2023_12_carbon_pricing_investing_in_climate_action

1 info@kraneshares.com +1 (212) 933 0393 Carbon Pricing: Investing in Climate Action By Oktay Kurbanov, Partner at Climate Finance Partners (CLIFI)

Intro duction In recent years , the world has experienced unprecedented climate events . September 2023 was the warmest September on record, reaching 1.44 °C (2.59 °F) above the 20th century average temperature . In the same month, we witnessed an unprecedented amount of rain and floods , which caused devastation in New York, Brazil, Libya, and Hong Kong . Another concerning statistic was the lowest sea ice coverage on record, driven by the deteriorati on of Antar ctic ice.1 While no specific event can be directly attributable to global warming, these events highlight the urgency and importance of coordinated action to address climate change . To achieve climate objectives, economists have favored c arbon pricing as an effective policy tool that leverages market -based incentives . Policymakers around the world have embraced this idea by establishing Emission Trading Schemes (ETS) , first introduced in Europe in 2005 . Currently, a bout 2 5% of world emissions are covered by some form of carbon pricing.2 This paper start s with a discussion of the positive impact s of ETS on energy transition to achiev e climate goals :

• Incentiviz ing behavior change of companies to decarbonize
• Efficient allocation of capital to the most cost -effective use

1 National Oceanic and Atmospheric Administration, “ Topping the charts: September 2023 was Earth’s warmest September in 174 -year record ”, “Assessing the Global Climate in September 2023 ”, 10/13/2023 2 The Economist, “ How carbon prices are taking over the world ”, 10/1/2023

2 info@kraneshares.com +1 (212) 933 0393

• Raising funds to finance innovation and social programs
• Establishing a global reference price of carbon to act as a benchmark that puts an explicit cost on emissions Increasingly, asset managers have been looking for ways to participate in climate action : through Environmental , Social & Governa nce ( ESG) strategies , net -zero alignment, and company activism. KraneShares carbon allowance ETFs provide managers with an innovative way to invest in climate action and have an i mpact in the following areas:
• Supporting liquidity, efficiency, and price stability of the four largest carbon markets (by trading volume) thus helping these markets achieve climate policy objectives
• Support ing net-zero aligned portfolios by offering a carbon -neutral investment opportunity which can also improv e risk/return profile of the portfolio
• Creat ing and educat ing a constituency of investors to support carbon investing and climate action In the following discussion, we address these impact areas in greater detail . Emission Trading Schemes: Climate Action with Proven Track Record Carbon Emissions Trading Systems (ETS), also referred to as Cap and Trade, is a market for trading carbon allowances that are regulated by governmental organizations . A regulated (“in-scope”) entity must satisfy its compliance obligations by surrendering carbon allowances in the amount equal to its carbon dioxide emissions . The price at which carbon allowances can be purchased is determined by auctions and secondary markets , thus introduc ing market -based incentive s into the system . There is also an element of built -in declining of supply of these allowances, creating an environment supporti ve of price appreciation. This dynamic incentivizes behavior change by businesses to encourage investments in cleaner technolog ies. Companies that can successfully reduce their emissions are rewarded with increased profitability from reduc ed costs of their ETS compliance obligations . Because of the market -based mechanisms , the programs create an environment for efficient capital allocation by directing it to the most cost -effective projects . This system has demonstrated its effectiveness in driving down emissions in both European and US ETS , (See Table 1):

3 info@kraneshares.com +1 (212) 933 0393 Table 1. Summary of e mission decrease s across major global ETS EU ETS UK ETS CA ETS RGGI ETS Start 2005 2005 2013 2009 In-Scope Emissions at ETS Start, Mt 2,087 269 349 157 In-Scope Emissions in 2022, Mt 1,310 103 282 108 Emissions Decrease, % -37% -62% -19% -31% Real GDP Growth , % 30% 25% 37% 21% Source s: stationary emissions from EU ETS, UK ETS (backfilling with EU ETS data before 2021) , California Air Resource Board , Regional Greenhouse Gas Initiative (“RGGI”, encompassing 11 Northeast and Mid -Atlantic states as of 2022) . GDP from the IMF and the Pacific Northwest Regional Economic Analysis Project (PNREAP) . The 19-62% emissions decreases are especially impressive considering the 21-37% real GDP grow th of these global e conomies over the same period. In addition to their crucial role in reducing emissions , ETS are a considerable source of revenue for the respective governing bodies. As summarized in Table 2 below , the funds raised at annual auctions of carbon allowances are directed to various climate - and energy - related purposes , as well as to support rate rebates , local communities, and the general budget : Table 2. Revenue generated by major ETS and their uses ($ billions)

