Environmental Characteristics

1. Long Eligibility with the EU Taxonomy.

For the purposes of this Product, “elibility” means the investment contributes to an environmental objective identified in Article 9 of the Taxonomy Regulation, which Mercator has assessed as being a sustainable investment for the purposes of Article 2(17) of the SFDR Regulation, but for the specific investment there is not enough data disclosure to evaluate if the investment meets all of the conditions under Article 3 of the Taxonomy Regulation to be designated as an “environmentally sustainable economic activity”. For the purposes of this Product, “eligibility” also includes sustainable investments contributing to an environmental objective, but for which detailed technical screening criteria have not yet been adopted.

2. Long Alignment with the EU Taxonomy

For the purposes of this Product, “alignment” means investments that meet the criteria under Article 3 of the Taxonomy Regulation.

3. Short Transition Risk

Short transition risk predominantly using high Scope 1-3 emissions per unit of revenue as proxy. In addition to Scope Emissions, other environmental KPIs and unsustainable business activities, indicating a high desgree of transition risk will be considered in taking short positions.

For the Long Book the Sustainability Indicators used are percent (%) eligible and aligned investments with the Taxonomy Regulation on a gross investment basis (where of gross investment equals the amount invested in the long book plus the amount invested in the short book). A key feature is to promote and invest in economic activities with sustainable characteristics and “convert” Taxonomy Regulation eligible investments into higher quality aligned investments as non-financial climate related disclosures improve.

For the Short Book the Sustainability Indicator used as proxy for Transition Risk is Scope 1-3 emissions/unit of revenue. “Transition Risk” here is informed by the “Guidelines on reporting climate-related information”*, as the financial materiality and impact on business models with a negative contribution to climate and sustainability from societal responses (policy, regulation, technology, market, reputation) and the pricing of these external costs.

The Product utilizes Principal Adverse Impact indicators from the SFDR for idea generation and in the due diligence process for identification of potential short candidates as well as monitoring of transition risk across the entire portfolio.

*https://ec.europa.eu/finance/docs/policy/190618-climate-related-information-reporting-guidelines_en.pdf

2. No Sustainable Investment Objective

The Product promotes environmental or social characteristics but does not have as its objective sustainable investment. Although the Product does not have as its objective sustainable investment, the Product commits to making one or more sustainable investments. As detailed further below, the Product will be invested in investments that include companies which are:

• “Eligible” and “Aligned” under the EU Taxonomy. “Do no significant harm” is evaluated in accordance with Article 3(b) and Article 3(d) of the Taxonomy Regulation.

• SFDR Sustainable Investments (“Eligible” and “Aligned” under the EU Taxonomy). “Do no significant harm” is evaluated in accordance with the SFDR.

In a case where there is potential for harm to other Environmental Objectives this will be evaluated in the context of the current maturity of a proposed or deployed technology and its potential future positive contribution to the addressed Environmental Objective.

Companies that are outliers on specific indicators, or which exhibit high adverse impact across several indicators, are identified based on data acquired from third party providers, and internal analysis. Such outliers are analyzed further as they are exposed to double materiality and elevated negative financial impact on enterprise value via transition risk. In addition, they are flagged to the CIO for evaluation and may be designated as investments that are either: (i) not suitable for long book investments; or (ii) suitable for short book investments.

PAI data is used as both a qualitative and quantitative direct input into the Product’s due diligence and investment process. As the availability of sustainable investment data improves, the intention is to adjust/add more indicators over time.

The Product’s consideration of the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights against its portfolio is as follows:

• “Eligible” and “Aligned” under the EU Taxonomy. “Minimum Safeguards” are evaluated in accordance with Article 3(b) and Article 3(d) of the Taxonomy Regulation.

• SFDR Sustainable Investments (“Eligible” and “Aligned” under the EU Taxonomy). “Good Governance” is evaluated in accordance with the SFDR.

Both cases of “Minimum Safeguards” and “Good Governance” involve evaluation of UN Global Compact violations and/or other relevant indicators.

3. Environmental or social characteristics of the financial product

The Product seeks to promote environmental characteristics linked to the objective of decarbonization through a combination of active stewardship and the application of a designated environmental criteria for its investments. In particular, the Product aims to create a positive environmental impact by investing in companies that fulfill the environmental criteria set out below.

