Carbon neutral

certification program

Ethos offers a Carbon Neutral Certification for mutual funds, exchange-traded funds (ETFs), separately managed accounts (SMAs), portfolios, and other investment products.

Through the certification, Ethos performs an independent analysis of a fund’s carbon footprint and carbon credits (offsets) to verify whether the fund is carbon neutral during a specified period.

The carbon footprint consists of verified Scope 1 and Scope 2 emissions of every holding of the fund. Carbon credits require proof of purchase from an approved carbon credit provider.

Once certified as carbon neutral, Ethos promotes a fund with Certified Carbon Neutral badges on our platform for financial advisors and investors, as well as through our network. Ethos also grants publishing rights to the fund manager to promote the fund as certified carbon neutral.

Included below is more information on how Ethos verifies carbon footprint and carbon credits, as well as on how Ethos promotes funds that become certified carbon neutral.

Carbon Footprint definition

For the purposes of certifying carbon neutrality, Ethos defines the carbon footprint of a fund as the total tons of Scope 1 and Scope 2 CO2 emissions of its holdings multiplied by the fund’s percentage ownership of those holdings. Percentage ownership is based on the market value of the fund’s shares divided by the total market value of the holdings.

Following internationally-accepted definitions, Scope 1 emissions are direct emissions from a company’s owned or controlled sources, such as company vehicles or fuel combustion. Scope 2 emissions include indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by a company.

For Scope 2 emissions, Ethos uses the market-based reporting methodology whenever available. The market-based method shows emissions the company is responsible for through its purchasing decisions, while the location-based method indicates what the company is physically putting into the air through energy consumed. We believe the market-based methodology better reflects what a company can control, such as the use of renewable energy. We always indicate in our analysis which methodology we use for each fund holding.

While Ethos researches and models Scope 3 emissions for every fund holding (and provides this data to funds), we do not consider Scope 3 for fund-level certification. Scope 3 emissions are all other indirect emissions (outside of Scope 2) that occur in a company's value chain. We do not consider Scope 3 emissions for certification due to several limitations with Scope 3 data, including:

• Lack of standardized reporting methodology by companies;
• Low coverage of companies reporting Scope 3 emissions (resulting in significant use of modeling); and
• Likely overlap of scope 3 emissions across company value chains ("double-counting" across shared customers and suppliers).

Carbon Offset definition

Ethos defines a carbon offset as a verified reduction in CO2 emissions, measured in tons.

As part of the Carbon Neutral Certification, Ethos requires funds to submit proof of purchase of carbon credits from a list of approved providers of carbon credits, such as Grassroots Carbon. Ethos uses the Proof of Purchase to determine whether the purchased credits effectively offset the emissions generated by the fund’s holdings (the Carbon Footprint).

Carbon Neutral definition

Ethos defines carbon neutral as a net total of zero tons CO2 emissions or negative CO2 emissions for a specified period of time. Ethos calculates a fund’s net emissions as the fund’s total certified Carbon Footprint minus its total certified Carbon Offset:

Net Emissions = certified Carbon Footprint – certified Carbon Offset

Carbon Neutral calculation process

The Carbon Neutral Certification process occurs annually, with quarterly data calculations per the following process:

To calculate a fund’s Carbon Footprint (total Scope 1 and Scope 2 emissions), Ethos begins by researching the Scope 1 and Scope 2 emissions of every holding within the fund for the most recent year. Ethos uses primary sources (company filings), third party analyses, and statistical methods such as linear regression of company peer emissions to verify the accuracy of the total carbon footprint of a fund.

Not all companies report Scope 1 and 2 carbon emissions. Where a company does not report emissions, Ethos models company emissions based on several variables, such as peer average carbon intensity and size of the company (revenue). Ethos uses basic linear regression for this modeling, such as:

To find a best-fit model for predicting emissions, we tested 15+ independent variables of carbon emissions, using existing data from 1200+ companies that we feel have high-quality reporting for their carbon-related data.

