When Energy Costs Become the Market
The case for resource efficiency in a world of structurally higher energy and commodity prices
There are moments when the investment environment shifts in ways that are not merely cyclical. The events of the past six weeks feel like one of those moments. The closure of the Strait of Hormuz, the largest disruption to global energy supply since the 1970s oil crisis, has repriced oil, gas, fertilisers, freight and a widening range of industrial inputs with a speed and severity that caught markets off-guard. Brent crude moved from below $70 per barrel at the start of the year to above $110, a rise of more than 50% in roughly eight weeks. As we write, the situation is escalating further. Peace talks between the US and Iran collapsed on 12 April. The US Navy has declared a blockade of the Strait overnight. Oil has surged back above $100 this morning. The Strait remains effectively closed and there is no clear path to resolution in sight.
At Osmosis, our investment thesis is built on a straightforward proposition: companies that generate more economic output from less energy, less water and less waste are not just better for the environment. They are structurally better businesses. The current environment is beginning to test that proposition in the way we would expect. That said, we remain clear-eyed – it is still early. Encouragingly, our resource efficiency factor has shown resilience since the conflict began on 28 February – and although the signal has been more muted than we initially anticipated, it is moving in the right direction. We expect the margin pressure now building across the broader economy to assert itself more forcefully in company fundamentals over the coming quarters.
We are also pleased to share two significant additions to the senior team. Mark Hardiman joins as Chief Financial Officer, bringing over two decades of experience in global asset management including senior roles at Aberdeen, HSBC Asset Management and BNY Mellon. His appointment strengthens our financial and operational leadership as we continue to scale.
April also marks the arrival of Dr. Fadi Zaher as Chief Investment Officer, completing the onboarding of a five-strong team who join us from Legal and General Investment Management. Fadi was previously Head of Index Solutions at LGIM, where he was responsible for the design, construction and management of systematic strategies totalling around £100 billion in assets. He brings deep expertise in factor-based investment, quantitative research and systematic product innovation, and will lead Osmosis’s next phase of investment development. His colleagues, Silvio Corgiat Mecio as Head of Systematic Solutions, Jason Lee and Fanggang (Royce) Yan as quantitative researchers, joined in November, and the full team is now integrated and contributing. Together they meaningfully expand our analytical and systematic capabilities at precisely the moment when the investment environment demands the most rigorous thinking.
The Macro Context: A Supply Shock with Cascading Consequences
The conflict in the Middle East and the closure of the Strait of Hormuz has delivered what the International Energy Agency described as the largest supply disruption in the history of the global oil market. Tanker traffic through the strait collapsed from approximately 130 ships per day in February to fewer than ten in March. A temporary ceasefire in early April briefly raised hopes of a reopening, but peace talks collapsed on 12 April, and the US declared a naval blockade of the Strait overnight. As of today, 230 loaded oil tankers remain stranded inside the Gulf, and the Strait is effectively closed to normal commercial traffic.
The consequences have radiated outward well beyond the energy sector itself. As of the time of writing:
- Energy: the World Bank‘s energy price index surged 41.6% in March alone, led by European natural gas up 59.4% and crude oil up 45.8%
- Fertilisers: the Gulf accounts for nearly half the world’s urea and around 30% of global ammonia. Urea prices have risen over 40% since the disruption began, with the UN warning global food prices could average 15 to 20% higher in the first half of 2026
- Freight and supply chains: container bookings through the region collapsed by over 95%. Major carriers have rerouted vessels around the Cape of Good Hope, adding weeks to delivery times and materially increasing freight costs
- Industrials and materials: aluminium prices have edged higher given the Gulf’s significant share of internationally traded metal. Plastics, petrochemical feedstocks and synthetic rubber are all under cost pressure
- Inflation: UK inflation is expected to breach 5% in 2026. The ECB has already postponed planned rate cuts and raised its inflation forecast, with economists warning of technical recession risk for energy-intensive economies if the blockade persists into the summer
This is not a routine geopolitical premium. It is a systemic shock transmitting through supply chains in real time. Whether or not the Strait reopens quickly, the episode has demonstrated with remarkable clarity how exposed the global economy remains to concentrated resource chokepoints and how rapidly that exposure can reprice corporate earnings.
