IN APRIL 2010, Bud Sturmak, director of the investment-and-consulting firm RLP Capital, was at his Manhattan apartment when he heard something about an explosion on an oil rig in the Gulf of Mexico. It would be weeks before the nation grasped the full magnitude of the Deepwater Horizon spill, but as the nightmare unfolded, Sturmak quickly realized he needed to get on the phone. He had millions of dollars of his clients’ money tied up in so-called socially responsible funds, and, as he recalls, “I wanted to find out which of these funds were invested in BP.”

As hard as it is to believe these days, before Deepwater Horizon happened British Petroleum was in good standing with many moderate environmentalists. The company was pumping millions into biofuel research and solar technologies, and receiving accolades for doing so. BP executives were even speaking up about climate change and pushing the now defunct Beyond Petroleum campaign.

Greenwashing? Sure, but it worked. BP was perceived as greener than other oil behemoths, and that made it a popular pick for socially responsible stock portfolios. When Deepwater Horizon blew, many principled investors were stuck holding a bag full of dead pelicans and aggrieved Gulf Coast fishermen.

Yet, as Sturmak made call after call that afternoon, he found that not all the portfolio managers he’d placed his clients’ money with held BP stock. Not Ariel Investments. Not Domini Social Investments. Not Parnassus Investments. They didn’t have BP because of a stock-picking tool called ESG.

The initials stand for “environmental, social, and governance.” (Governance refers to transparency and corporate citizenship: whether a company’s CEO makes more than it pays in taxes, for example.) Made simple, ESG is a label for bundles of information about how companies treat people and the planet. These metrics aren’t being employed out of any sense of altruism, though; they’re used to mitigate risk and locate value. Fund managers Sturmak relied on had conducted ESG assessments that led them to conclude that BP wasn’t a good long-term bet. The company’s green-tech activities gave it some high marks, but those were offset by the 2006 pipeline failure at a BP facility on Alaska’s North Slope, which spilled some 267,000 gallons of oil. Ditto for the 2005 accident at a BP refinery in Texas that killed 15 workers and injured close to 200 citizens. The company had a greenish veneer, but ESG helped analysts zero in on the fact that it was taking a lot of potentially expensive risks. “I was psyched we didn’t have them,” Sturmak says. 

AT A TIME OF unprecedented animosity toward bankers and Wall Street, it may come as a surprise to learn that some professional investors are putting money into the sorts of green investments that environmentalists have been plugging for years.

ESG analysis—a method for ferreting out risk and pinpointing good investments—is in many cases supplanting traditional socially responsible investing (SRI). That method, which boomed in the mid-nineties, is essentially investor hand-washing made easy: you exclude certain “sin stocks,” such as oil companies or weapons manufacturers, to try to keep your dollars from bankrolling activities that conflict with your personal values.

Trouble is, cutting out high-profit industries can sometimes hurt the bottom line, and the stigma that SRI might erode performance is hard to shake. “SRI is this legacy term that, to some investors, is like religion or politics,” says Grant Cleghorn, director of institutional sales and marketing at Parnassus, a green-minded investment firm in San Francisco.