Driving Change and Positive Outcomes through Deal Documentation

By Weeam Ben Rejeb, Student, Legal Affairs at FinDev Canada 

The critical role of development finance institutions (DFIs) in helping to achieve the Sustainable Development Goals is well documented[1]. As a DFI, FinDev Canada’s mission is impact-driven as we seek to deploy and mobilize capital to promote inclusive private sector growth through market development and job creation in our target regions. Alongside financial objectives, achieving impact goals tailored for each deal is central to our decision-making processes and business strategy. Specifically, we seek to support companies that promote gender-inclusive, climate-smart economic growth.

So far, so good. Now, how do we actually ensure that our development impact targets are met, not only today, but throughout the life of our investment and beyond? How do we establish that we are not simply paying lip-service to our impact goals, but that we actively seek to implement them?

In this blog, we explore how we can use transactional agreements to document understanding and drive impact and financial outcomes in fulfillment of our mandate. In fact, we use our transactional agreements as tools for upholding our social commitments, ensuring client alignment with principles and best practices in areas of business integrity, sustainability, and inclusivity. More specifically, the use of contractual mechanisms is a key avenue in helping to push our mandate for women’s economic empowerment, positive market development, and the mitigation of climate change.

Here’s how.

First, we work with our clients to establish our “use of proceeds”. In other words, we delineate what FinDev Canada’s financial commitment can and cannot be used for, enabling us to target our development impact goals. For instance, we can request that a portion of the funds be used to support women-owned or women-led Small and Medium sized Enterprises and promote quality jobs for women[2]. We also include an “Exclusions list” which prohibits the use of our funds towards harmful activities involving forced or child labor, certain high-risk substances, and industries that do not align with our mandate.

In addition, we include substantive requirements regarding environmental and social (E&S)risks. This can include specific clauses such as the implementation of an action plan to remedy any gaps identified during our due diligence assessment. For example, if a gap is identified with respect to international best practices on workplace gender-based violence and harassment, we can require our clients to revise their human resources policies and procedures to ensure risks of discrimination for women and other vulnerable workers are appropriately addressed. We also require compliance with robust industry standards such as the IFC Performance Standards. These E&S commitments are embedded in our transactional agreements as binding conditions, in the form of “affirmative covenants” (i.e. promises that the borrower is required to fulfil), “negative covenants” (i.e. promises not to do certain things), “representations”, and “warranties” (i.e. binding statements which, if not untrue, can lead to breach of contract). Our clients also have periodic reporting obligations, compliance with which is essential for monitoring the E&S risks our clients face and their ability to manage and mitigate those risks, as well as development impact reporting, which feeds into our data analytics system, thereby allowing us to further refine, focus and align client offerings with impact objectives.

Furthermore, we strive to better understand the realities faced by our clients, operating in often difficult markets where they can be exposed to uncertain circumstances and particular risks. For instance, while the COVID-19 pandemic is planetary in scope, it presents varying sets of issues and challenges in different parts of FinDev Canada’s priority markets.[3] For this reason, and to uphold our commitment to accompany our clients towards sustainable growth, we favor a collaborative approach to remedying any breach or suspected breach of E&S covenants. We do this through a 2-step approach. First, we include enhanced information rights and comprehensive reporting requirements in our documentation to help us proactively identify any potential breach of E&S covenants. Second, we provide our clients with grace periods to jointly assess and resolve any issues. We are then able to develop corrective action plans to ensure that the agreement is upheld, in spirit and letter.  

In short, the transactional agreements we sign with our clients are an important component of ensuring compliance with our mandate and our commitment towards sustainable development. We utilize contractual clauses and legal requirements to promote positive change and push the envelope towards our development impact goals. As we continue to grow, we will pursue our quest towards greater positive impact. We will continue to look for innovative ways to mitigate E&S risks, and support our clients towards becoming more gender inclusive, climate smart, and pillars of market development in their regions.

Nevertheless, we are still learning how to better leverage our legal toolbox towards unlocking greater impact. There is increasing appetite, both within FinDev Canada and in the larger financing space, towards developing strong impact-driven legal standards. This is why, along other private sector investors and financial institutions, we are a proud participant in Project Aurora: the Gender Lens Project. As part of this 2X Challenge initiative, we aim to help develop industry “gold standards” for gender-lens investing and enhance our legal documentation for the better.