Sources: The International Carbon Action Partnership (ICAP), https://icapcarbonaction.com/en/ets , accessed Region 2022Since InceptionUses of Revenues EU ETS 42.2 151.9- Most of revenue is used for climate- and energy-related purposes

• Supporting Modernization and Innovation Funds
• Low-carbon technologies and industrial solutions to decarbonize
• Renewable energy, energy storage, carbon capture, modernizing energy systems, improving energy efficiency.
• The balance of funds is supporting general budget of member states UK ETS 7.6 12.9- Supporting key government priorities, including decarbonization
• Energy efficiency, CCUS, wind, hydrogen, supporting green jobs
• De-risk investment decisions, bespoke support for clean-tech developers CA ETS 4.0 22.3- Funding the Greenhouse Gas Reduction Fund
• Projects with environmental, economic, and public health benefits
• Investments in energy efficiency, clean transportation, solar energy, and other GHG-reducing projects
• Refund to utility ratepayers and benefiting low-income communities RGGI 1.2 5.9- Focus on consumer benefits programs
• Direct energy bill assistance
• Energy efficiency, renewable energy, and other GHG reduction projects Total 55.1 193.0 $ billions

4 info@kraneshares.com +1 (212) 933 0393 11/17/2023; California Climate Investments, 2023 Annual Report; U.K. Government, “Developing the U.K. Emissions Trading Scheme: Main Response”, June 2023. In 2022, the four major ETS programs generated $55 billion to support government climate objectives and social programs related to energy transition. This is another illustration that well-functioning ETS are a key to successful government policies and driving force s behind climate action. Investor Participation Supports Market Efficiency & Price Discovery One of the key components of a well -functioning ETS is the p articipation of financial entities such as investment funds, banks, commodity traders and others . Financial entities use both auctions as well as secondary markets with carbon allowance futures to participate in an ETS, resulting in a positive impact on these markets :

• Increased trading activity leads to efficient price discovery , low costs , and a boost in market confidence in carbon pricing
• Liquid futures markets enable a convenient way to buy or sell physical allowances using the delivery mechanism at settlement
• Opportunity for in -scope entities to hedge their compliance obligations , lock into profits , and manage costs KraneShares carbon allowance ETFs gain their exposure to compliance carbon allowances through futures, tapping into the most liquid markets to provide investors with exposure to the price of carbon while supporting liquidity and stability of the ETS. Launched in 2020, KRBN became the first ETF to focus on carbon allowance markets.3 As financial participants started trading carbon assets, these markets ’ liquidity increased three -fold from 2019 to 2022, contributing to their efficient operation:

3 Bloomberg, retrieved 11/12/2023

5 info@kraneshares.com +1 (212) 933 0393 Table 3. Carbon allowance futures annual trading volume and growth in major markets, $ billion

Source: Bloomberg as of 12/31/2022 Investment funds such as KRBN (global basket of the four largest carbon allowances markets) , KCCA (California carbon) , and KEUA (European Union carbon) help market stability and provide a steady support for prices by increasing demand for long positions in carbon . As of October 31, 2023 , Krane Shares carbon allowance ETFs had a long position of carbon allowances total ing 16.5 million metric ton s of CO 2,4 which is the equivalen t to emissions from 40 natural gas plants fired for a year or the same amount of carbon sequestered by 20 million acres of U.S. forests in one year .5 Increased demand from long -oriented investment funds and other financial entities helps governments achieve their goal of gradually increasing carbon prices . When California updated its governing document for achieving carbon neutrality in 202 2 (“Scoping Plan”) , it emphasized the need for “a well -designed [Cap -and-Trade] system that continues to send a steadily increasing price signal, minimizes for leakage, reduces emissions in the covered sectors toward the state’s targets, is cost -effective and technologically feasible, and avoids energy rate spikes .” The confluence of the supportive regulatory framework and increased investor interest has led to the strong performance of carbon markets . One can see this by looking at the IHS Global Carbon Index, jointly developed by IHS Markit and Climate Finance Partners , a sub - adviser to the KraneShares carbon allowance ETFs . The index tracks the performance of a