The Climate Does Not Wait for Political Consensus
The energy shock has dominated headlines, but there is a deeper backdrop that investors should not lose sight of. The physical climate continued its trajectory in 2025 with a consistency that is becoming very difficult to characterise as anything other than a trend. According to data from NASA, NOAA and the Copernicus Climate Change Service, 2023, 2024 and 2025 were the three warmest years in the 175-year observational record.1 The global average surface temperature in 2025 sat approximately 1.47 degrees Celsius above pre-industrial levels. For the first time ever, the three-year average for 2023 to 2025 as a whole exceeded the 1.5-degree threshold that governments agreed in Paris to treat as a critical boundary. Copernicus has noted that the Paris Agreement threshold could now be reached by the end of this decade, more than ten years earlier than was projected when the accord was signed.2
The physical consequences are not projections any longer. Ocean heat content reached a new record high in 2025, with the heat content increase in 2025 alone equivalent in energy terms to around 200 times the world’s total electricity generation in 2024.3 The last eleven years have been the eleven warmest on record. Extreme weather events are intensifying in frequency and severity. In the United States alone, 2025 produced two dozen billion-dollar weather and climate disasters, causing at least 276 deaths and $115 billion in damages.4 The Los Angeles wildfires set a new record as the costliest wildfire in history. These are not isolated incidents. They are the compounding output of a system under sustained and accelerating stress.
It is worth noting that this picture is being taken seriously at the highest levels of monetary policy. Writing in the Financial Times this month, an executive board member of the European Central Bank made the case in unambiguous terms.5 Europe spends nearly 400 billion euros each year on fossil fuel imports. That money leaves the continent, transfers resources to producing nations and leaves European households and businesses exposed to precisely the kind of price volatility we are living through today. The ECB member described what happened to euro area inflation after the invasion of Ukraine, when energy prices drove the headline rate to 10.6% in October 2022, as fossilflation. The same dynamic is now repeating. The March ECB macroeconomic projections explicitly factor in the current Middle East conflict as a source of higher inflation and lower growth in 2026.
The ECB piece also cited analysis from the Banco de España showing that wholesale electricity prices in Spain in early 2024 were approximately 40% lower than they would have been had wind and solar generation remained at 2019 levels. The UK Climate Change Committee has produced analysis showing that for every pound invested in sustainable energy, the economic benefits outweigh the costs by a factor of between 2.2 and 4.1.6 These are not environmental arguments. They are financial ones, made by central bankers and economic institutions.
What makes the political response harder to understand is that it is happening against a backdrop of actively declining media coverage of the underlying problem. A Media Matters analysis published in March 2026 found that US broadcast networks ABC, CBS and NBC combined aired just 8 hours and 25 minutes of climate coverage in 2025 across 201 segments, a 35% decline from 2024 and the third consecutive year of falling coverage, despite that year producing some of the most severe climate events on record.7 Of those 201 segments, only 8% mentioned fossil fuels at all. Fox News Sunday aired zero climate segments across the entire year. Meanwhile, senior members of the US administration made dozens of appearances on those same networks specifically to sell the rollback of EPA climate regulations to the public, platforms on which, as documented across two decades of research, the overwhelming majority of guests have historically cast doubt on climate science regardless of their scientific qualifications to do so.8 The result is a widening gap between what the physical environment is delivering and what a large part of the public is being told about it. That gap is not an accident. It is engineered.
Against this backdrop, the political response in parts of the world has moved in a direction that I find genuinely difficult to follow. There is a concerted and well-funded effort, driven by fossil fuel interests and parts of the political right, to frame increased fossil fuel dependency as the solution to the energy security problem. The argument, in its various forms, is that the answer to a vulnerability created by reliance on fossil fuels is simply more fossil fuels. Double down. Entrench the dependency. Delay the transition.
I have never witnessed, nor have I met anyone who has, a situation in which the way to solve a problem of unhealthy dependency is to deepen that dependency. The comparison that comes to mind is a personal one. I was recently diagnosed with skin cancer. My doctor, thankfully, did not recommend more sun exposure as part of the treatment plan. The logic would be absurd. Yet that is precisely the structure of the argument being made by those who would have us respond to the economic and security costs of fossil fuel dependence by locking in more of it.
