The type of investment vehicle, and the way the deal is structured, can influence the types of gender and climate outcomes that the fund manager and the investee company want to see over the investment cycle.
The climate mitigation or adaptation criteria and 2X gender criteria identified in the screening and due diligence stage can be embedded into the deal structure and used to define targets and milestones for gender and climate impact vs current baseline.
Proposed metrics and targets should be defined for both impact and business/financial performance. The impact measurement section of the Toolkit provides examples of metrics that combine both gender and climate for a variety of sectors.
An example of a gender-smart climate finance milestone could be the investee company reaching an agreed target for the percentage of women customers provided with affordable low-carbon services.
Another example would be a female-led investee company reaching its climate mitigation or net-zero targets, (See the IIGC Carbon Compass: Investor Guide to Carbon Footprinting to see how carbon footprint analysis links with investment objectives and meeting climate targets), while mitigating transition risks or gender risks in the process of reaching those goals.
It is important to note that there are still few examples of gender-smart financial instruments - and fewer that combine both gender and climate considerations - indicating that there is a market gap for new products to be developed as the field evolves.
Below is a table outlining examples of instruments commonly used for debt, equity, credit, and blended finance; their definitions; and some real-world examples. (Many of these examples are adapted from the ASEAN Green Financial Instruments Guide).
Introduction
Considerations for legal agreements and conditional incentives
There are several ways in which investors or fund managers can influence an investee company to reach gender and climate related milestones. This can include a combination of positive incentives for the investee company to achieve the results, or punitive measures if they fail to do so.
For example, investors can reward a company’s management with increased compensation by tying investee company bonuses to achievement of gender and climate-based milestones. Similarly, the investor could delay or halt tranches of finance if milestones are not met. These conditionalities should be negotiated with the investee company to ensure they are fully aware of the implications.
Positive and negative incentives can be embedded within legal agreements and investment documentation. These could include, for example:
A Gender (GAP) and/or Environmental and Social Action Plan which includes a legal requirement for implementation and reporting.
Rights to request information or conduct assessments if you are not satisfied with the investee company’s gender and climate measures to meet milestones.
An obligation to provide sex-disaggregated data to meet reporting requirements on gender-based milestones.
An obligation to provide data relating to scopes 1, 2, and 3 for emissions reporting.
Build in updates on gender and climate activities as agenda items for board meetings.
Specify a zero tolerance for any form of discrimination against women to be reinforced through compliance with the UN Convention on the Elimination of all forms of discrimination against women (CEDAW) within ESG Investing codes.
Examples of these incentives applied in practice could include rebates on loans if energy efficiency performance standards are met, or green bonds requiring post-issuance reporting and certification in line with the Climate Bond Standard or mandatory reporting and disclosure on the Green Bond Transparency Platform. You can find more examples in this table of financial products (pdf).
Deal structuring should aim to include the development of a Gender Action Plan (GAP) and/or Environmental and Social Action Plan - a project plan that comprises actions, associated activities, owners, prioritisation, resource requirements, targets, monitoring system, timeframes, and impact and commercial indicators. The Action Plan should ideally specify actions and indicators that address the intersection of climate and gender, which can be defined according to data revealed in the risk and impact assessments conducted during the due diligence stage.
A sample of a GAP from Gender-smart Investing Training for Fund Managers can be found here. This GAP is based on an example company to illustrate key components that Fund Managers should include.
An example of an Environmental and Social Action Plan developed by the Infrastructure Projects Facility for Western Balkans can be found here.
Establishing a gender and climate action plan with the investee company
Questions to consider
What structure for your chosen financial instrument will allow you to benefit from your investment most effectively while generating impact?
Have you negotiated with the investee company to embed gender and climate considerations in the deal and legal documentation?
Have you agreed your gender and climate milestones, and developed a legally binding Action Plan or set of conditional incentives?