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How Company Waste Can Predict Investment Return

Stocks in this article: BA AAPL MSFT EBAY

NEW YORK (The Street) -- A company's financial metrics can be largely ignored in the search for good investment return.

That's the counterintuitive message from Osmosis Investment Management, which instead uses three hurdles to select companies: their energy consumption, water consumption and waste management.

The fund manager has found such strong correlation between return and the sustainable basis on which companies are run that it is confident placing its criteria above traditional metrics.

Osmosis Investment Management Partner Ben Dear says the managers' funds are still pitched on the basis of return.

"You could never sell SRI (socially responsible investing) to institutions, they'd say 'speak to the guy down the corridor and he'll give you 30 basis points (a small portion)," Dear said on the mindset of large investors.

"The only way to get investment is to benchmark our returns to other global equity managers, and our approach stacks up."

The UK-based MoRE World fund has average annualized returns of 16.8% over the 9 years to 2013 against an 8.5% return for the MSCI World Index. 

Socially responsible investment strategies are still striving to gain broader credibility in the financial community, though companies are increasingly aware of reputational damage from failing to be socially responsible for their resource consumption.

Osmosis chief executive Gerrit Heyns said the manager used publicly available data to assess the resource use of large companies, with a strong link between those that were socially responsible and had high returns on assets, equity and a lower debt to capital ratio.

He noted that Brazil, South Africa and South Korea produced good data on company resource use while nearly all of the UK's FTSE 100 companies disclosed this information. "The U.S. is woefully behind the rest of the world, with no guidelines for companies to produce this data," Heyns said.

The Calvert-Osmosis MoRE World Strategy fund holds 100 stocks, with 1300 companies out of the MSCI developed world index (which comprises about 4700 stocks) meeting its investment criteria. It is overweight European stocks and also has holdings in Japan and Australia. The fund has about 30 U.S. stocks, including Boeing (BA), Apple (AAPL), Microsoft (MSFT), eBay (EBAY), Staples (SPLS) Kellogg  (K) and Cisco (CSCO).

Major banks such as Morgan Stanley (MS) are active around the SRI philosophy, establishing an institute for sustainable investing last November. The bank notes UN statistics project global demand for food and energy will jump 50% in the next 15 years, while demand for water rises by around 40%. Meanwhile, global business opportunities in health, education, agriculture and other sustainability related sectors is forecast to total $10 trillion annually by 2050.

As such, Morgan Stanley has a five-year goal to have $10 billion in total client assets invested in products that have a positive environmental or social impact while notching good investment returns. Last year, the bank underwrote nearly 50% of green bonds offered globally - fixed income products whose proceeds support projects with environmental benefits.

This backdrop creates ripe opportunity for managers such as Osmosis, which partnered with Calvert Investments - another SRI fund manager - this month to gain distribution in the United States.

Calvert has over $13 billion in assets and strategies including its Global Water Fund, with annualized returns of 10.96% since inception in late 2008. Over 1, 3 and 5 year periods its annualized returns are 28.72%, 13.81% and 16.62%. The $337 million fund holds 40 stocks across infrastructure, utilities and the technology sector.

For investors who prefer stock picking to mutual funds, many solar stocks have soared recently as alternative energy sources become increasingly cost-competite with traditional fossil fuels. 

Heyns emphasized the SRI was not an "either or" proposition which compromised returns, but involved choosing global companies that met socially responsible criteria and tended to outperform the market.

-- By Jane Searle in New York

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