Long book (sustainable investments):

• Long “eligibility” with the EU Taxonomy. For the purposes of this Product, “eligibility” means the investment contributes to an environmental objective identified in Article 9 of the Taxonomy Regulation, which Mercator has assessed as being a sustainable investment for the purposes of Article 2(17) of the SFDR, but for the specific investment there is not enough data disclosure to evaluate if the investment meets all of the conditions under Article 3 of the Taxonomy Regulation to be designated as an “environmentally sustainable economic activity”. For the purposes of this Product, “eligibility” also includes sustainable investments contributing to an environmental objective, but for which detailed technical screening criteria have not yet been adopted. The Product will take long positions in such assets.

• Long “alignment” with the EU Taxonomy. The Product will take long positions in investments that are aligned with the EU Taxonomy. For the purposes of this Product, “alignment” means investments that meet the criteria under Article 3 of the Taxonomy Regulation.

Short book:

• Short transition risk predominantly using high Scope 1-3 emissions per unit of revenue as a proxy. The Product aims to take short positions in investments that are identified as having elevated levels of transition risk. High levels of Scope 1, 2 and 3 emissions per unit of revenue are considered as a critical aspect for decarbonization and exposure to transition risk. In addition to Scope Emissions, other environmental KPIs and unsustainable business activities, indicating a high degree of transition risk will be considered in taking short positions. Investments will be evaluated on an absolute basis or comparisons to peer or industry averages/benchmarks.

4. Investment Strategy

To achieve the environmental and social characteristics promoted by the Product, the Product’s core investment focus is on companies that have a positive impact on decarbonization and structural disruption across asset-heavy and basic industries, such as:

• Power production

• Transportation

• Manufacturing

• Primary production (agriculture, mining)

“Decarbonization” is a multi-decade globally supported societal initiative to stem the effects and impacts of climate change. At a high-level it encompasses several sub-categories such as:

• “The Energy Transition”

• “Efficiency & Sustainability”

• “The Circular Economy”

The ongoing and accelerating disruption from the transformation of the asset heavy/basic industries will provide investable themes for the next 20-30 years.

Incumbents in the asset-heavy sectors have been the largest contributors to environmental degradation and climate change, largely due to them avoiding pricing their external environmental and societal costs. This is rapidly changing as societal awareness around climate and the environment is increasing and the tolerance for polluting technologies and poor corporate behavior is being eroded.

R&D and investment across materials science, green technologies, electrification, and digitization drive innovation and competitive economics for alternative efficient and sustainable activities and business models. Over the next two decades new and nascent technologies and corporates will scale and succeed, while incumbents must pivot or perish.

The Product seeks to capitalize on this structural change via a global long/short mandate, low net, focus on capital preservation, return goal of 12-15% annualized, volatility range 8-12% while offering investors exposure to a decarbonization focused, sustainable, and transparent investment process and portfolio.

In selecting the investments to attain the environmental and social characteristics promoted by the Product, Mercator is subject to the following binding criteria:

• Long book selection. Investment must contribute to the stated objective of decarbonization, predominantly via eligibility or alignment with the EU Taxonomy.

• Short book selection. Investment must be exposed to transition risk, predominantly via high ratio of Scope 1-3 emissions per unit of revenue.

These binding criteria are implemented on a continuous basis and are taken into account at each stage in the investment process, which consists of (i) idea generation; (ii) primary research; (iii) equity research; and (iv) portfolio construction.

The due diligence process comprises assessing normal governance matters, which include corporate governance, board structure, salaries and labor relations. Primary information sources consist of corporate disclosures in presentations, Sustainability/ESG reports, annual reports, and other regulatory filings. Part of the data is provided by third parties. Additional information and context are sought via direct meetings and conversations with management or outreach to the company under the engagement initiative.

5. Proportion of investments

The intent of the planned asset allocation is to achieve the overall objective of decarbonization by taking:

1. Long positions in companies with alternative sustainable technologies/processes/materials/products, or

2. Short positions in companies with high carbon emissions or elevated transition risk.

Numbers are presented on a gross investment basis where gross investment equals the amount invested in the long book plus the amount invested in the short book. Given the long/short mandate and the environmental characteristic “Short Transition Risk” expressed in the short book, by definition the assets invested in the short book are not eligible for SFDR sustainable investment evaluation. This becomes important if the Product is to be compared to long-only sustainability focused mandates. For transparency and comparability, the Product’s SFDR disclosures are presented both on 1) Gross Investment amount basis, and 2) Long Book Only investment amount basis in the table below.

