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In brief: An ESG ratchet for management teams

Could this be the next frontier in tying ESG targets to financial incentives in private funds?

Linking sustinability goals to financial incentives is a hot topic in private markets. It is also a pretty broad church: asset-level loans, fund finance facilities, discretionary bonuses for staff, carried interest – all can be given a sustainability-specific factor.

A recent note from lawyers at Travers Smith sums it up nicely, and also highlights an, as yet relatively unexplored, area: portfolio company management ratchets. Says Travers Smith: “At the portfolio level, an equity ratchet that gives management extra upside if they hit sustainability targets is not yet prevalent in deal terms, but could be a tool for certain companies if there is a particular need to focus minds.”

Go deeper: The Chancery Lane project, a collaboration between lawyers from across the profession that aims to foster climate-friendly laws and contracts, has drafted a clause that can be inserted into contracts to do exactly this. It will “put climate change and environmental objectives on the same platform as other business drivers” in portfolio management contracts, the authors say. Read more here.