When we launched Osmosis in 2009, with the financial crisis still very much in our minds, we believed there was an opportunity to change the way capital was utilised as a force for good.
The idea of rewarding ‘good’ companies wasn’t a new one, but there was debate about what exactly constituted good. In a world of diverse cultures, religions, ideologies, what is morally right or wrong shares no commonality. We had the foresight that sustainability was both going to be a key opportunity and that defining sustainability would be a significant challenge for the industry.
We sought an evidence-based approach to mitigating environmental risk, allowing no room for subjectivity. Our independent research determined that by looking at a company’s carbon emissions, water consumption and waste generation, we could identify those companies most efficiently utilising these resources to create economic value. In June 2014, our research was backed up by academic evidence which supported our belief that our resource efficiency factor was indicative of forward-looking firm value.
Further research to support the efficacy of the program evidenced that resource efficiency was uncorrelated to other styles such as value or growth. Importantly, our analysis showed that these environmental factors, when combined, strengthened the consistency of the factor return and allowed us to target better risk-adjusted portfolio returns.
Fast forward to today, and Osmosis remains at the forefront of transitioning environmental data into traditional portfolio theory and construction. Our approach has attracted institutional shareholders including, Oxford Endowment Fund and Capricorn Investment Group, and we remain majority owned by employees and directors. Our successful range of Resource Efficient investment portfolios have attracted a global client roster, including government pension funds, insurance companies, foundations, endowments, family offices and banks.
Osmosis believes that to gain mainstream adoption, sustainable investment should not come at the cost of financial returns and that sustainability metrics, if quantifiable and objective in nature, can be applied to mainstream portfolios to generate alpha.
Climate change and pressure on natural resources, coupled with growing societal awareness, are drivers forcing corporates to implement sustainable production and business processes. We believe that those companies that are more resource efficient, having effectively monetised sustainability to the balance sheet, are more likely to outperform their peers over the long term. Quite simply, doing MoRE with less will be rewarded.
Corporate sustainability performance is neither well understood nor efficiently priced by markets. Our research shows that Resource Efficiency can be used to target excess returns while having a low correlation to other common factors.
Osmosis targets excess returns through the identification of Resource Efficiency in listed companies. We define Resource Efficiency as the carbon emitted, waste generated, and water consumed, relative to value creation. Resource efficient companies are, therefore, those which most efficiently use limited resources to create economic value. Our portfolios overweight efficient companies and underweight, or short, inefficient companies as identified by the Osmosis Model of Resource Efficiency (MoRE).
Approach and process
Osmosis pioneered a unique research process to standardise unstructured corporate environmental data, enabling the construction of our proprietary sustainable investment factor.
Utilising publicly disclosed corporate environmental data from 2005 onwards, our in-house research team standardises carbon, water and waste data to sector specific frameworks. We believe this three-factor model delivers a comprehensive approach to environmental investment. Our stock specific resource efficiency factor score provides context and relative comparability to the environmental balance sheets of companies within 32 sectors.
By objectively measuring the carbon, waste and water of the largest companies in the world our models were able to successfully compare companies’ environmental performance to their peers. Importantly, we were able to show that the investment portfolios of those companies that were more efficient, were able to deliver greater return on equity. Furthermore, when measured through the whole economy our portfolios would evidence significantly reduced holdings of carbon, water and waste.