Deploying a global long/short mandate the Product invests in markets outside of North America. In order to offer investors cost effective investments/exposures while avoiding country risk, currency risk, and counterparty risk, the fund’s equity exposure outside North America is primarily held in delta-one equity swaps. Prime broker counter parties buy/hold the equities on the fund’s behalf. Internally the Product treats these positions in all aspects (due diligence, engagement etc.) just like cash equity positions. The Regulatory Technical Standards (RTS) Commission Delegated Regulation (EU) 2022/1288 from April 20221, precludes the use of derivatives in the numerator in the calculation of Taxonomy aligned sustainable investments. The Product complies with the RTS calculation but also provides numbers inclusive of delta-one equity swap positions for full transparency and comparability. This view on equity swaps is supported by the “Joint consultation on Taxonomy-related sustainability disclosures”2, European Banking Authority (EBA). The blanket ban on derivatives reflects a very conservative initial stance from the European Supervisory Authorities (ESAs) and is expected to be revisited as the Taxonomy/SFDR framework is further implemented3.

In the table below four different scenarios are shown for transparency and comparability. The highlighted section “Gross Investment – Without Derivatives” represents the selected conservative planned asset allocation numbers. A cautious approach is warranted given the existing uncertainty with regards to how best include the short book and the use of derivatives (delta-one equity swaps) in the long book. The expectation is that the Product will exceed these minimum commitments in the coming reporting periods.

Comments on the Planned Asset Allocation table:

1. #1 Alignment with E/S characteristics and #2 Other minimums stay the same as both the long and short book are expected to meet E/S characteristics

2. #1A Sustainable – Long Book is the minimum SFDR sustainable investment which halves between Long Book Only and Gross Investment as the denominator increases

3. #1A.1 Sustainable – Taxonomy Aligned minimum SFDR sustainable investment decreases if derivatives (swap positions) are taken out, while at the same time increasing #1A.2 Sustainable – Non-Taxonomy Aligned SFDR sustainable investment by the same amount

4. #1B Other E/S – Short Book minimums are the same for all scenarios as the short book is expected to substantially meet its E/S characteristics

1. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32022R1288&from=EN
2. “Joint consultation on Taxonomy-related sustainability disclosures”, May 2021
3. “Final Report on draft Regulatory Technical Standards”, ESAs, Oct 2021

The Product’s use of derivatives is almost exclusively in delta-one single equity swaps to access attractive investments/exposures in line with the stated mandate in non-North American markets. There is no hedging/netting of individual equity positions but limited use of swaps on equity ETFs or equity indices for risk management purposes.

Delta-one single equity swaps are executed via prime broker counter parties who on the fund’s behalf:

• Buy/hold long position in single name equities for the long book which promote the environmental characteristics of being eligible or aligned with the EU Taxonomy Regulation

• Sell/hold short position in single name equities for the short book which promote the environmental characteristics of being short Transition risk as defined in Section 2 above

The expressed portfolio view on individual equities as outlined above and the similar treatment of these positions with regards to the investment process and corporate engagement is aligned with the attainment of the fund’s promoted environmental characteristics.

Swaps on equity ETFs or equity indices for risk management purposes does generally not contribute to the attainment of the environmental or social characteristics promoted by the financial product. Only if the underlying collateral of the swapped equity ETF or index can be verified will it be considered for inclusion.

The minimum extent of EU Taxonomy aligned sustainable investments is 3% as highlighted in the above “Table: Planned Asset Allocation Scenarios” for the scenario “Gross Investment Without Derivatives”. This minimum reflects the nature of the long/short mandate where the short book is not eligible for sustainable investments, and the current ban on derivatives in the calculation of EU Taxonomy alignment, which excludes a portion of the EU Taxonomy aligned long book currently held via delta-one equity swaps. The expectation is that the Product will exceed these minimum commitments in the coming reporting periods.

