---
title: Environmental Targets for a Limited Partnership Agreement
excerpt: 
date: 2024-03-27T14:16:34Z
modified: 2025-07-23T11:18:35Z
file_type: md
permalink: clauses/environmental-targets-for-a-limited-partnership-agreement.html
wpid: 2099
status: publish
type: clause
jurisdiction:
  - England &amp; Wales
maintenance-status:
  - Not maintained
practice-area:
  - Banking and finance
  - Private equity and investment management
eleventyComputed:
  clause_child_name: "Stella and Flora's Clause"
  clause_summary: Amendments and additions to the Institutional Limited Partners Association (ILPA) standard form Limited Partnership Agreement allowing environment, social and governance (ESG) issues to be investigated, raised and incorporated in investment and pricing decisions.
  clause_last_updated_date: 2022-05-03
layout: layouts/clause.njk
---

# Environmental Targets for a Limited Partnership Agreement

## Child’s name

Stella and Flora's Clause

## Summary

Amendments and additions to the Institutional Limited Partners Association (ILPA) standard form Limited Partnership Agreement allowing environment, social and governance (ESG) issues to be investigated, raised and incorporated in investment and pricing decisions.

## What this clause does

By bringing best practice United Nations Environment Programme (UNEP) principles of responsible investment (PRI) wording out of side letters and into the main agreement, this clause puts asset managers (including those less informed on ESG) on an equal footing, enabling informed investment decisions that assist in minimising exposure to environmental risk and achieving net zero targets.

## Clause Content

Operative Provisions:

*Integration with purpose and Investment strategy*

**2.2** **Purposes.**

The purposes of the Fund are to:

2.2.1 carry on the business of investment activities in line with the Investment Strategy, which shall include meeting the Environmental Targets;

2.2.2 \[●\]; and

2.2.3 engage in such other activities as are necessary, advisable, lawful and consistent with the foregoing, (the **Investment Objectives**), in all cases in accordance with the Investment Policy, the ESG Policy, the UNPRI, Section 7.1 (*Investment Restrictions*) and the other provisions of this Agreement.

*Management Fee Ratchet*

**8. Management**

**8.1**  **Management of the Fund**.

8.1.1 The General Partner and the AIFM shall, and shall cause the Fund to, at all times comply with the UNPRI and this Agreement, including the Investment Objectives, the Investment Policy, the ESG Policy, the investment restrictions set forth in Section 7.1 (*Investment Restrictions*) and the standard of care set forth in Section 20.5 (*Standard of Care*).

8.1.2 The General Partner and the AIFM shall at all times comply with the DDQ Requirements when making Investments \[and, to the extent that the Fund invests as a secondary fund of funds and that due diligence operations with respect to the underlying portfolio companies are limited as a result of the nature of the Fund and the information available to it,\]\* the General Partner and the AIFM shall use reasonable endeavours to ensure that any fund in which the Fund invests complies with the DDQ Requirements when making investments.

\* \[*Drafting note: if the Fund solely invests as a secondary fund, it may be appropriate to include only the reasonable endeavours obligation as the GP will not have control over the DD process.*\]

**8.2**  **Management Fee**.

8.2.1 The Fund shall pay the \[General Partner/AIFM\] an annual management fee with respect to each Limited Partner (**Management Fee**) calculated with respect to such Limited Partner in accordance with Section 8.2.2 below, beginning as of the Initial Investment Date and continuing until the earlier of (i) the last day of the initial Term (excluding, for the avoidance of doubt and notwithstanding Section 18.1 (*Term*), any extension thereto), and (ii) the appointment of a liquidator other than the General Partner. The Management Fee shall be payable in quarterly instalments in advance commencing on the Initial Investment Date and on each of January 1, April 1, July 1 and October 1 thereafter (each a **Payment Date**). Any payment for a period of less than a calendar quarter shall be adjusted on a *pro rata* basis according to the actual number of days during such period.

