October 5, 2021 9:25 AM EDT

ESG funds—investment funds that are supposed to include companies that score the highest marks in environmental, social and governance factors—have become increasingly popular as more people look to put their money where their environmental concerns are. When BlackRock debuted a new ESG-aligned fund in April, investors couldn’t get enough. They poured $1.25 billion into the U.S. Carbon Transition Readiness ETF (stock ticker LCTU) on its first day. No ESG fund, or any type of exchange-traded fund (ETF) for that matter, had ever received that much investment so quickly.

But this wasn’t entirely a feel good story about investors betting on a more environmentally-sound future. BlackRock’s ETF included the pipeline company Kinder Morgan and oil and gas companies like ExxonMobil and Chevron.

It wasn’t all that unusual for an ESG. The story of LCTU and the companies within it is representative of both the immense popularity and the confusing and controversial nature of ESG funds. The amount handled by money managers in these funds has risen from roughly $569 billion in 2010 to $16.5 trillion last year, according to the Forum for Sustainable and Responsible Investment. Yet ESG funds have risen to prominence without much regulation or requirements from the SEC, which has only recently started to develop a framework for handling ESG funds. So a company’s presence in an ESG fund does not guarantee it is a top steward of the environment, just as a fund being billed as an ESG does not guarantee it is filled with environmentally sound companies.

“There’s a fundamental problem, which is the SEC allows you to name funds that don’t necessarily reflect what’s inside the fund,” said Andrew Behar, CEO of As You Sow, a nonprofit shareholder advocacy group.

So how can you tell whether you’re truly making a sustainable, green investment? TIME spoke with a variety of investment fund managers and presidents to get a sense of how they operate. Here’s a guide to help you learn the different ways various funds define ESG, how companies get vetted, and which companies are reaching the highest standards.

The limits of ESG funds

ESG generally entails “investing in the best of everything,” according to Leslie Samuelrich, president of Green Century Funds. Asset managers attempt to package a few dozen companies that rate better than their peers in various characteristics, ranging from greenhouse gas emissions to environmental racism, and have trustworthy corporate governance. Many funds use ESG ratings from MSCI to make determinations.

ESG does not automatically mean certain types of companies are excluded even if, Samuelrich adds, they are “what you would sort of think of as ‘oh those are dangerous companies.’” That’s why companies like ExxonMobil, which engages in activities like flaring and emits loads of greenhouse gases but is working to reduce its carbon footprint, can be found in BlackRock’s LCTU fund. BlackRock has specific funds that eliminate fossil fuel companies, but its general ESG-aligned funds contain fossil fuel companies it believes will most benefit from a transition to a low carbon economy. Funds with ESG or sustainability in the name from State Street, Fidelity, Vanguard, and other asset managers, also feature fossil fuel companies or utilities powered by fossil fuels.

It’s up to the asset managers to determine whether they want to screen out companies involved in fossil fuels, tobacco, guns, or other investment areas generally considered harmful to people or the environment. Green Century Funds, for instance, does not allow any fossil fuel companies in its funds, and Trillium Asset Management and Parnassus Investments have the same prohibition.

While ESG funds are based on relativity, Matthew Patsky, CEO and lead portfolio manager of Trillium, doesn’t believe companies like ExxonMobil and Occidental Petroleum should ever be included in funds billed as being good for the environment, regardless of how they stack up against competitors.

“The small independent is likely the dirtiest,” Matt said. “ExxonMobil is going to be cleaner than that.”

But, he added, “You can see they funded more of the misinformation campaign to declare that climate change was a hoax than any other corporate entity globally. Well, for me, that’s a non-starter. I don’t want to ever see it in a portfolio.”

How companies get vetted by ESG fund managers

Although standards for environmental care differ across industries, there are a few benchmarks ESG fund managers typically consider when vetting companies for the environment. For carbon emissions, for instance, they seek companies that have science based targets vetted by outside experts. They look for absolute goals because relative goals — such as reducing emissions on a per customer basis — don’t give a full picture.

And when it comes to net zero emissions promises, Julie Gorte, senior vice president for sustainable investing at Impax Asset Management, says there is “a ton of fairy dust,” referring to companies that claim they will eliminate carbon based on technologies that don’t exist yet. Gorte says companies that are the most serious about reducing emissions lay out specific plans for cutting not just their own direct and indirect emissions but for emissions created by other companies along its value chain, which are known as Scope 3 emissions.

“And if a target doesn’t say that then they’re probably just blowing smoke and hoping no one will notice,” Gorte said.

Gorte added that emission reductions were most important for a company trying to reach net zero, before carbon offsets, which can sometimes be used as a cover for keeping harmful environmental practices.

Fund managers typically delve deeper than the numbers available on public reports.

