New York
SPIRITUAL guru Deepak Chopra had just finished teaching a class about ethics in business at Columbia Business School when he called billionaire investor Paul Tudor Jones II in the fall of 2012.
"Listen, one of my students has got a really good idea," Mr Jones said Mr Chopra had told him. The student had posed two questions: "Why can't companies be an instrument for goodness? Why can't companies focus their capital - human and financial - on being a change agent for societal betterment, a change agent for justness?"
This was long before the ESG movement - the focus on environmental, social and governance issues - became fashionable, and Mr Jones was struck by the question. So he set out to answer it.
Since then, he has built an entire foundation, Just Capital, around the idea and developed a series of metrics to measure corporate America on more than mere profits, using annual polls to determine what corporate practices, including how workers are treated and job creation, matter most to Americans.
Up until now, his measure of corporate America was simply a list of companies, a ranking that he hoped would encourage chief executives to think more about doing right by society. But now, it is about to become a financial product.
On Wednesday, Goldman Sachs will jump into the social impact investing world, using Mr Jones' metrics to build a new exchange-traded fund.
The fund is a feel-good version of the Russell 1000, tracking the top 50 per cent of those companies in every industry based on Just Capital's publicly available model, which scores businesses using a complex formula related to workers, customers, products, environment, jobs, communities and management. Only 6 per cent of the calculation of the index relates to how well a company provides investor return.
The top five companies in the 2017 rankings all came from the tech sector: Intel was No 1, followed by Texas Instruments, Nvidia, Microsoft and IBM.
Whether the formula is a winning one for investors is a bit of an open question. The fund would have outperformed the Russell 1000 by 3.47 per cent over the past two years. That's the good news.
The bad news is there is no way to test the formula any further back, and each year, the index changes based on shifts in the polling. If Americans become more concerned about job creation and less concerned about worker pay, different companies could be included.
"We rank the companies as best we can," said Mr Jones, who became famous for shorting the stock market before Black Monday in 1987 and went on to found the Robin Hood Foundation, an anti-poverty organisation. "And it's our best effort - it's not a science. There are many different ways you can debate the decisions that we have had to make, and I'm sure it will evolve and we're going to get better at it."
So it's a bit of a guess how well Just Capital's index will perform over the long-term, a point Mr Jones acknowledges upfront.
"I think it outperforms similar indexes," he said. But he quickly warned that "when we get in a bear market, this thing is going down 95 per cent of what the other ones are, too".
According to Just Capital, the companies in the fund outperformed the remainder of the Russell 1000 in a number of important, socially conscious ways: They paid 71 per cent less in fines for consumer sales-terms violations and 94 per cent less in Equal Employment Opportunity Commission fines, produced 45 per cent lower greenhouse gas emissions per dollar of revenue, and created American jobs at a 20 per cent greater rate. Investors will pay a 0.2 per cent fee, which is about half the price of most other ESG-oriented funds.
But Goldman Sachs and Mr Jones aren't selling the fund as a quick-buck way for day traders to beat the stock market.
Instead, it is being sold as a curated solution at a time when pension funds and other institutional investors are looking to shift their investments into socially responsible funds.
"We are seeing clients think about this product in different ways," said John Goldstein, a managing director within Goldman Sachs Asset Management. "Some look at it as value-aligned market exposure, while others see a set of drivers of performance in a changing world."
Whether social impact investing will turn out to be the most profitable way to invest has become one of the biggest questions within the investment world.
Laurence Fink, a co-founder of BlackRock, the largest investment manager in the world, with over US$6 trillion under management, told chief executives in a letter this year: "To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society."
Mr Jones came to the same conclusion several years ago. He said he had been taken aback when he realised how a company's stock performance correlated with how responsibly it behaved.
"I've got to think about, even in my own business, how I am treating my employees, how we're running and operating this business," he said.
One major distinction between his new fund and the bevy of new socially responsible funds that have emerged is that it does not exclude any company based on a moral argument. So the fund can include coal companies or tobacco companies, for example, but only those that lead their industry based on his metrics.
While it may be in vogue to talk about socially responsible investments, until they prove they can perform better over a significant period of time, it will be hard for even the most virtuous investors to plough significant sums into them.
For now, Mr Jones is happy to get the conversation started.
"The corporate mission as practised today was designed in 1970 by Milton Friedman, when he famously said the social responsibility of the corporation is to improve its products," he said. "The biggest objective I think for those of us at Just is to begin the debate." NYTIMES
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