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Goldman Sachs' new ESG fund puts less emphasis on financial performance

A new exchange-traded fund from Goldman Sachs Asset Management LP will give almost no weighting to companies' financial performance, instead tracking factors such as whether companies pay fair wages or create products that benefit society.

The ETF, which uses an index constructed by the nonprofit JUST Capital, is the latest fund to consider companies' environmental, social and governance metrics in the construction of a portfolio. The fund's prioritization of such factors over shareholder returns comes at a time when many ESG strategies are attempting to become more mainstream by balancing ethical concerns with attractive returns.

The Goldman Sachs fund, which began trading under the ticker JUST on June 12, pushes against that notion. Among the seven categories its underlying index uses to weight companies, one — the management and shareholders category — considers whether a company is profitable over the long term and provides strong investor returns. That category accounts for only 6% of the index's overall weighting.

JUST Capital structured the categories according to a series of polls in the U.S. meant to capture what Americans define as "just" business behavior. The polling led JUST Capital to weight worker treatment most heavily, at 23% of its rankings, followed by customer treatment at 19%; whether products benefit society at 17%; environmental protections at 13%; community involvement at 11%; job creation at 10%; and business leadership and shareholder return at 6%.

The ETF weights its holdings accordingly to provide broad exposure to the Russell 1000 index, Goldman Sachs Asset Management said in a press release. The index's member companies employ more U.S. workers, create less greenhouse gases, give more to charity and pay far fewer fines to the Equal Employment Opportunity Commission. They also have a 7% higher return on equity than the overall Russell index, the company said, despite the low weighting given to financial performance.

The Goldman Sachs Group Inc. unit's emphasis on nonfinancial factors also runs against growing uncertainty among regulators and over whether focusing on such factors is in an investor's best interest. In early June, the U.S. Government Accountability Office pushed the Labor Department to clarify its stance on ESG investing after the department said retirement advisers should not "too readily" put ESG factors ahead of economic interests.

The movement has also drawn the ire of some industry groups, which have argued that it distracts companies and investors from focusing on operations and performance and overly politicizes corporate actions.