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. Fu...