Do-Good Investors: Watch Out For What These Funds Hold

If you listen to the marketing hype, assets devoted to ESG—industry jargon for investments sensitive to environmental, social and governance issues—account for some $8.7 trillion, double the amount just five years ago. That's great news for the planet, right? Not so fast. Much of the growth is a matter of semantics. What were once run-of-the-mill value or growth funds are being reclassified as sustainable or ESG-friendly.

Take, for example, American Century's $227 million Sustainable Equity Fund. In 2004 it launched with the name Fundamental Equity, focusing on large companies. Last year the frequent underperformer was renamed to meet growing investor demand for sustainable investing. Says portfolio manager Joe Reiland, "We all want to preserve the environment and do well and do good."

Even more rampant than shape-shifting funds are those with liberal definitions of what qualifies as ESG. Take the two largest asset managers in the world, BlackRock and Vanguard. Both have ESG funds with holdings that defy what many might consider socially responsible. BlackRock's MSCI KLD 400 Social ETF holds McDonald's, ConocoPhillips and Occidental Petroleum, even though McDonald's has struggled with ongoing labor disputes and many ESG funds steer clear of companies that hold fossil-fuel reserves. BlackRock declined to comment on specific holdings...