4 KraneShares, 10/31/2023 factsheets 5 EPA, Greenhouse Gas Equivalencies Calculator , accessed 11/12/2023 2022 628.9 32.8 44.5 5.8 712.1 -4% 88% 1% 77% -1% 2021 652.0 17.5 43.9 3.3 716.7 159% - 108% 120% 161% 2020 251.8 - 21.1 1.5 274.4 23% - 44% 10% 24% 2019 205.0 - 14.7 1.4 221.0 36% - 116% 35% 39% 2018 150.8 - 6.8 1.0 158.6 354% - 31% 81% 307% 2017 33.2 - 5.2 0.6 39.0 11% - 56% -57% 13% 2016 30.0 - 3.3 1.3 34.6 -31% - -12% -1% -28% 2015 43.2 - 3.8 1.3 48.2 - - - - -Total GrowthEUA VolumeUKA VolumeCCA VolumeRGGI VolumeRGGI YoY GrowthYearTotal volumeEUA YoY GrowthUKA YoY GrowthCCA YoY Growth

6 info@kraneshares.com +1 (212) 933 0393 basket of the most liquid global carbon markets listed in Table 3 above . Since its launch on July 25, 2019 , the index returned 127% through October 31, 2023 (See Figure 1). Figure 1 . IHS Markit Global Carbon Total Return Index, 7/25/2019 – 10/31/2023

Source: S&P Global as of 10/31/2023 . Index returns are for illustrative purposes only and do not represent actual Fund performance. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. The above analysis and historical results show the beneficial impact on carbon markets from investor participation . This participation support s a well -functioning and efficient ETS that helps reduce emissions, generate revenue for climate programs , and incentivize energy transition by companies by steadily increasing carbon pric es. Supporting Net Zero Alignment: Carbon Neutral Investment KraneShares carbon allowance ETFs help address the needs of investment managers striving for net zero alignment of their portfolios . More than 300 asset managers with $64 trillion in assets joined the Net Zero Asset Managers initiative . One of the stated goals of the signatories is to support investing aligned with net zero emissions by 2 050 or sooner .6 As discussed above, i nvesting in carbon allowances supports this goal by promoting the ETS, which act as a major policy tool in reducing emissions and achieving net zero goals. Very often, in pursuit of reducing the carbon footprint of their portfolios, managers tend to underweight high -emitting industries. This approach is effective at reducing carbon

6 https://www.netzeroassetmanagers.org , accessed 10/30/2023 KRBN ETF launch on 7/30/2020 0100200300400500600700800900 Jul-19 Nov-19 Mar-20 Jul-20 Nov-20 Mar-21 Jul-21 Nov-21 Mar-22 Jul-22 Nov-22 Mar-23 Jul-23

7 info@kraneshares.com +1 (212) 933 0393 footprint, but it also exposes the portfolio to the volatility of sector bets. For example, the S&P Paris -Aligned ESG index holds no exposure to the Energy sector, effectively underweighting Energ y by 4.5% vs. S&P 500.7 Such a sector bet would have cost a manager about 3% underperformance vs. S&P 500 in 2021 -2022 when geopolitical tensions led to rising energy costs , with the S&P Energy sector rallying 55% in 2021 and 66% in 2022.8 KraneShares carbon allowance ETFs can complement the set of investment strategies to reduce the carbon footprint of climate -focused portfolios . Carbon allowances are by construction carbon -neutral investments since underlying assets are simply registry entries in the respective ETS.9 As such, any allocation to these ETFs will reduce carbon footprint of the portfolio by the same percentage , per $ invested . Such an allocation to global carbon markets may also improve the portfolio’s risk / return profile , as illustrated below using a 10% allocation to a global basket of carbon markets : Table 4. Impact of allocating 10% to carbon markets on stock -only and 60% stocks / 40% bonds portfolios using returns data from August 2014 – October 2023

