Fossil fuels, fracking and fashion are contributing to the world’s environmental troubles, and the Goldman Sachs Future Planet Equity ETF (GSFP), which launched today, addresses these and other problem areas with investments in companies Goldman thinks can bolster both the environment and shareholder returns.

The product is the 22nd exchange-traded fund from Goldman Sachs Asset Management, and its first transparent, actively managed equity ETF. The new fund is part of GSAM’s thematic investment strategy, which looks to sectors the company believes are at the vanguard of economic innovation and disruption. 

“We’re of the investment view that the world is changing very rapidly, and that levels of innovation and disruption are extremely elevated,” Katie Koch, co-head of GSAM’s fundamental equity business, said in a press call yesterday that discussed the Future Planet Equity ETF. “Many clients are underinvested in those themes because traditional benchmarks are very backward looking and are allocating capital to the companies and themes that have worked best in the past.”

Koch said some of GSAM’s hot-button thematic ideas include finding future tech leaders beyond the so-called FANG stocks, tapping into the wants of millennial consumers, playing on the intersection of healthcare and technology, and investing in the theme of climate transition and the future of the planet.

“Certain themes will be some of the great wealth creating opportunities of the next decade, and climate is very important among them,” she added.

The Future Planet Equity ETF focuses on five themes comprising clean energy; resource efficiency; sustainable consumption; the circular economy (namely, recycling); and water sustainability.

When it comes to clean energy, the fund looks to industries such as solar and wind power, bioenergy and carbon sequestration, among other activities. One of the fund’s holdings within this broader theme is Neste, a Finnish maker of fuel oil produced solely from renewable raw materials.

The resource efficiency theme addresses sustainable manufacturing and smart cities. It also involves electric vehicles, which GSAM believes have massive growth potential.

“Only about 4% of cars globally are electric vehicles,” said Alexis Deladerrière, GSAM’s global chief investment officer and the lead portfolio manager of the Future Planet Equity ETF. “We believe that within the next 15 to 20 years it will get to more than 80%.”

He said the fund invests in electric vehicles not through manufacturers such as Tesla Inc., but via the value chain that goes into making these vehicles. One example is Nidec Corp., a Japanese maker of precision motors that go into smartphones, computer hard drives and electric vehicles. The company’s e-axle motors are energy-saving devices that can boost the range of an electric vehicle, Deladerrière said.

And then there’s the area of sustainable consumption, which includes food and agriculture, tourism and fashion.

Deladerrière noted the fashion industry is very unsustainable in the way it sources materials such as cotton and plastic. And also because some fashion items are thrown out after just a few uses. Clothes recycling can help reduce waste, and one of the leaders in this nascent field is fund holding Re:NewCell AB, a Swedish company that bills itself as a "sustaintech" operation with a unique textile recycling technology.

“Its technology is similar to paper recycling technology,” Deladerrière said.

Elsewhere, the circular economy theme targets companies involved with single-use substitution and waste management, while the fund's water sustainability component deals with water treatment, water distribution and desalination.

The fund’s top five holdings are Enel SpA, an Italian electric and gas company that’s making a big push into green energy; Ecolab Inc., an American water treatment company; Japanese air conditioner maker Daikin Industries Ltd., which builds systems using refrigerants designed to mitigate global warming; Xylem Inc., an American water technology provider; and Ball Corp., an American maker of glass containers.

Inflection Point
GSAM posits that the world is at an inflection point that’s driving what it calls a global sustainability revolution. Governments are making commitments to be carbon neutral. Certain large, influential corporations are making pledges ranging from buying renewable energy to ordering electric vehicles. And many consumers say they’re committed to the notion of a sustainable planet and are willing to pay up for products and services aligned with that, according to Katie Koch.

GSAM’s new ETF has an expense ratio of 0.75%. It joins an increasingly crowded market for funds trading under the banner of sustainable or environmental, social and governance or socially responsible investing.

The ESG movement long ago shifted from fad to mainstream, and fund sponsors have responded by rolling out products seemingly on a weekly basis that tap into this trend. Helping to fuel this movement are statistics showing that sustainable investment strategies are holding their own in performance—and at times are punching above their weight. Fund research firm Morningstar reported that sustainable investing-oriented open-end funds outperformed non-ESG funds in this year’s second quarter, largely because of a resurgence among the tech stocks that often dominate ESG-screened indexes. (Conversely, the reliance on growth-oriented tech companies in ESG-screened indexes meant the sector lagged when value stocks outperformed in the first quarter.)

Indeed, one of the criticisms of ESG-based indexes is that they often resemble garden-variety large-cap indexes filled with the market’s biggest and most heavily traded companies. Naysayers contend that investors would be better off investing in lower-cost, market cap-weighted ETFs than in more expensive funds that promote their ESG bona fides.

It’s a legitimate critique, and one that Goldman Sachs Asset Management addressed in its media call yesterday when it emphasized its belief that index benchmarks are backward-looking mechanisms that miss the boat on innovative and disruptive companies, and that active management is key to finding cutting-edge companies that can actually move the needle on climate change and sustainability.

We’ll see if they’re correct.