Issue 28: 2014

SPECIAL SECTION — ESG Strategies

The Model of Resource Efficiency

Osmosis Investment Management

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Please tell us a little about
the Model of Resource Efficiency strategy.

Saad Rashid: With the MoRE strategy we use publicly available information from some of the largest companies in the world. But while the data is widely available, we’ve found that some is often ignored by the larger investment community. Perhaps they’re unable to put it into some kind of context, or perhaps it appears inconsistent to them — either way, it is often passed over. What we do is analyze this underused data to create a proprietary methodology to find potentially valuable companies.

What kind of information do you look for?

Rashid: We’re highly focused on data related to resource efficiency: the amount of energy and water companies consume, and the amount of waste they create. We search each sector of the economy, apart from financials, for the most resource-efficient companies because our research has shown that, when compared with less-efficient companies, they often generate a greater return on assets, a greater enterprise value and greater shareholder value. Of course, if a company doesn’t disclose this kind of data, or make it available in a transparent fashion, it won’t qualify for investment in our portfolios.


Ben Dear, Co-founder, and Saad Rashid, Investment Director,
Osmosis Investment Management (Photographs by Dan Burn-Forti)

 

What do you say to investors who still believe
socially responsible investing means underperformance?

Ben Dear: We believe investors should not have to sacrifice their returns for their values. Indeed, the search for alpha — or outperformance versus an appropriate index — is at the core of the MoRE strategy. Our approach is to look across sectors for companies that use the least amount of energy, the least amount of water, and produce the least amount of waste in relation to the revenues they generate. We believe the group of companies ranked highest in terms of resource efficiency should outperform the market.

Where does your focus on resource efficiency
fit in an overall ESG strategy?

Dear: Actually, in terms of ESG, we’re focused on the environmental, or E, aspect more than the S and G. We look for well-run companies that use resources efficiently, in part because the markets have always recognized and rewarded this kind of efficiency. What’s more, over the longer term, efficiency should become more important as global demand for resources continues to rise. The global population of middle-class consumers could rise from two billion in 2013 to five billion by 2030, according to 2014 data from the Organisation for Economic Co-operation and Development. Between now and then, these factors could help push up demand for key resources by about 50%.

What are some of the most important shifts
in ESG over the last decade?

Rashid: One factor that’s changed is that corporations are being more transparent around ESG issues. At the same time, there are more investors who are willing to use this data within mainstream investing strategies. This is in contrast to the traditional method of negative screening, where investors might say, for example, we won’t invest in oil and gas, or we won’t invest in energy, or we won’t invest in transportation, because those sectors didn’t meet certain standards.

Which countries and regions do you cover?

Rashid: The companies we invest in come from most if not all of the developed markets. Within our MoRE strategy we have versions that focus on specific regions, such as the United States, the U.K., Europe or Japan, in addition to versions focused on the World and International.

You focus on large companies.
But, aren’t there plenty of small companies that
are being very innovative in terms of improving efficiency?

Dear: That’s true to an extent. But large businesses typically have the financial means to buy those smaller companies, or buy the technology they develop. Large corporations also have a greater capacity than smaller ones for in-house research and development, and to use their solutions as a competitive advantage. We’re also very focused on the kinds of management teams that have encouraged innovation within their businesses or generated efficiencies in their production processes.

Can you measure the overall impact of your portfolios?

Dear: Since we seek to invest in the most resource-efficient companies in the world, we typically find that they offer a significantly positive environmental impact. Our environmental “foot printing” of the companies in our World portfolio suggests a 50% reduction in the amount of energy and water consumed and waste produced relative to companies in the MSCI World Index.

 

 

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

Projections made may not come to pass due to market conditions and fluctuations.

Past performance is no guarantee of future results.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Stocks of small and mid cap companies pose special risks, including possible illiquidity and greater price volatility, than stocks of larger, more established companies.

International Investing
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Other
The MSCI World Index captures large and mid cap representation across 23 Developed Markets (DM) countries. With 1,615 constituents, the index covers approximately 85% of the free float–adjusted market capitalization in each country.