Sources: S&P Global . Stocks: S&P 500 , Bonds: S&P U.S. Aggregate Bond Index, Carbon : top 4 carbon allowance markets by constituent trade volume. See Terms & Definitions at end of report for full definition s. Index returns are for illustrative purposes only and do not represent actual Fund performance. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Historical returns for b oth the stock -only and 60/40 portfolio s benefit greatly by allocating 10% of the portfolio to carbon markets. In both cases, the annualized return increase s

7 S&P 500 factsheet, as of October 31, 2023 8 Source: S&P Dow Jones Indices, CLIFI 9 Indirect emissions from registry & data processing are no considered for the purposes of this discussion. This is consistent with MSCI not including Scope 3 in carbon footprint and carbon intensity calculations (see “ MSCI Index ESG Metrics Calculation Methodology ,” December 2020) Stocks90% Stocks

• 10% CarbonDifference % Change Annualized Return 10.8% 12.3% 1.5% 14.0% Annual Volatility 15.4% 15.1% -0.3% -2.1% Sharpe Ratio 0.66 0.76 0.10 15.4% Stocks / Bonds (60% / 40%)90% Stocks / Bonds
• 10% CarbonDifference % Change Annualized Return 7.0% 8.8% 1.8% 26.4% Annual Volatility 9.9% 10.2% 0.3% 3.2% Sharpe Ratio 0.60 0.75 0.15 25.5%

8 info@kraneshares.com +1 (212) 933 0393 notably , by 1.5% for stocks and 1.8% for the 60/40 portfolio , or by about 14% and 2 6% in relative terms vs. the initial portfolio . Most notably, due to diversifying10 properties of carbon allowances, increases in returns are not accompanie d by significant increases in volatility. The stock portfolio’s volatility actually slightly decreases by allocating 10% to carbon markets, while the 60/40 portfolio ’s volatility increases by only about 0.3% in relative terms . As evidenced by these results, c arbon allowances present a unique opportunity to add carbon -neutral exposure to support net-zero alignment of portfolios . While doing so, they may also improv e risk/return characteristics. Considering the challenges and complexit ies of decreasing carbon footprint and aligning portfolios with net zero goals, carbon allowance ETFs are valuable additions to the investment toolkit to help portfolio managers accomplish these goals. Promoting Carbon Pricing As part of its design, KRBN tracks the IHS Global Carbon Index , providing investors access to an investable carbon benchmark with transparent, market -driven pricing . The IHS Global Carbon Index helps support and promote a reference price of carbon , as represent ed by the weighted daily average price of carbon across the four largest carbon markets by trading volume . Having a market -determined price of carbon can provide a real -time gauge to see how far carbon pricing needs to rise to incentivize energy transition and help achieve climate goals . As of October 31, 2023, the four markets covered by the Index had weighted average price of $50.11 Comparatively , the average price of carbon across all market s, weighted by share of emissions in territories covered by carbon pricing , was $23 in 2023 , according to the “State of Climate Action” report published by the World Resource Institute . Their analysis found th at global carbon prices would need to reach $170 -290 to align economies with a 1.5°C trajectory .12 The current carbon price leve ls across markets is far short of the target range and can help policy and corporate planning for energy transition discussions .