8.2.2 \[Subject to Section 8.3 (*Management* *Fee Offset*) below, t\]\[T\]he Management Fee payable with respect to each Limited Partner shall be an amount equal to:

8.2.2.1 until the termination of the Commitment Period, or, if earlier, the effective date on which a management fee begins to accrue with respect to a Successor Fund,

(i) where none of the Environmental Targets have been met on the Impact Calculation Date that precedes the Payment Date, \[●\]% *per annum* of the Commitment of such Limited Partner;

(ii) where one of the Environmental Targets has been met on the Impact Calculation Date that precedes the Payment Date, \[●\]% *per annum* of the Commitment of such Limited Partner;

(iii) where two of the Environmental Targets have been met on the Impact Calculation Date that precedes the Payment Date, \[●\]%\* *per annum* of the Commitment of such Limited Partner\*\*; and

\* \[*Drafting note: this figure would be negotiated between the parties on a case by case basis, but an indication should be provided as to the level of the adjustment that should occur if the target has not been met. Further, the figures in (i), (ii) and (iii) should differ.*\]

8.2.2.2 thereafter, or during such time as the Commitment Period is suspended in accordance with Article 11 (*Key Person Event; Suspension*), \[●\]% *per annum,* paid quarterly on each Payment Date, of the Capital Contributions made by such Limited Partner to fund the Acquisition Cost of Portfolio Investments other than Temporary Investments, less an amount equal to the Acquisition Cost of Portfolio Investments, other than Temporary Investments, that have been realised (in whole or in part), written off or Permanently Written Down as of the end of the most recent financial quarter\[, and reduced by:

(i) where none of the Environmental Targets have been met on the Impact Calculation Date that precedes the Payment Date, \[●\]% per annum; and

(ii) where one \[or more\] of the Environmental Targets have been met on the Impact Calculation Date that precedes the Payment Date, \[●\]% per annum\].\*\*

\*\* \[*Drafting note: management Fee uplift can continue for each Environmental Target met.*\]

*Oversight and Remedies*

**13. Advisory Committee**

\[*Drafting note: consider making the targets objective so that no determination of the advisory committee is required, unless in case of dispute, in which case an independent expert can be consulted. The problem with the advisory committee making this determination is that the General Partner/ Manager selects the investors who nominate those individuals, and it is usually the General Partner who constitutes the advisory committee. There is a fairly clear conflict of interest if Limited Partner representatives, as members of the advisory committee, determine whether targets have been met. General Partners would likely be uncomfortable with the advisory committee having the power to set targets that directly affect fund economics. In addition, the advisory committee and its members typically do not owe fiduciary duties to the fund or to the partners as a whole, and so are not subject to any requirements to act in the best interests of the fund.*\]

13.2 Scope of Authority

13.2.5 The General Partner shall:

13.2.5.1 give the Advisory Committee a \[quarterly/bi-annual\]\* ESG progress report \[in accordance with the template agreed with the General Partner in Schedule \[Z\] (*Template for ESG Progress Report*); and

\* \[*Drafting note: drafters should determine whether quarterly or semi-annually would be the appropriate frequency, bearing in mind that the management fee is adjusted annually and that the frequency depends on the scope of the progress report and the level of ongoing scrutiny the Advisory Committee will apply.*\]

13.2.5.2 no later than \[●\] days after any Impact Calculation Date, give the Advisory Committee a statement as to whether, and which of, the Environmental Targets have been made in respect the year ending on the most recent Impact Calculation Date and provide evidence thereof, and shall promptly provide any information reasonably requested by the Advisory Committee to facilitate the Impact Calculation.

13.2.6 \[By no later than \[●\] days after any Impact Calculation Date, the \[Advisory Committee\] shall make and inform the General Partner of the results of the Impact Calculation.\]

13.2.7 Following any ESG Breach:

13.2.7.1 the General Partner shall promptly notify the Advisory Committee of such ESG Breach;

13.2.7.2 the General Partner shall, as soon as practicable, provide the Advisory Committee with a corrective action plan containing proposed remediation measures to resolve the ESG Breach, including a reasonable and practicable timeframe for the implementation of such measures;

13.2.7.3 the Advisory Committee shall promptly review the proposed corrective action plan and, acting reasonably with a view to resolving the ESG Breach, promptly and in a commercially reasonable manner either approve such plan or work with the General Partner to agree amendments to the corrective action plan (and the General Partner shall work with the Advisory Committee to do so) (the **Agreed Remediation Measures**); and

13.2.7.4 the General Partner shall implement the Agreed Remediation Measures and shall provide regular updates on the progress of the Agreed Remediation Measures that are not more than one month apart, with such updates to continue until the ESG Breach has been resolved to the reasonable satisfaction of the Advisory Committee\[.\]