The EU Taxonomy aligned sustainable investments have underlying businesses related to the environmentally sustainable economic activities listed by the EU Taxonomy Regulation. The degree of EU Taxonomy alignment is evaluated on a turnover basis as investee companies in sectors of focus have diverse business segments. The Product does not invest in fossil gas and/or nuclear energy related activities that comply with the EU Taxonomy. Primary information sources consist of corporate disclosures in presentations, Sustainability/ESG reports, annual reports, and other regulatory filings. Part of the data is provided by third parties. Additional information and context are sought via direct meetings and conversations with management or outreach to the company under the engagement initiative. There is no audit/assurance on an individual position basis of the fulfilment of the criteria for environmentally sustainable economic activities for Taxonomy alignment carried out by a third party. The Product’s investment process and compliance with the SFDR and EU Taxonomy frameworks is evaluated on an annual basis by Waystone (www.waystone.com).

The minimum shares of investments in transitional and enabling activities are subsets of the 3% minimum share of Taxonomy aligned sustainable investments. The transitional sustainable investment minimum is 0.7% and the enabling sustainable investment minimum is 1.6%.

The minimum share of sustainable investments with an environmental objective that are not aligned with the EU Taxonomy is 22%.

As described above, for the purposes of this Product, EU Taxonomy “eligibility” means the investment contributes to an environmental objective identified in Article 9 of the Taxonomy Regulation, which Mercator has assessed as being a sustainable investment for the purposes of Article 2(17) of the SFDR.

Based on the above, sustainable investments that are not Taxonomy aligned will be comprised predominantly by the following categories:

1. EU Taxonomy eligible investments for which there are not enough data disclosures to evaluate if the investments meet all of the conditions under Article 3 of the Taxonomy Regulation to be designated as an “environmentally sustainable economic activity”

2. EU Taxonomy eligible investments for which detailed technical screening criteria have not yet been adopted

3. EU Taxonomy aligned investments that meet the criteria under Article 3 of the Taxonomy Regulation, but which are listed and traded on exchanges outside of North America, and hence currently held by the Product via delta-one single equity swaps. The blanket exclusion of derivative exposures in any Taxonomy aligned portfolio calculation makes them non-Taxonomy aligned sustainable investments for the purposes of Article 2(17) of the SFDR by default.

The expectation is that the Product will increase its share of Taxonomy aligned sustainable investment once the reporting prescribed by Regulation (EU) 2021/2178 on the Taxonomy- aligned activities of non-financial undertakings (from January 2023) and financial undertakings (from January 2024) starts, finalized technical screening criteria, and the future reevaluation by the European Supervisory Authorities (ESAs) of the blanket derivatives ban.

Investments that are included under “#2 Other” will include the following categories:

1. Investments in the product’s long or short book that do not have environmental characteristics and/or fall outside of the overall investment objective to make a positive contribution towards decarbonization. For example, this could be a Special Purpose Acquisition Company (SPAC) where it is not possible to determine the ultimate SPAC acquisition target. No minimum environmental or social safeguards will be considered. “Questions and answers (Q&A) on the SFDR Delegated Regulation”, Nov 2022

2. Swaps on equity ETFs or equity indices for risk management purposes for which the underlying collateral of the swapped equity ETF or index cannot be verified. No minimum environmental or social safeguards will be considered.

Although the Product intends to invest in sustainable investments and promote environmental characteristics, the #2 Other category may include investments for which the purpose is to contribute to investment returns via long/short alpha.

6. Monitoring of environmental or social characteristics

The following sustainability indicators will be used in the Product’s analysis of its investments against its designated environmental criteria:

• Long “eligibility” with the EU Taxonomy. The percentage of the Product’s AUM that is eligible with EU Taxonomy.

• Long “alignment” with the EU Taxonomy. The percentage of the Product’s AUM that is aligned with EU Taxonomy.

• Short Transition risk. Average Scope 1, 2 and 3 emissions per unit of revenue or other relevant metric for transition risk.

These sustainability indicators will be monitored on an ongoing basis against data disclosed by investee companies, through data acquired from third party providers, and internal analysis.

7. Methodologies

1. Long – Eligibility and Alignment

   • A company’s economic activities are compared to listed eligible activities under the Environmental Objectives in Article 9 of the Taxonomy Regulation and determined to be “own performance”, “transitional”, or “enabling”.

   • Eligibility is expressed as the cumulative % of total company turnover in identified economic activities.

   • Alignment is expressed as the cumulative % of total eligible company turnover in identified activities passing all three criteria under Article 3 of the Taxonomy Regulation.