10 Diversification does not ensure a profit or guarantee against a loss. 11 Source: S&P Global , IHS Markit Global Carbon Index , “Weighted Carbon Price” 12 World Resource Institute, “ State of Climate Action 2023 ”

9 info@kraneshares.com +1 (212) 933 0393 The price of carbon has also started to play an increasingly important role in managing transition risks in the corporate world. As climate risk disclosures became the norm, prompting investor and regulatory inquiries, the need to manage this risk explicitly became increasingly more critical . Consequently, c ompanies started to explicitly put internal costs on carbon emissions. 13 This carbon accounting ensures that companies optimally direct their capital in a risk-balanced way, accounting for possible shifts in climate regulations, social norms , and sustainability requirements . According to Carbon Disclosure Project (CDP) , a non -profit that runs an environmental -related disclosure system, 14% of 5900+ companies surveyed use internal carbon pricing. Additionally, 20% of the companies anticipate using internal carbon pricing within two years. Market capitalization of these companies excee ded US$27 trillion.14 Table 5 below shows the extent of explicit carbon accounting by industry sectors:15 Table 5. Internal carbon pricing use by sector (%)

Source: McKinsey, based on CPD data as of 2022

13 The i nternal carbon price differs by company, and is often based on either cap -and-trade allowance prices, the social cost of carbon, or high quality carbon offsets. 14 CDP, “ Putting a price on Carbon ,” April 2021 15 McKinsey, “ Prime Numbers: Internal carbon pricing is on the rise, but needs to rise higher ,” 10/6/2023

10 info@kraneshares.com +1 (212) 933 0393 It is encouraging to see that internal carbon pricing is more popular among polluting sectors such as Energy, where 50% of the sector’s top companies put a price on carbon emissions . As companies look for objective metrics to set internal pricing on carbon , a carbon benchmark such as the IHS Global Carbon Index provide s a dynamic reference price anchored to major compliance markets. By tracking the IHS Global Carbon Index, KRBN offers a way to go long the price of carbon as well as hedge increasing climate risk and expense pressures within broader inves tment portfolios. Galvanizing Support for Carbon Investing Launched in July 2020, KRBN was the first ETF of its kind16, encouraging wider participation of investment managers in climate action . KRBN, and later KCCA and KEUA , offer an innovative way to democratize access to investing in carbon pricing . From retail investors to large institutions , the KraneShares carbon allowance ETFs provide access to markets previously inaccessible to a large segment of investors. Since 2020 carbon markets became an asset class of its own , complementing sustainable, climate -conscious, and low -carbon investment approaches. As pioneers in the space, KraneShares Carbon Allowance ETFs help promote carbon pricing through a n exchanged traded fund that offer s many advantages to investors large and small:

• Daily liquidity, tight bid -ask spreads, and deep underlying market that could accommodate large inflows and outflows
• Investors p rotections and strict fiduciary standards subject to the Investment Company Act of 1940
• Transparent pricing and easy to access reporting Through the development and promotion of its suite of carbon allowance ETFs, KraneShares in partnership with Climate Finance Partners continue to expand its engagement with climate -conscious investor s through numerous events, webinars, whitepapers, commentaries, and blogs .

16 Source: Bloomberg, retrieved 11/12/2023

11 info@kraneshares.com +1 (212) 933 0393 This engagement helps drive forward a climate agenda by galvanizing the investor community to play an active role in climate action , especially through carbon investing . At current level s, carbon prices need to increase substantially to make emissions abatement technologies feasible to implement. Carbon Capture and Sequestration (CCS) , for example, is a valuable technology that can address hard -to-abate area s such as natural gas plants . For this technology to be economically viable for the average natural gas plant in Europe , the cost of carbon would nee d to rise to levels around €165 ( $179) .17 The increased investor enthusiasm for carbon investing helps make these abatement and carbon capture technologies a reality through carbon price action. As the investor community signals its support for investing in carbon allowances and engaging in climate dialogue with companies , it sends a clear message to businesses t o pursue decarbonization. Conclusion When investors seek impact -oriented investments, opportunities that provide both scale and liquidity are rarely found . Carbon allowance ETFs help meet this demand by offering a unique blend of positive impact and participation in climate action at a large scale while providing daily liquidity and strong performance potential . By supporting the successful operation of the existing ETS, investment funds such as KraneShares carbon allowance ETFs help achieve climate ambitions and incentivize behavior change of companies to decarbonize. Moreover, financial participants’ demand for long exposure can play a crucial role in increasing liquidity , price stability , and efficient operation of new ETS that are coming online in different parts of the world : Brazil (draft law introduced in 2023), India (the first compliance cycle is expected to start in 2024), Indonesia (first compliance stage started in 2023), Mexico (compliance stage expected in 2024), among others .18 The IHS Global Carbon Index is designed to start including new markets once they become open to investors and reach a required liquidity threshold.19 By investing in the KraneShares Global Carbon Allowance Strategy ETF ( KRBN ), which tracks the Index, investors will automatically gain exposure to new markets once they are added to the index.