Before Parnassus invested in Digital Realty Trust, director of research Lori Keith visited some of their data centers with a few of her colleagues. The company, which has around 300 data centers worldwide, has set the goal of reducing its direct and indirect emissions by 68% by 2030 and increased their usage of renewable energy. At the data centers, Keith inspected Digital Realty Trust’s operations for herself and interviewed executives and frontline employees to validate whether the company was truly making progress and came away satisfied.

“Those (visits and interviews) are really important for us to make sure that anything that they’re putting out there is of serious intent and that they are genuinely moving towards those targets,” said Keith, who is also portfolio manager of Parnassus’s $8 billion Mid Cap Fund.

Yolanda Courtines, portfolio manager of the Vanguard Global ESG Select Stock Fund, says she tries to meet with the executive team and board of every company on her fund at least once a year and sometimes five or six times.

“It’s asking simple questions. ‘Are you working with your supply chain? How are you helping them reduce their environmental footprint? Are you putting solar panels on the roofs of your suppliers?,’” she said. “That’s the sort of questioning level that you kind of really want to get into to understand what’s happening.”

Relying purely on data, according to Patsky, does not always provide an adequate portrayal of a company. And he admits that Trillium’s vetting process, which involves everything from talking to current and former employees to checking with NGOs familiar with companies’ labor conditions in China, still can’t uncover everything.

“I don’t want to lead you to believe that we have perfect insight, because if we had perfect insight, we’d have the equivalent of inside information that we don’t,” Patsky said.

The companies that stand out to fund managers

There are no perfect companies in ESG funds, either. Fund managers think of them as leaders and laggards, with plenty of space in the middle. Investors who are conscious about the environment will likely find their best choices in leaders who are making environmental gains beyond most of their peers but still have flaws.

Behar, the CEO of As You Sow, gave Kellogg’s as an example of a leader on the food supply chain. Like most companies, it used wheat and oat crops that had been treated with the herbicide glyphosate, a known carcinogen. After being pressured by lawsuits and activists that included As You Sow, Kellogg’s made a plan in 2020 to phase out glyphosate by 2025. Companies like General Mills and PepsiCo have also recently made regenerative agriculture plans.

“A company like Kellogg’s is being a leader. General Mills is also being a leader,” Behar said. “And now the whole industry has to follow because of competitive pressure.”

Courtines highlights Michelin, the tire company. “That’s a tough industry to be in,” she said, “but they are very, very responsible owners of managing the rubber supply chain and in helping build the tires that are going to be the best tires for electric vehicles that will help reduce carbon footprint on the roads in the future.”

Two companies that came up in conversations with multiple fund managers were Microsoft and Google. Both are already carbon neutral. Google has eliminated legacy carbon, and Microsoft has a plan to do the same by 2050. “Their initiative is to remove everything that they’ve emitted since they started, and hopefully that leads to other companies taking a similar approach,” said Iyassu Essayas, director of ESG at Parnassus.

But, as Patsky points out, Google is being investigated for anti competitive practices. Still, he believes its environmental record outweighs those concerns enough to include in Trillium’s funds, highlighting Google’s 100% usage of renewable energy and even its purchase of the smart thermostat company Nest.

“That’s just one of their many products, but it’s one of the products where I’m like, ‘All right, that’s just brilliant,’” he said. “It’s like a self learning device that’s trying to improve environmental outcomes by moving people toward recognizing that they can be comfortable with the temperature being a little warmer in the summer and colder in the winter.”

How to examine companies and ESG funds yourself

Retail investors can investigate specific funds by reading through their prospectuses. Of course, that involves lots of fine print. As You Sow has an online tool that provides more digestible information on where dozens of ESG funds stand on fossil fuels, guns, gender equality, and other issues.

To study individual companies, fund managers recommend average investors research annual sustainability reports, which you can usually find by searching the internet for a company’s name and “sustainability report.” Companies with legitimate environmental progress will have reports with absolute goals and statistics and not just anecdotes. (Look for concrete numbers with specific deadlines.) Average investors could also check whether the corporate governance structure has enough people concerned with the environment, by searching for whether board members and upper level executives have ever talked about prioritizing the environment or come from previous jobs and companies concerned with the environment.

It can get complicated, so Samuelrich, from Green Century, recommends investors first consider a company’s core business.

“What is the company sort of set up to do, and is it doing something this harmful? Is it doing something that’s neutral? Or is it doing something that’s inherently positive?” Samuelrich said.

From there she said investors should hone in on one or two issues most important to them and search for information in news articles or on companies’ websites and in their sustainability reports.

“What you’re looking for is things like, are they trying to reduce their carbon emissions? Do they say that on their website? Are they trying to reduce their plastics use? Are they trying to minimize their water use? Do they have a policy around supply chain labor standards, for example?…Do they have women or people from diverse backgrounds on their board?”

Correction, 10/13:

An earlier version of this story implied that Yolanda Courtines works at Vanguard. She manages the Vanguard Global ESG Select Stock Fund, but she works for Wellington Management Company.

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