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Addressing ESG concerns can be achieved using different techniques: negative screening, positive screening, tilting , integration, active engagement and shareholder voting, to name a few. These techniques have widely different impacts on portfolio construction and outcomes. For example, negative screening generally reduces the investable universe while tilting impacts portfolio weighting. Engagement, on the other hand, does not affect the portfolio construction itself but takes place after investment decisions have been made. Given societal pressures, the exclusion of companies from portfolios that operate in sectors that are ethically undesirable, or that are in their current form incompatible with a responsible future, is currently the approach most frequently adopted. Arguably, it is also easiest to implement. Yet, negative screening is not the only way of achieving a transition to a sustainable and responsible future.
The impact of exclusions on investment performance is subject to active debate with some studies demonstrating no impairment , and others finding a detrimental impact . Evidence suggests that negative screening can impose a financial cost on investors. Often, stocks that are shunned by investors, so-called ‘sin stocks’, in industries such as alcohol, tobacco and gambling have higher expected returns than otherwise comparable stocks.
Engagement on the other hand can be a powerful tool to achieve positive excess returns as well as improving the environmental, social, or governance behaviour of companies. , Many sectors that are increasingly judged inappropriate—oil and gas, utilities, airlines, and chemicals etc., are needed in some form or another (although substantially transformed or at a smaller scale) for the modern economy to survive in an environmentally and socially just future. The companies which are best positioned in all necessary sectors to achieve the transition to such a future should be encouraged to undertake the required changes. Positive screening, integration, and tilting therefore present effective alternatives to further the transformation to a sustainable and responsible economy.
No one-size-fits-all approach: At Osmosis, we identify investment opportunities based on a positive best-in-class approach identifying companies in every economic sector, from alternative energy and chemicals to airlines, that most efficiently use limited resources to create economic value compared to their direct competitors. We accept the responsibilities of share ownership; we will not be passive stakeholders. Where mandated by the client, we will use our right to vote. We also directly engage with companies in our investment universe to improve corporate environmental performance measurement and reporting.
This document is issued by Osmosis Investment Management US LLC (“Osmosis”). Osmosis Investment Management UK Limited (“Osmosis UK”) is an affiliate of Osmosis and has been operating the Osmosis Model of Resource Efficiency. Osmosis UK is regulated by the FCA. Osmosis and Osmosis UK are both wholly owned by Osmosis (Holdings) Limited (“OHL”).