17 Source: Climate Finance Partners (CLIFI). Also see CLIFI, “ Carbon Capture and Storage (CCS) – Are We There Yet? ” 6/5/2023, for a related discussion and data (Tables 1 & 2) 18 Source: International Carbon Action Partnership (ICAP) 19 The index requires m inimum of $10M for average monthly program trade volume in prior six-month period . See S&P Dow Jones Indices, “IHS Markit Global Carbon Index Guide ,” as of March 2023

12 info@kraneshares.com +1 (212) 933 0393 Investing in carbon markets through carbon allowance ETFs supports ETS-driven emissions reduction and compliance carbon market s operations , thus align ing investors with climate - conscious strategies, contributing to a sustainable and environmentally responsible future. There is a growing community of investors who have become supporters of carbon pricing through their exposure to compliance carbon investment strategies. This creates strong support and momentum for regulators to ramp up their climate ambitions towards carbon neutrality and incentives for businesses to transition toward sustainability and science - based emission reduction targets , making th e net -zero future a reality.

Terms & Index Definitions: S&P 500: Standard & Poor's Index is a capitalization -weighted index of 500 stocks. The S&P U.S. Aggregate Bond Index: The S&P U.S. Aggregate Bond Index is designed to measure the performance of publicly issued U.S. dollar denominated investment -grade debt. The index is part of the S&P AggregateTM Bond Index family and includes U.S. treasuries, quasi -governments, corporates, taxable municipal bonds, foreign agency, supranational, federal agency, and non -U.S. debentures, covered bonds, and residential mortgage pass -throughs. Carbon allowances : Top 4 carbon allowance markets by constituent trade volume. IHS Markit’s Global Carbon Index is used since the index start date July 25, 2019. From 11/30/2016 to prior to the index start date, 60% and 5% were respectively assigned to EUA futures prices ( current year and next year December vintages) using Intercontinental Exchange daily published settlement prices, 20% and 5% were respectively assigned to CCA futures (current year and next year December vintages) using IHS Markit OPIS’s da ily Carbon Market Report published prices, and 10% was assigned to RGGI (current year December vintage) using IHS Markit OPIS’s daily Carbon Market Report published prices. Prior to 11/30/2016, 60% and 5% respectively were assigned to EUA futures prices (c urrent year and next year December vintages) using Intercontinental Exchange daily published settlement prices and 35% was respectively assigned to CCA futures (current year December vintage) using IHS Markit OPIS’s daily Carbon Market Report published pri ces. For the two ranges developed prior to the index start date, Intercontinental Exchange and IHS Markit OPIS’s Daily Carbon Market Report publish daily pricing for each contract vintage for all relevant days when the futures trade.

Important Notes: Carefully consider the Funds’ investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds' full and summary prospectus, which may be obtained by visiting www.kraneshares.com/krbn , www.kraneshares.com/kcca , and www.kraneshares.com/keua . Read the prospectus carefully before investing. Risk Disclosures:

13 info@kraneshares.com +1 (212) 933 0393 Investing involves risk, including possible loss of principal. There can be no assurance that a Fund will achieve its stated objectives. Indices are unmanaged and do not include the effect of fees. One cannot invest directly in an index. This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subj ect to change. Certain content represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results; material is as of the dates noted and is subject to change without notice. The Funds rely on the existence of cap and trade regimes. There is no assurance that cap and trade regimes will continue to exist, or that they will prove to be an effective method of reduction in GHG emissions. Changes in U.S. law and related regulations may impact the way the Funds operate, increase Fund costs and/or change the competitive landscape. New technologies may arise that may diminish or eliminate the need for cap and trade markets. Ultimately, the cost of emissions credits is determined by the cost of actually reducing emissions levels. If the price of credits becomes too high, it will be more economical for companies to develop or invest in green technologies, thereby suppressing the demand for credits. The Funds may invest in derivatives, whic h are often more volatile than other investments and may magnify the Funds' gains or losses. A derivative (i.e., futures/forward contracts, swaps, and options) is a contract that derives its value from the performance of an underlying asset. The primary ri sk of derivatives is that changes in the asset's market value and the derivative may not be proportionate, and some derivatives can have the potential for unlimited losses. Derivatives are also subject to liquidity and counterparty risk. The Funds are subj ect to liquidity risk, meaning that certain investments may become difficult to purchase or sell at a reasonable time and price. If a transaction for these securities is large, it may not be possible to initiate which may cause the Funds to suffer losses. Counterparty risk is the risk of loss in the event that the counterparty to an agreement fails to make required payments or otherwise comply with the terms of derivative. The use of futures contracts is subject to special risk considerations. The primary risks associated with the use of futures contracts include: (a) an imperfect correlation between the change in market value of the reference asset and the price of the futu res contract; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the inabilit y to predict correctly the direction of market prices, interest rates, currency exchange rates and other economic factors; and (e) if the Fund has insufficient cash, it may have to sell securities or financial instruments from its portfolio to meet daily v ariation margin requirements, which may lead to the Fund selling securities or financial instruments at a loss. The Funds invest through a subsidiary, and is indirectly exposed to the risks associated with the Subsidiary's investments. Since the Subsidiary is organized under the law of the Cayman Islands and is not registered with the SEC under the Investment Company Act of 1940, as such the Funds will not receive all of the protections offered to shareholders of registered investment companies. The Funds a nd their Subsidiary will be considered commodity pools upon commencement of operations, and each will be subject to regulation under the Commodity Exchange Act and CFTC rules. Commodity pools are subject to additional laws, regulations

14 info@kraneshares.com +1 (212) 933 0393 and enforcement policies, which may increase compliance costs and may affect the operations and performance of the Funds and the Subsidiary. Futures and other contracts may have to be liquidated at disadvantageous times or prices to prevent the Funds from exceeding any applicable position limits established by the CFTC. The value of a commodity - linked derivative investment typically is based upon the price movements of a physical commodity and may be affected by changes in overall market movements, volatili ty of the Index, changes in interest rates, or factors affecting a particular industry or commodity. Fluctuations in currency of foreign countries may have an adverse effect to domestic currency values. The Funds are subject to interest rate risk, which is the chance that bonds will decline in value as interest rates rise. Narrowly focused investments typ ically exhibit higher volatility. The Funds’ assets are expected to be concentrated in a sector, industry, market, or group of concentrations to the extent that the Underlying Index has such concentrations. The securities or futures in that concentration c ould react similarly to market developments. Thus, The Funds are subject to loss due to adverse occurrences that affect that concentration. The Funds are non -diversified. KRBN, KEUA, and KCCA may underperform other similar funds that do not consider conscious company/ESG guidelines when making investment decisions. ETF shares are bought and sold on an exchange at market price (not NAV) and are not individually redeemed from the Fund. However, shares may be redeemed at NAV directly by certain authorized broker -dealers (Authorized Participants) in very large creation/r edemption units. The returns shown do not represent the returns you would receive if you traded shares at other times. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns. Beginning 12/2 3/2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn't available, the midpoint between the national best bid and national best offer ("NBBO") as of the time the ETF calculates the curren t NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time. The KraneShares ETFs and KFA Funds ETFs are distributed by SEI Investments Distribution Company (SIDCO), 1 Freedom Valley Drive, Oaks, PA 19456, which is not affiliated with Krane Funds Advisors, LLC, the Investment Adviser for the Funds, or Climate Financ e Partners , the Sub -Advisor for the Fund, or IHS Markit Ltd. [R_US_KS_SEI]