Political can-kicking does not eliminate the underlying problem. It compounds it. Every year of delayed action is a year in which the physical risks accumulate, the scale of the required adjustment grows larger, and the eventual repricing of carbon-intensive assets becomes more abrupt and more disruptive when it arrives. The energy shock we are living through right now is, in part, a consequence of exactly this kind of deferred reckoning. As the ECB board member put it, the real question is no longer whether Europe can afford to make the energy transition. It is whether it can afford not to.
What this means for our investment thesis is straightforward. The return opportunity embedded in the resource efficiency signal is not static. It grows with the problem. As physical climate risks intensify, as carbon pricing expands, as water stress becomes more acute across more geographies, and as regulators, insurers and counterparties apply greater scrutiny to corporate environmental balance sheets, the financial gap between efficient and inefficient operators widens. The compounding of climate risk is, for investors positioned correctly, the compounding of a return opportunity. Delay does not remove that opportunity. It enlarges it.
Resource Efficiency as Financial Resilience
The investment implication is not subtle. When energy and resource costs rise sharply and unpredictably, the companies that consume less of those resources per unit of output are materially better placed. This is not a sustainability argument; it is a profitability argument.
A company with half the carbon intensity of its sector peer faces half the direct cost exposure when energy prices spike. A manufacturer with lower water consumption faces lower utility costs. A business generating less waste has less to dispose of at rising treatment prices. These efficiencies, which our Model of Resource Efficiency has been quantifying and standardising since 2005, are now visibly translating into financial outperformance.
We saw precisely this dynamic in 2022, when the energy repricing that followed the invasion of Ukraine reasserted efficiency as a key driver of relative returns. Our research has consistently shown that across twenty years of data, the most resource-efficient companies, measured within their own sectors rather than across them, have outperformed their least efficient peers. The current environment is a live replication of that finding.
Since the market peak at the end of February, we have begun to see this play out in real time. Resource-efficient companies have shown relative resilience compared to their less efficient peers in a broadly negative market, and our Core Equity Transition strategy has delivered relative outperformance versus its benchmark over the past month, net of fees. There is also a contribution from a specific improvement we made to our portfolio construction in January, which we discuss in more detail in the section below.
Why Our Approach Is Different
It is worth restating what distinguishes the Osmosis approach in an environment like this, because we believe it matters more now than it did six months ago.
Proprietary data, no estimates. We measure resource efficiency as the carbon emitted, water consumed and waste generated relative to the economic value a company creates, per million dollars of revenue. We do this across 36 industry sectors using only data reported directly by companies and verified by our in-house environmental research team. We use no third-party estimates, no modelled proxies and no ESG scores. What we measure is actual resource consumption, not reported intent.
Sector neutrality.9 Our portfolios do not achieve their environmental outcomes by simply underweighting energy or overweighting technology. Every sector in our portfolio targets a lower carbon, water and waste footprint than the equivalent benchmark sector. Using our metrics, the Core Fossil Fuel Transition Fund delivered reductions of 79% in carbon, 63% in water and 60% in waste relative to the MSCI World at the end of March, achieved across the broader economy.
An uncorrelated investment signal. Our resource efficiency factor is demonstrably uncorrelated to conventional ESG scores and to standard investment style factors. In sectors such as chemicals, the companies that score most highly on conventional ESG ratings are frequently the most resource-intensive operators, while the genuinely efficient businesses score poorly. This misalignment is a persistent feature of the generalist ESG industry and one of the reasons we have always focused exclusively on the environmental component.
No hidden factor exposures. Our portfolios are optimised against the Barra GEMLT multi-factor risk model with explicit sector and regional controls. The active return generated by the strategy comes from the resource efficiency signal, not from inadvertent bets on momentum, value or market cap. This discipline matters particularly when volatility is high and factor rotations are sharp.
The Longer Picture
We are conscious that the past twelve months have tested investor patience and we have addressed that directly with investors throughout. The underperformance of our flagship Core Equity Strategy was not driven by sector positioning. Our strategies are sector-neutral by design. The drag came from the concentrated returns generated by a cluster of non-disclosing companies, many of which were significant beneficiaries of AI-related capital flows. Companies without sufficient environmental disclosure receive a neutral score in our model and are held at minimal active weight. When those companies generate outsized returns, the strategy does not participate.
