) [2] x the Carbon Price, if the Amount is exceeded by [21% or more]; or

(b) is less than [Net Zero OR the Target Net Carbon Budget], the Buyer[s] shall pay to the Seller[s] on or before the Net Zero Adjustment Date an amount equal to the shortfall in tonnes of Carbon Dioxide Equivalent multiplied by the Carbon Price.

[Drafting Note: Cross reference standard payment and set-off provisions for completion accounts] 

Schedule [1] – Carbon Statement     

1. Definitions

1.1. The definitions in this paragraph 1.1 apply in this [agreement / schedule].

Specific Policies means the policies set out in paragraph 5 of this Schedule 1 (Completion Accounts).

Carbon Offsetting Principles has the meaning given to such term in paragraph 4(b) of this Schedule 1 (Completion Accounts).

[Drafting Note: Insert additional definitions as required] 

2. Preparation of the Net Zero Carbon Statement

[Drafting Notes: (i) Generally, the purchaser is tasked with producing the completion statement based on the agreed principles/methodology and the seller is given rights to review and challenge which ultimately concludes in expert determination if differences cannot be resolved. The Seller should be required to cooperate with and provide access to the Purchaser for the purposes of producing the completion statement. (ii) Cross reference existing Review and Dispute mechanism for Completion Accounts in the SPA so that they can apply as required to the creation of the Net Zero Carbon Statement and related accounts. (iii) Ensure a deadline for preparation is included as per clause 3.1 above.]

3. Expert determination of Completion Net Carbon

[Drafting Note: Cross reference existing expert determination provisions in the SPA (including the mechanics for finalising the accounts/statement once agreement has been reached or determined) but updating for the Climate Professional as the Expert] 

4. Basis for preparing the Net Zero Carbon Statement

Subject to the Specific Policies, the Net Zero Carbon Statement shall be prepared on the following basis, [and in the order of priority shown below:]

(a) applying the specific carbon footprinting principles, specifications, bases, conventions, rules and estimation techniques set out in:

(i) [ISO 14064];

(ii) [GHG Protocol Initiative Corporate Accounting and Reporting Standard];

(iii) [The Carbon Trust Standards and Protocols];

(iv) [Science Based Target calculations];

(v) [Carbon Footprint Standard]; 

(vi) [BEIS Voluntary Reporting Guidelines];

(vii) [other],

(b) applying the specific carbon offsetting and carbon in setting principles, specifications, bases, conventions, rules and estimation techniques (Carbon Offsetting Principles) set out in:

(i) [ISO 14064 offset protocol];

(ii) [GHG Protocol for Project Accounting (offset accounting protocol)];

(iii) [International Carbon Code of Best Practice];

(iv) [Carbon Footprint – Certified Emissions Reduction standards];

(v) [Gold Standard Verified Emission Reductions];

(vi) [other], and

(c) to the extent not provided for by paragraphs 4(a) and 4(b) above, applying the same carbon footprint and Net Zero calculation standards, principles, policies and practices (with consistent classifications, judgements, valuation and estimation techniques) that were used by the Target to determine [its Net Zero status OR the Target Net Carbon Budget.]

5. Specific Policies

5.1. [Scope of Emissions]

(a) Scope 1-3 emissions of the Target and its Subsidiaries as defined by the GHG Protocol shall be accounted for on an itemised basis.

(b) The emissions of goods and services no longer provided by the Target or any of the Subsidiaries shall be fully provided for.

(c) Where an emission is a GHG other than carbon dioxide it shall be converted to a Carbon Dioxide Equivalent using the conversion units adopted by the IPCC from time to time. 

5.2. [Offsetting]

(a) Only carbon offsetting that has been verified in accordance with the procedures and techniques set out in the Carbon Offsetting Principles shall be accounted for in the Net Zero Carbon Statement.

(b) Carbon Offsetting shall be accounted for on an itemised basis showing the source and geographic location of the offsetting project.

(c) [Carbon Offsetting shall be depreciated by the:

(i) embodied carbon used to create the offset project;

(ii) the carbon required to decommission the offset project at the end of its useful life; and

(iii) the efficiency of the technology used to offset decreasing over time. 

(d) [Carbon Offsetting shall be impaired by the negative impact of the offset project on biodiversity in the geographical location of the project.] [Drafting Note: for consideration if data is available.] 

5.3. [Carbon inventories] 

(a) Carbon Dioxide Equivalents shall be calculated to the nearest tonne for all Target and Subsidiary Scope 1-3 emissions on an itemised basis. 

(b) Carbon footprint inventories that have been estimated with a range of measurements shall use the highest estimate in the range. 

(c) Carbon offset and inset inventories that have been estimated with a range of measurements shall use the lowest estimate in the range.

5.4. [Post Net Zero events]

(a) The Net Zero Carbon Statement shall not take account of:

(i) [any event or transaction that occurs or arises[, or information that comes to the parties’ attention,] more than [NUMBER] days after the Completion Date OR after the delivery of the Draft Documents in accordance with paragraph 2.1 of this Schedule [1]];

(ii) any event or activity that emits Greenhouse Gas Emissions and occurs or arises after the Completion Date as a result of a voluntary act or omission of the Buyer, except where such act or omission was carried out or effected in the ordinary course of the Business pursuant to a binding obligation of the Target.

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