Climate Contract Playbook Edition 3
77
[Bella’s clause]
The Origin Story
Child’s name
Bella’s clause
Full name
Management equity ratchet terms
Practica Area / Sector
Private Equity, Finance, Corporate
Financial sponsors hold significant influence and control over their investee companies. However, the day-to-day decisions made by management teams can be equally important in driving growth in value. Consequently, management teams are typically incentivised to achieve the business’ growth objectives using incentive schemes (often in the form of bonus arrangements or share-based schemes). The value of such schemes is typically dependent on financial performance, growth in value and/or the returns achieved by the sponsor but not on the contribution made by the business in the fight against climate change. Provide a template clause for inclusion in investment documents to financially incentivise management teams to meet targets which are linked to climate change and environmental issues. The clause would be designed as an “equity ratchet” which could be overlaid on a share-based incentive scheme so as to increase the percentage of the equity share capital of the investee company held by management at exit if the business has achieved appropriate climate change related targets during the life of the investment. However, it is hoped that it would be relatively straightforward to adapt the clause for use alongside other types of incentive scheme (such as exit bonus arrangements) if desired. The UK government has set a target to be net zero by 2050 42 . Governmental planning and intervention policies may be required to meet this, but many UK businesses are already announcing their own targets to help meet this goal. There is also a broader societal interest in climate change, and growing interest in responsible investments that comply with environmental and ethical standards. Investors should be encouraged to incentivise management teams to set their own targets in advance of legislative pressure to do so.
Issue
Solution
Context
This clause will put climate change and environmental objectives on the same platform as other business drivers.
Impact
1. Directors and senior managers of investee companies 2. Private equity funds and other financial sponsors 3. British Venture Capital Association 4. Law firms 5. Industry bodies
Stakeholders
The proposed clause should encourage management teams to take a more active interest in ensuring that their businesses meet climate change related targets.
Application
42 http://www.legislation.gov.uk/ukpga/2008/27/part/1/crossheading/the-target-for-2050
Made with FlippingBook - professional solution for displaying marketing and sales documents online