There is a second dynamic worth naming directly. The resource efficiency factor continues to deliver the same underlying style characteristics it always has: it systematically selects companies that generate more value from the resources they consume. Those companies tend to score highly on quality and profitability measures. The difficulty over the past two years has been that quality as a factor has been broadly unrewarded by markets, and the profitability dimension in particular has compounded the underperformance. In an environment driven by momentum, AI-related narratives and concentrated speculative flows, precisely the kind of well-run, capital-efficient businesses our model identifies were passed over in favour of higher-beta names with less regard for underlying fundamentals.
It is not without significance that our portfolios currently stand at or close to record levels of profitability on standard measures. The quality of what we own has not diminished. If anything, it has improved. What has been missing is a market environment that rewards it. Energy shocks, inflationary pressure and the rotation away from speculative growth towards cash-generative, operationally resilient businesses are precisely the conditions under which that changes. We believe those conditions are now forming.
Having diagnosed the portfolio construction issue precisely, we transitioned from the Barra GEM3 risk model to the newer GEMLT framework in January 2026. GEMLT provides more granular factor coverage and better captures the specific exposures that were creating unintended drag in the portfolio. Since the transition, the GEMLT model has already delivered approximately 15 basis points of positive benefit relative to what GEM3 would have produced over the same period. We do not regard this as a change of approach. It is a more precise instrument for expressing the resource efficiency signal cleanly, and the early results reflect that.
The current energy shock does not change our approach. It validates it.
A Note on the Fossil Fuel Transition Strategies
The picture for our Fossil Fuel Transition strategies warrants specific comment because it is genuinely more nuanced than for the Core Equity strategy. These portfolios exclude companies deriving more than 5% of revenues from fossil fuels. In an environment where oil prices have surged from below $70 at the start of the year to above $110, with further volatility this morning as the situation escalates, that exclusion creates a direct and visible performance headwind. We do not seek to minimise it.
The mandate was constructed with exactly this trade-off in mind. The rationale, co-developed with a major Dutch institutional investor, was never that fossil fuel exclusion would be cost-free in every market environment. It was that the long-run combination of divestment from the supply side of fossil fuels, paired with a strong tilt towards resource-efficient companies across the remaining economy, would deliver superior risk-adjusted returns over a full cycle while meaningfully reducing portfolio exposure to the financial risks of the energy transition.
There is also a question worth raising about the benchmark against which the strategy is often measured. The MSCI World ex Fossil Fuels Index excludes companies that own fossil fuel reserves, but it continues to hold companies involved in the transportation, distribution and servicing of the fossil fuel industry. In an oil shock environment, that benchmark benefits from precisely the kind of energy sector exposure that ex-fossil fuel investors believed they were reducing. It is, in our view, a flawed construction for investors with a genuine commitment to fossil fuel divestment, and in the current environment the numbers reflect that. Investors comparing our strategy to this benchmark should be aware that the benchmark itself retains meaningful indirect exposure to the sector its name implies it excludes.
What the current environment is beginning to demonstrate, and what we believe will become increasingly apparent as higher energy prices work their way through corporate income statements, is the resource efficiency thesis in action. When input costs across industrials, chemicals, consumer staples and materials are rising sharply, the resource-efficient companies within those sectors have a structural cost advantage over their peers. That advantage does not show up immediately. It takes time for margin pressure to translate into earnings dispersion, but it does translate, and the current environment is precisely the one in which the signal is most likely to deliver.
The energy exclusion is a near-term headwind that is explicit and intentional. The resource efficiency tilt across the remaining economy is the mechanism by which we expect to offset it, and that process is now underway.
Looking Ahead
We are monitoring the situation in the Middle East and its implications for commodity markets closely. We are not in the business of forecasting geopolitical outcomes and we would caution against drawing straight-line conclusions from a rapidly evolving situation. What we can say with confidence is that the structural case for resource efficiency as a source of financial return, not merely an environmental aspiration, has rarely been more clearly articulated by events.
In terms of our own strategies, we are encouraged by what we are seeing. Since the start of the conflict on 28 February, the Core Equity Transition strategy has outperformed its MSCI World benchmark to 13 April, net of fees. The resource efficiency factor is showing clear signs of recovery as higher input costs begin to exert the kind of margin pressure across the broader economy that our signal is designed to identify and exploit.
