The old phrase to “do well by doing good” is an apt description of what’s known as ESG investing. Standing for environmental, social, and governance, ESG investing appeals to investors who care that their investment dollars support honorable companies that in one way or another benefit rather than despoil the world, notes Scott Chan, editor of Investing Daily's The Complete Investor.

The “doing well” part comes in because such companies can reduce your exposure to risk. Companies with unscrupulous management or that violate environmental laws, for instance, pose the risk of incurring millions of dollars in fines, which could eat into profits and damage the share price.

Another way to think of ESG is in terms of sustainability. A company committed to long-term sustainable growth is likely to be more careful not to incur the wrath of regulators. Upstanding executives also are more likely to act with shareholder interest in mind and less likely to pursue short-term gains that might harm shareholders.

ESG investments now account for about 25% of professionally managed assets around the world. Europe leads the pack at more than 50%, while the U.S. is at about 21%. Asia is the laggard: Japan is at only about 3% and the rest of Asia is below 1%.

For fund investors who like the idea of ESG investing, our fund portfolio already has a solid ESG fund: large-blend Parnassus Core Equity Fund (PRBLX). In fact, the entire Parnassus fund family, founded in 1984 by Jerome Dodson, offers responsible investment funds to the public.

While the family’s investment philosophy ultimately is to own good companies that carry attractive or reasonable valuations, Parnassus screens stocks for ESG factors when making investment decisions.

Parnassus Core Equity shuns companies that derive significant revenue from alcohol, tobacco, gambling, weapons, nuclear power or that have financial ties to Sudan. Three investment team members are devoted exclusively to analyzing ESG factors.

After excluding companies that don’t pass ESG muster, the fund utilizes fundamental research to hone in on high-quality companies deemed to hold sustainable competitive advantages and increasingly relevant products or services. Valuation also is important, with managers attuned to waiting for an attractive entry point before buying.

The emphasis on quality and valuation has paid off by providing protection during rocky markets. The fund is in the 9th percentile in annualized returns over 10 years, a period that includes the financial crisis, and it ranks in the 10th percentile for the past 15-year stretch.

But during strong markets, when investors are more aggressive, the fund tends to lag. That helps explain its middling performance compared to other large-blend funds over the past five years (55th percentile).

Parnassus Core Equity is very selective, aiming to own only around 40 stocks. As of the end of April, it held just 38. The managers seek to cap positions at about 5% of assets, and at least 75% of holdings must pay a dividend.

Generally the fund yields between 1% and 1.5%. Thus true to its nature as a blend-style mutual fund, Parnassus Core Equity fairly accurately mirrors the market as a whole, with no one characteristic – growth, value, income, etc. – dominating.

The fund managers generally hold a three-to-five-year time horizon. This keeps turnover relatively low — in 2017 it was under 25%, meaning less than one-fourth of its holdings were replaced last year. No load is charged, and the expense ratio is about average at 0.87%. The minimum required initial investment is $2,000, or $500 for an IRA.

A low-cost fund with ESG qualities and a long history of outperformance — $10,000 invested in Parnassus Core Equity 10 years ago would have become about $26,000 today — Parnassus Core Equity remains a solid long-term holding as a large-cap blend fund despite its more recent somewhat mediocre showing.

The fund tracks the S&P 500 fairly closely, but if the market enters troubled waters, it offers modest defensive qualities as proven during the financial crisis. Between the major bear market of October 2007 to March 2009, the fund outperformed the S&P 500 by about 13 percentage points.

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