2. Short – Transition Risk (high Scope 1- 3 emissions per unit of revenue or other significant deviation in relevant metric for transition risk)

   • Source emissions data and other relevant metrics from corporate sustainability reports, Life Cycle Assessments, or from third party data providers (Carbon Disclosure Projects, Bloomberg, MSCI etc.).

   • Identify companies in polluting sectors or business models that are outliers vs. peers or sector averages on specific indicators, or which exhibit high adverse impact across several indicators (i.e. high levels of transition risk).

   • Outliers are further analyzed as they are exposed to double materiality and elevated potential negative financial impact on enterprise value via transition risk.

8. Data sources and processing

Below is a subset of relevant source documents used:

1. Taxonomy: Final report of the Technical Expert Group on Sustainable Finance, March 2020
   https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/200309-sustainable-finance-teg-final-report-taxonomy_en.pdf

2. Technical expert group on sustainable finance (TEG) – Taxonomy tools, 13 March 2020
   https://ec.europa.eu/info/files/sustainable-finance-teg-taxonomy-tools_en

3. Corporate Value Chain (Scope 3) Standard, 2011, https://ghgprotocol.org/standards/scope-3-standard

4. Technical Guidance for Calculating Scope 3 emissions, 2013
   https://ghgprotocol.org/sites/default/files/standards/Scope3_Calculation_Guidance_0.pdf

5. Suggestions for updating the Product Environmental Footprint (PEF) method, 2019
   https://publications.jrc.ec.europa.eu/repository/handle/JRC115959

6. Suggestions for updating the organization environmental footprint (OEF) method, 2019, https://op.europa.eu/en/publication-detail/-/publication/42850a3f-4478-11e9-a8ed-
   01aa75ed71a1/language-en

7. Company reports and disclosures, sustainability reports, and Life Cycle Assessments (LCAs)

8. Third party reports & data from:

   • a. CDP

   • b. Bloomberg

   • c. MSCI

   • d. Academia

   • e. National labs (NREL, Fraunhofer etc.)

   • f. Industry organizations

Data quality is ensured by using reliable and reputable sources and preferably multiple sources for cross-referencing. There is limited or no processing of the data other than making sure it is representative and comparable across corporates and sectors. Some data may be estimated for listed economic activities for companies not subject to the regulation.

Multiple directly relevant or proxy KPIs can be combined into metrics/scores indicating a PASS/FAIL outcome. Methodologies will evolve with enhanced disclosures of non-financial climate and environmental data.

9. Limitations to methodologies and data

The most limiting factors in attaining the Product’s environmental characteristics are:

1. Currently only 2(6) EU Taxonomy Environmental Objectives are available. This limits the number of published eligible economic activities and hence the potential to achieve high Taxonomy eligibility and alignment in a regionally diverse portfolio.

2. Disclosure of non-financial climate related data by corporates is not sufficient, reliable, or relevant to evaluate against the EU Taxonomy quantitative benchmarks.

3. Deploying a global long/short mandate the Product invests in markets outside of the EU.

These companies are not subject to the EU Taxonomy or the Corporate Sustainability Reporting Directive (CSRD), which in certain cases limit disclosures. The Product recognized this and selected “eligibility” under the EU Taxonomy as both an environmental characteristic and a sustainability indicator. This follows the spirit of the Sustainable Finance Framework and allows the Product’s Article 8 equivalent framework to grow more robust over time as additional environmental objectives come into effect and corporate disclosures improve.

10. Due diligence

As part of the equity research stage of the investment process, a comprehensive financial and corporate due diligence process is undertaken, including an assessment of corporate climate strategy, implementation, and performance. Internally the CIO makes the final investment decision.

11. Engagement policies

Mercator is committed to undertake engagement activities with investee companies to affect and influence improved ESG-related practices. As part of this initiative specific focus is given to disclosures of:

1. Scope 3 emissions (supply chain) and especially underlying assumptions in the key categories of:

   • a) “Purchased goods and services”

   • b) “Use of sold products”

   • Scope 3 emissions should be informed by a comprehensive Life Cycle Assessment
     (LCA) report preferably verified by a certified independent third party.

2. Carbon offsets purchased and used by corporates in programs aimed at reducing net carbon emissions or reach certain targets (such as net-zero). To assess the quality of offsets the following list of disclosures is required:

   1. What type of offsets are they buying (natural or technology based)?

   2. What was the price paid?

   3. General offset characteristics (permanence, additionality, verifiability)?