Model clause

Net Zero Convertible Loan Note

Nozomi's Clause

Make the qualifying criteria for receiving finance conditional on setting a Net Zero target and reflecting those obligation in a convertible loan note instrument that incentives Net Zero performance.

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Why use this?

This clause will cascade government policy into finance agreements and incentivise management teams and founders to put climate change and environmental objectives on the same platform as other business drivers.

It will mobilise “green finance” and will allow investment managers to demonstrate how they are cascading ESG strategies into deal paperwork.

How it promotes a net zero future

The UK government has set a target to be net zero by 2050. Investors, particular those co investing with public funds, should be encouraged to incentivise management teams to set their own net zero targets in advance of legislation being enacted.

ESG is becoming of increasing importance to the investment sector and alignment of climate change and Net Zero to investment helps meets some of these requirements.

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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.

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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 

Climate Coupon Discount Rate: means a rate of [6] per cent simple interest per annum

Climate Conversion Discount: shall mean a price per Share being [10] per cent lower than that offered to investors on a Relevant Fund Raising.

Default Conversion Discount shall mean a price per Share being [20] per cent lower than that offered to investors on a Relevant Fund Raising.

Default Interest Rate shall mean [12] per cent per annum, compounding monthly. 

Environmental Targets means:

(a) the Company achieving the Net Zero Target;

(b) the establishment by the Company of a sustainability committee as a committee of the Board chaired by a non-executive director with experience of improving sustainability and mitigating carbon footprint;

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

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

Net Zero Professional: an independent environmental or net zero consultant that specialises in the creation of Net Zero targets.

Net Zero Target means that the balance between greenhouse gas emissions from all operations and greenhouse gas removals, accounted for by credits from either insetting or offsetting projects, is zero.

Net Zero Target Date: means the date by which the Net Zero Target will be met, such date to be no later than [2050]

Additional Clauses

  1. CONDITIONS

2.1 The Notes shall be subject to the passing of all directors’ and shareholders’ resolutions of the Company to set and publicly announce a Net Zero Target Date.

  1. UNDERTAKINGS

3.1 The Company undertakes to:

3.1.1 [publicly] set a Net Zero Target Date within 1 month of the date of this instrument;

3.1.2 provide the Noteholders with a plan to deliver the Environmental Targets within 6 months of the date of this instrument; and

3.1.3 inform the Noteholders as soon as reasonably practicable following achievement of the Net Zero Target and provide a written report from a Climate Professional confirming the same.

  1. INTEREST

4.1 Until the Notes are repaid by the Company or converted into Shares, interest shall accrue on any outstanding Notes (so far as not converted) at the following rates:

4.1.1 Default Interest Rate until the Net Zero Target is achieved; and

4.1.2 Climate Coupon Discount Rate after the Net Zero Target is achieved and such achievement has been confirmed in a written report from a Net Zero Professional.

  1. EVENTS RESULTING IN IMMEDIATE REDEMPTION

5.1 The Notes then in issue shall be immediately redeemed at the principal amount, together with interest on the Notes outstanding at the Default Interest Rate, if:

5.1.1 the Company does not set a Net Zero Target Date in accordance with the undertaking set out in clause [ ]; or

5.1.2 the Company does or omit to do anything which could reasonably be expected to cause the Company to not achieve the Net Zero Target.

  1. CONVERSION

6.1 Al outstanding Notes shall automatically convert into fully paid Shares on occurrence of a Relevant Event with the following discounts:

6.1.1 Default Conversion Discount if the Net Zero Target has not been achieved; and

6.1.2 Climate Conversion Discount if the Net Zero Target has been achieved and such achievement has been confirmed in a written report from a Net Zero Professional.

Glossary references: Net Zero Target

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