The approach that Patrick McVeigh and his firm Reynders, McVeigh Capital Management take to investing is likely to be the basis of how every investment advisor manages their portfolios in the future.

McVeigh, president and chief investment officer of the seven-year-old, Boston-based RIA with $850 million in AUM, describes what they do simply as “smart investing” or “taking traditional investing and improving it a little bit.”

Like other RIAs, McVeigh believes balance-sheet quality is important. Companies in which he invests need to be healthy financially and not overleveraged. But he takes his analysis a step further and considers how environmental, social and governance (ESG) issues might hurt or help company performance. That extra step has helped the overall return of equities in their separately managed accounts reach 60 percent over the last seven years, compared with 33 percent for the Standard & Poor’s 500 index, he says.

More asset managers are looking at ESG factors these days—consider the fact that 1,179 organizations, including 727 investment managers, have signed on to the Principles for Responsible Investment, which, among other things, calls for ESG factors to be incorporated into investment analysis and decisions.

Public companies themselves are rapidly embracing corporate social responsibility, with 53 percent in 2011 filing CSR reports, up from 20 percent the year before, says McVeigh. “You have a majority of companies now saying these are important issues and we need to measure them and report on them. Investors want them,” he says.

McVeigh and other money managers like him draw a distinction between themselves and other socially responsible investors. Traditional SRI uses negative screens to eliminate companies involved in activities or producing products that conflict with investors’ values. Such screens might eliminate companies selling alcohol or birth control, operating casinos or making weapons.

Companies in which McVeigh invests typically are not off limits because of their general business. He uses positive screens to find the best performers or those on the brink of a turnaround in various industries—an approach often referred to as sustainable investing.

“I've been doing this for about 30 years. … A lot of it comes down to us looking for change. As an investor, you often want to invest where a company goes from being bad to starting down the path of being good. It’s where you often get the greatest change in valuations,” he maintains.

Examples of two companies in which Reynders, McVeigh have invested but have long been unloved by many socially responsible investors are Nestles and Walmart, he says. Nestles is “still a hated company” because of controversy decades ago over infant formula. In the early 1980s, critics charged Nestles and other formula makers were convincing women in poor countries to switch from breastfeeding to formula, which resulted in more unhealthy babies. A recent study by OxFam International found Nestles to be the food company doing the most to help poor communities with nutrition, McVeigh said.

“Walmart is probably as controversial a company as there is, with as negative a reputation as anyone,” McVeigh says. But starting in 2005, the company realized its reputation was hurting its business, so it started doing much more to address environmental issues and  “green” its supplier system, he added.

Natural gas is another controversial industry in which his firm has invested client money. Fracking, a method used to extract natural gas from shale, has made much more natural gas available in the U.S., but has been criticized for polluting water supplies. “Our feeling is we can use natural gas in an environmentally sound way and some of the problems that have come about with fracking need to be addressed. There are better ways to do fracking,” he said. The firm has invested in companies with superior technologies, he adds, such as GasFrac Energy Services, a Houston company that fracks with propane, which is later recycled, rather than water.

Is the investing that Reynders, McVeigh does SRI? McVeigh thinks so. “We view our clients as being socially responsible and wanting to have an impact on society,” he said.

At the same time, he’s not criticizing what traditional investors have done.

“We're saying what people have always done is good. They are looking at finding financially healthy, relatively inexpensively priced stocks,” says McVeigh. “You can go back to [Benjamin] Graham and [David] Dodd, who said you want to invest in companies with good management. We're just saying, ‘What is good management?’ We're trying to broaden it and say what good management is in this day and age. How does it include employees? It’s different today than 20, 30, 40 years ago.”

Says McVeigh: "We're not throwing the cookbook out, we're just adding a few more recipes."

Who wouldn’t want to do that?