The picture for the Fossil Fuel Transition strategy is, as we have discussed, more nuanced. The structural underweight to the energy sector continues to create a headwind against both the MSCI World and the MSCI World ex Fossil Fuels benchmark, though as discussed above, the latter index retains meaningful indirect exposure to fossil fuel transportation and services and is therefore not a clean comparator for investors with a genuine divestment mandate. The efficiency signal across the non-energy portfolio is building in the way we would expect, and we anticipate that dynamic strengthening as higher energy costs work through to company earnings over the coming quarters.
Full performance data for all strategies is available on request and in our fund factsheets. We welcome any questions on our positioning, our methodology or the broader market context from investors and their advisors. Please do not hesitate to contact the team.
We are building for the long term, and we are doing so with conviction. The quality of the thesis, the rigour of the process and the depth of the team have never been stronger. We look forward to demonstrating that in the periods ahead.
Yours faithfully,
Ben Dear
CEO, Osmosis Investment Management
References
- NASA GISS, NOAA GlobalTemp, Copernicus/ERA5, Berkeley Earth, HadCRUT5, JRA-3Q: 2025 Global Temperature Analysis, January 2026. ↩︎
- Copernicus Climate Change Service (C3S/ECMWF): Monthly Climate Bulletin, January 2026. European Commission press release, 15 January 2026. ↩︎
- Cheng et al., Advances in Atmospheric Sciences: Global Ocean Heat Content 2025, January 2026. World Meteorological Organization State of the Global Climate Update, January 2026. ↩︎
- Stanford University Environmental Assessment; AccuWeather; ABC News, January 2026, as cited in Media Matters for America, February 2026. ↩︎
- Financial Times, April 2026: ECB Executive Board member op-ed, “Europe’s energy dependence has become one of the critical vulnerabilities of our economy.” Citing Banco de España analysis and UK Climate Change Committee report. ↩︎
- Financial Times, April 2026: ECB Executive Board member op-ed, “Europe’s energy dependence has become one of the critical vulnerabilities of our economy.” Citing Banco de España analysis and UK Climate Change Committee report. ↩︎
- Media Matters for America: “How broadcast TV networks covered climate change in 2025”, March 2026. ↩︎
- Media Matters for America: “Frequent Fox appearances are central to Trump’s climate and energy disinformation strategy”, September 2025. Media Matters for America: “Study: Media Sowed Doubt in Coverage of UN Climate Report”, October 2013. ↩︎
- Our research identifies companies from the MSCI World or Emerging Market Index that report sufficiently on at least 2 of the following 3 metrics: carbon, water, and waste, to calculate a resource efficiency score for each reporting company – the Model of Resource Efficiency. Our Core strategies overweight efficient companies and underweight inefficient companies within each Osmosis defined sector, to remain sector neutral to each benchmark. Our Active strategies invest only in efficient companies, outside of the financial sector described below. Companies in the financials sector are not given Resource Efficiency Scores. Certain strategies select Financials, based on complementary characteristics to the Resource Efficiency factor, for inclusion in the portfolio to maintain the portfolio’s overall factor weightings. All strategies exclude tobacco and companies that breach the UN Global Compact on social and governance safeguarding. ↩︎
Important Information
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Performance
NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. An investor’s actual account is managed by Osmosis based on the strategy, but the actual composition and performance of the account may differ from those of the strategy due to differences in the timing and prices of trades, and the identity and weightings of securities holdings.
Past performance is not an indication of future performance. Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be profitable. No current or prospective client should assume that future performance will be profitable, equal the performance results reflected, or equal any corresponding historical benchmark index. For reasons including variances in fees, differing client investment objectives and/or risk tolerance, market fluctuation, the date on which a client engaged Osmosis’s services, and any account contributions or withdrawals, the performance of a specific client’s account may have varied substantially from the referenced performance results. In the event that there has been a change in a client’s investment objectives or financial situation, the client is encouraged to advise us immediately. It is important to remember that the value of investments, and the income from them, can go down as well as up and is not guaranteed and that you, the investor, may not get back the amount originally invested.
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