*Carried Interest Ratchet*

**Option 1**

**14.3** **Distributions of Distributable Proceeds**

**Option 1 Version A (*Extra Carry Percentage and Negative Extra Carry Percentage*)**

Subject to 6.5 (Use of Distributable Proceeds to Fund Drawdowns), Distributable Proceeds (other than Temporary Investment Income) from any Portfolio Investment shall be initially apportioned among the Partners in proportion to their Sharing Percentages with respect to the applicable Portfolio Investment. The amount so apportioned to any Affiliated Partner shall be distributed to such Person and, except as otherwise provided in this Article 14 (*Distributions; Allocations*) and Section 6.6 (*Defaulting Partners*), the amount so apportioned to each other Partner shall be distributed between the General Partner and such Partner as follows:

14.3.1 First, 100% to such Partner until such Partner has received cumulative distributions pursuant to this Section 14.3.1 equal to such Partner’s aggregate Capital Contributions;

14.3.2 Second, 100% to such Partner until the cumulative amount distributed to such Partner pursuant to this Section 14.3.2 is equal to the Preferred Return for such Partner;

14.3.3 Third, \[80\]% to the General Partner and \[20\]% to such Partner until the General Partner has received cumulative distributions with respect to such Partner pursuant to this Section 14.3.3 equal to \[20\]% \[plus any Extra Carry Percentage\]\* of the cumulative amount of distributions made or being made to (i) such Partner pursuant to Section 14.3.2 and this Section 14.3.3 and (ii) the General Partner with respect to such Partner pursuant to this Section 14.3.3; and

14.3.4 Fourth, thereafter, (i) \[20\]% plus any Extra Carry Percentage to the General Partner and (ii) \[80\]% minus any Extra Carry Percentage to such Partner.

\* \[*Drafting note: consider excluding this to be picked up by 14.3.4 below as whether the Extra Carry Percentage applies may change over time.*\]

For the purposes of this clause, **Extra Carry Percentage** shall mean \[●\]%, where at least \[3\] of the Environmental Targets have been met on the Impact Calculation Date that precedes the date on which Distributable Proceeds are initially apportioned. An ESG Breach at any time during the most recent period from the previous date on which Distributable Proceeds were apportioned until the next date on which Distributable Proceeds are to be apportioned will cause the Extra Carry Percentage to be deemed to be \[zero/negative %\] in respect of such Distributable Proceeds.

**Option 1 Version B (*Extra Carry Percentage and Increased Preferred Return*)**

Subject to 6.5 (*Use of Distributable Proceeds to Fund Drawdowns*), Distributable Proceeds (other than Temporary Investment Income) from any Portfolio Investment shall be initially apportioned among the Partners in proportion to their Sharing Percentages with respect to the applicable Portfolio Investment. The amount so apportioned to any Affiliated Partner shall be distributed to such Person and, except as otherwise provided in this Article 14 (*Distributions; Allocations*) and Section 6.6 (*Defaulting Partners*), the amount so apportioned to each other Partner shall be distributed between the General Partner and such Partner as follows:

14.3.1 First, 100% to such Partner until such Partner has received cumulative distributions pursuant to this Section 14.3.1 equal to such Partner’s aggregate Capital Contributions;

14.3.2 Second, 100% to such Partner until the cumulative amount distributed to such Partner pursuant to this Section 14.3.2 is equal to the Preferred Return for such Partner, or if there has been an ESG Breach during the period from the most recent date on which Distributable Proceeds were apportioned until the next date on which Distributable Proceeds are to be apportioned, the Increased Preferred Return for such Partner\[, plus any Extra Carry Percentage of the cumulative amount of distributions made or being made to (i) such Partner pursuant to Section 14.3.2 and Section 14.3.3 and (ii) the General Partner with respect to such Partner pursuant to Section 14.3.3\];

14.3.3 Third, \[80\]% to the General Partner and \[20\]% to such Partner until the General Partner has received cumulative distributions with respect to such Partner equal to \[20\]% of the cumulative amount of distributions made or being made to (i) such Partner pursuant to Section 14.3.2 and this Section 14.3.3 and (ii) the General Partner with respect to such Partner pursuant to this Section 14.3.3; and

14.3.4 Fourth, thereafter, (i) \[20\]% plus any Extra Carry Percentage to the General Partner and (ii) \[80\]% minus any Extra Carry Percentage to such Partner.