In addition to the best-fit model, we also model expected emissions with a simpler equation of:

Expected emissions = peer-average carbon intensity (CO2 per $M revenue) * $M revenue

Ethos defines peer groups based on publicly-available classification information, focusing on alignment of core business model and operations.

For all fund holdings that have company-reported emissions, Ethos also compares reported Scope 1 and 2 emissions with modeled (predicted) emissions and with peer-averages. Where there is a significant difference between company-reported emissions and its predicted emissions, Ethos performs additional investigation to determine if the self-reported amount is accurate, e.g., ensures the company provides credible commentary about how it has achieved lower emissions intensity than its peers.

If a company’s self-reported emissions intensity is more than 3 standard deviations above or below its peers and the company does not provide commentary on how they reached their emissions levels, Ethos considers whether to use the modeled or peer-average method to set the company’s emissions. We make this decision only if we believe that there is not sufficient evidence to verify a company’s self-reported emissions.

After calculating the Carbon Footprint, Ethos uses a fund’s submitted Proof of Purchase from an approved provider of carbon credits to assess the total tons of CO2 offset. Ethos’ assessment of carbon credits includes analyses such as the amount of carbon credits purchased (in tons of CO2), whether the credits have already been verified by a credible third party, and whether the credits involve live measurements taken according to accepted international standards.

Data collection and alignment process

Funds may submit their own data covering their Carbon Footprint to Ethos to be verified. If they choose not to, Ethos starts from its own database of company-level emissions.

If a fund submits its own data and Ethos determines that the emissions data for any fund holding is incorrect (e.g., out of date), Ethos and the fund discuss the source of misalignment and reach an agreement on the correct emissions amount.

If the aligned emissions amount is greater than the initial submitted amount, the fund agrees to purchase additional carbon credits to cover the difference. Any such amount is capped at one quarter of the cost that the fund paid for carbon credits. If the fund does not cover the difference, Ethos reserves the right to end the Carbon Neutral Certification for the following quarter.

Ethos performs this analysis once per quarter during the annual certification period.

When a fund becomes certified as carbon neutral, Ethos helps promote the fund on our platform and through our networks, and grants rights to the fund to promote through any channels they choose.

We aim to help catalyze the shift toward a carbon neutral economy and alignment with the Paris Agreement (limiting global warming to 1.5°C), and we hope that by promoting funds that are carbon neutral we can encourage others to follow suit.

Promotion on the Ethos platform

Ethos provides values-based investing software for financial advisors and investors through its platform at ethosESG.com. The platform includes a public-facing, free research service where any investor can look up companies and funds to find which align with their values, such as climate action. The platform also includes a paid subscription services for financial advisors and institutional investors to access ESG data, perform ESG research and modeling, and engage with their clients through reporting and other tools.

Every fund that becomes certified as carbon neutral by Ethos receives a Certified Carbon Neutral badge next to their name on Ethos, everywhere that their name appears.

This badge appears next to the fund’s name in search results (public and on the paid product), on the fund’s profile (every fund has a detailed profile on Ethos), on client-facing reports (web and PDF), and throughout the platform.

Promotion with our network

Ethos promotes certified carbon neutral funds to our network of financial advisors, retail investors, and institutional investors. We do this through:

• Recurring social media posts highlighting certified carbon neutral funds (LinkedIn, Twitter, Instagram, Facebook)
• Features on our blog (ethosESG.com/blog)
• Features in our email newsletter
• Short video interviews with the fund (optional), posted on YouTube and social
• Inclusion in other Ethos promotional materials

Rights of the fund to promote carbon neutrality

Upon successful certification as carbon neutral, a fund receives rights to communicate and advertise their certification, using branding materials from Ethos or their own materials, provided that:

• Ethos and the fund have an opportunity to review all advertising and promotional materials Materials will not be used or published without written approval from the other party prior to final production and use
• Each party may waive this right for some or all materials with a written notice to the other party
• This right to advertise is renewed quarterly throughout the annual certification period.