Ben Dear
With the undisputable link between carbon emissions and the frequency and severity of climate-related disasters impacting populations around the world, many investors are reviewing their portfolios’ fossil fuel exposure and considering the complex challenges that divestment presents.
The University of New South Wales in Sydney Australia, and Oxford University Endowment Management (Ouem) in the United Kingdom are seeding the latest fund launch in Osmosis’s Resource Efficient Core Equity Range.
The Developed Markets Resource Efficient Core Equity ex-Fossil Fuels Fund provides investors with a sophisticated investment solution to address the risks and unintended bets bought into portfolios from fossil fuel divestment. The portfolio uniquely addresses both the supply side of fossil fuel energy generation through fossil fuel divestment and the demand side of fossil fuel energy consumption by reallocating the active divestment risk to the most highly correlated resource-efficient companies across the economy.
The strategy was developed to protect investors from reflation in fossil fuel commodity prices and the longer-term risks of value destruction as the industry faces increasing regulatory and societal headwinds. The resulting portfolio demonstrates a significantly lower carbon footprint than the benchmark, while also reducing ownership of water and waste, two increasingly important environmental factors.
The Fund launched on 26 September in a UCITS ICAV and will be launched later this month in an onshore Australian Trust which will act as a feeder fund into the UCITS ICAV. The strategy (which was originally launched as a CCF in 2021) and is also available in segregated accounts, has seen significant growth in assets, which in aggregate totalled over USD $1 billion (AUD $1.6 billion) as of the end of September 2023. The Core Equity Range now manages over USD $12 billion (AUD $18 billion).
Key features of the Osmosis Strategy
- Strict environmental screens prohibit investment in companies with >5% of their revenues from fossil fuels or nuclear power. The Fund also excludes companies with any revenue from controversial weapons, civilian firearms, and tobacco manufacturing and those companies in breach of the UN Global Compact Principles.
- “Transition re-inclusion” criteria rewards positive change by investing back into companies on a meaningful transition path to cleaner energy sources (>50% renewable energy generation)
- By maintaining tight country, industry, and sector weights to the benchmark the Fund addresses concerns that fossil fuel divestment products can lead to inadvertent concentration risk in certain sectors.
- Through targeting the risk budget towards resource-efficient companies on a sector-relative basis the strategy has performed in line with the MSCI World Index since its initial launch in 2021, despite unprecedented supply and demand pressures and the subsequent rally in fossil fuel prices
- Portfolio has delivered significant reductions in ownership of Carbon (-65%), Water (-62%), and Waste (-64%) relative to the MSCI World
The latest addition to Osmosis’ ex-fossil fuel range will allow wholesale investors to target an uncorrelated source of sustainable alpha through Osmosis’s unique Factor of Resource Efficiency while significantly reducing the portfolio’s environmental intensity in a tightly controlled, risk-aware divestment strategy.
The Osmosis Factor of Resource Efficiency is the outcome of Osmosis’s proprietary research process which standardises unstructured carbon, water, and waste data, to sector-specific frameworks. Utilising publicly disclosed corporate environmental data from 2005 onwards, the firm’s stock-specific resource efficiency factor scores provide context and relative comparability to the environmental balance sheets of companies across 32 economic sectors.
Ben Dear, CEO Osmosis said “Partnering with two leading global universities in the launch of this innovative ex-fossil fuels fund is an exciting development for the firm and a testament to the efficacy of the strategy. The environmental challenges we face extend well beyond Fossil Fuel companies, and there is growing investor understanding that we need to reduce our reliance on natural resources in all sectors and geographical regions. Both the University of New South Wales and Oxford University Endowment Management share our belief that the efficient use of finite natural resources is critical to the future health and wealth of our planet and that addressing these externality risks at a portfolio level can not only reduce these environmental risks but also, if the allocation of risk is managed utilising our factor of resource efficiency, contribute to long-term economic returns.”
A spokesperson for the University of New South Wales said “We are pleased to invest in the Osmosis ex-fossil fuel strategy. The strategy was chosen for its ability to deliver stable returns through investment in a wide range of resource-efficient companies, its contribution to our decarbonisation journey, as well as addressing the increasingly important concerns of water and waste at a portfolio level.”
Sandra Robertson, Chief Investment Officer, OUem said “As a long-term supporter of Osmosis, we are pleased to deepen our partnership with a commitment to their new fund. This fund continues to innovate by combining fossil fuel screens alongside a focus on resource efficiency, therefore rewarding investment into companies on a meaningful transition path. Since becoming their first institutional backer in 2010, we have witnessed the substantial growth and success of the firm, from a pioneer in sustainable investment to a position of true leadership globally.”
Extensive screens and re-inclusion criteria
The Osmosis Fund uses a quantitative screening process to remove companies that generate more than >5% of their revenues from fossil fuels or nuclear power. The Fund also excludes companies with any revenue from controversial weapons, civilian firearms, and tobacco manufacturing and those companies in breach of the UN Global Compact Principles. The Fund has a unique “Transition re-inclusion” criteria that reward positive change by identifying companies on a meaningful transition path to cleaner energy sources (>50% renewable energy generation) This allows investors to divest from fossil fuels while still capturing the value added by transitioning companies.
Growth in Australian Assets
The seed investments will bring Osmosis’ ex-fossil fuel assets under management to over USD $1 billion (AUD 1.6 billion) and propel its Australian AUM to approximately USD $1.75 billion (AUD 2.7 billion). Osmosis’s flagship Core Equity Range has attracted over USD 12 billion (AUD 18 billion) in assets since its launch six years ago.
With further institutional allocations expected in the Australian region this quarter, Osmosis has newly incorporated an Australian subsidiary into the Osmosis group of companies.