For the purposes of this Section, **Extra Carry Percentage** shall mean \[●\]%, where at least \[3\] of the Environmental Targets have been met on the Impact Calculation Date that precedes the date on which Distributable Proceeds are initially apportioned.

**Option 2**

\[*Drafting note: the carried interest ratchet in Option 1 may be problematic for a number of reasons, including:*

- *There is no link between the targets (calculated annually), and the timing of the sale of an asset which would cause distributable proceeds to be distributed. A manager could have achieved the targets for 5/10 years, but once assets start to be realised and money distributed, could miss the targets in the period before the distribution and therefore not be rewarded for previous efforts. Similarly, a manager could have failed to meet targets until the period immediately prior to the distributions and then get rewarded, having met targets in the period immediately prior.*
- *A re-calculation of carry percentages before every distribution and the fluctuation in that percentage could cause serious administrative difficulties in calculating carry clawback (where at the end of the life of the fund, a calculation is performed in order to ensure that the Limited Partners (LPs) and the carry recipients have received the correct amounts over the course of the life of the fund).*

*Instead of the carried interest ratchet, consider these alternatives for Section 14.3:*

- *A* ***separate ‘environmental performance fee’*** *in respect of environmental targets rather than a carry ratchet, which can be paid in the style of a “General Partner’s Share”/ “Priority Profit Share” and allocated annually (or as frequently as the targets are calculated) as a priority share of profits before allocation of profits to LPs. This would work also to reverse the profit share if the targets are missed. For example, if the General Partner (GP) meets the target in a given year, it gets a profit allocation equal to \[0.5\]% of commitments. However, if the GP misses the target, the allocation is either: a) reversed and investors get an extra profit allocation equal to \[0.5\]% of their commitments, or b) this amount gets allocated to an environmental charity.*
- *A* ***‘true up’ concept at the end of the life of the fund*** *where if, for example, at least \[3\] of the Environmental Targets have been met in \[6\] years out of the \[10\] year life of the fund, or there have been less than \[●\] ESG Breaches over the life of the Fund, then the extra carry percentage shall be awarded. This removes the arbitrary timing of the distributions and the award of carry. It also ensures that there are no additional complications in respect of carry clawback. To make the true up concept work in practice, consider allocating the extra carry during the life of the fund to an “ESG escrow account” or similar. If the targets are met at the end of the fund’s life, the cash is released from escrow to the GP. If they are not met, the cash is released from escrow and paid to the investors, or alternatively is paid to an environmental charity, so that the investors don’t profit from poor environmental performance. Using an escrow means the GP will not need to ask investors to return distributions to the fund to then distribute to the GP as extra carry.*
- *A* ***true deal by deal carry****. Environmental targets would be applied to the asset which is realised to fund the carry. True deal by deal is fairly rare, so may not be taken up by many managers.*\]

- - - - - -

**Schedule \[Q\] (*Due Diligence Questionnaire*)**

\[*Insert* [*Gordon's DDQ*](https://chancerylaneproject.org/clauses/esg-due-diligence-questionnaire-for-ma-and-capital-markets/)*, adapted to the circumstances.*\]

- - - - - -

**Schedule \[X\] (*Sustainability Committee Terms of Reference*)**

The definitions in the \[name of Agreement\] apply in these Terms of Reference.

**Terms of Reference**

1\. The Sustainability Committee shall oversee the development, implementation and review of a Net Zero Target Plan \[for each of the \[Group Companies\]/\[Fund\]/\[Companies\]/\[Assets\]\].

2\. \[●\]

3\. \[●\]

\[*Drafting note: add further terms of reference* *to ensure that the Sustainability Committee fulfils a meaningful function and applies high climate ambition (see The Chancery Lane Project’s* [*net zero implementation tools*](https://chancerylaneproject.org/toolkit/net-zero-implementation-tools/) *for further information), identifying a clear intersection between the proposed roles of the Sustainability Committee and the Advisory Committee.*\]

- - - - - -

**Schedule \[Y\] (*ESG Policy*)**

\[*Insert ESG Policy*.\]

- - - - - -

**Schedule \[Z\] (*Template for ESG Progress Report*)**

\[*Drafting note: it is expected that this template will include confirmation and detail of compliance with the DDQ Requirements and, to the extent there has been non-compliance, any reason for such non-compliance (noting that only in limited circumstances is non-compliance permitted under this Agreement). It is also expected that the template will include confirmation, as at the date of the relevant ESG progress report, that there is no ESG Breach.*\]
