Two Newport Beach, Calif. investment firms have joined forces to launch the Pimco RAFI ESG U.S. Exchange-Traded Fund (RAFE), a smart beta product based on the principles of environmental, social and governance investing.

The fund is a collaboration between Pimco, a leading fixed-income shop, and Research Affiliates, which is known for its smart beta and asset allocation expertise.

RAFE is based on the RAFI ESG US Index that aims to outperform market capitalization-weighted indexes while investing in U.S.-listed large- and mid-cap, ESG-conscious companies. It uses Research Affiliates’ Fundamental Index approach that employs a smart beta strategy built on the principles of contrarian indexing and disciplined rebalancing.

The index overweights companies that score well on the ESG front and ranks holdings based on metrics related to financial discipline and diversity, which are described as being linked to long-term value creation and improved return potential.

Specifically, the ESG and diversity scores are determined by using data from Vigeo Eiris, a third-party ESG data and ratings provider.

According to the prospectus, Vigeo Eiris assesses hundreds of different factors within a framework of sustainability criteria based on international standards for determining ESG scores, and it considers various metrics related to gender diversity to determine the diversity scores.

Research Affiliates calculates the financial discipline score that identifies companies with high profitability, low investment, low issuance and low accruals.

Companies are sorted in descending order by their ESG, diversity and financial discipline scores, respectively. Those classified by Vigeo Eiris as having a major involvement in the following industries are excluded: tobacco, gambling, weapons—civilian firearms and military—fossil fuels, coal, tar sands and oil shale.

Selected companies are weighted by their fundamental weight, adjusted by the companies’ respective overall ESG scores.

The index is reconstituted annually and rebalanced quarterly on a staggered basis that’s meant to diversify risk and decrease market impact of trading.

The fund’s gross expense ratio is 0.45%, but a fee waiver reduces the net expense ratio to 0.29%.

ESG investing has been gaining in popularity even as some people are confused about how to compare the various ESG data and ratings. Others, including SEC Commissioner Hester Peirce, have criticized ESG as being a nebulous concept with no enforceable or common meaning.

Frankly, that could apply to the RAFE fund’s exclusion of companies that have “major involvement” in certain proscribed industries such as fossil fuels. What exactly does that mean? That should be clearly spelled out in fund literature.

Meanwhile, a recent article in the Wall Street Journal said the Securities and Exchange Commission has contacted some investment managers with ESG offerings seeking information about their investing criteria.

Nonetheless, many people believe the basic principles behind ESG investing have merit both philosophically and financially, and this sector likely will continue to be a growth area as fund sponsors seek to satisfy investor demand.