How deal terms can contribute to impact investing

With the everchanging ESG regulatory landscape for funds, a lot of attention has been paid over the last years on how to build in disclosures, standards and protections required from ESG regulation into the fund documentation. At the same time, the documentation relating to a fund's investments has not received that level of attention. Often regulatory and strategy-related requirements are only covered by generic catch-all clauses to deliver "all required information" or take "all necessary actions" which are of limited use for investors and investees when push comes to shove. This is all the more difficult for impact investing strategies the ability for the investor and investee to work in an equitable manner to drive both financial returns and measurable environmental and/or social returns. Legal documentation can be an incredibly useful tool to ensure alignment between the investor and investee objectives and the contribution of the investee to the investor's dedicated impact goals.

Impact specific provisions can be included in the investment documentation and traditional provisions can be adapted to really drive alignment. We have set out a few examples of provisions that can be altered to be considered "impact forward".

Most commonly:

1. Management incentivisation - Investors are working with their portfolio companies to consider implement impact-linked incentive structures for the investee's management and employee teams. As with impact-linked carry, this can attract varying opinions of effectiveness but can be a tool to further align impact goals between the investee and investor.
2. Responsible exits – As exits are becoming more inevitable, parties are considering how they can maintain impact generated once they pass on the business to a new owner.
3. Monitoring, information and impact reporting – Monitoring, measuring and reporting are core to the fundamentals of impact investing and legal documentation can be leveraged to ensure parties are contractually bound to meet such expectations around these processes and to provide such relevant information to allow an investor to meet its regulatory obligations. However, such requirements should be proportionate to what is actually necessary so as not to overburden the portfolio company.

These are just a few examples of deal terms that can be adapted for impact. As a firm, we are seeing more and more investors and investees that consider the benefit of such provisions to drive alignment and understand that defining the rules of the game upfront relying on legal creativity can be mutually beneficial and actively support the achievement of impact goals.