Reporting also remains a sticky issue for ESG investments. Nimeri says that it is difficult to attribute their performance to an ESG exposure, because it is difficult to isolate ESG exposures.

“You want to be able to make sure that returns are being driven by the ESG component,” says Nimeri. “Investors looking at broad allocation with limited tracking error and high diversification are better off going with a passive core product … If you have an ESG product that is style and sector neutral, it wipes out those other pieces and the return is generated purely by the ESG methodology.”

Active managers, to date, have also struggled to measure the return from impact investing, and to translate that impact in dollar terms.

As ESG becomes more “passive” within factor indexes, it risks becoming de-coupled from shareholder activism, a primary driver of investing impact. Firms like BlackRock, Vanguard and State Street have already been accused by not-for-profit groups like As You Sow for essentially acting as a rubber stamp to the whims of corporate executives.

While active managers have use proxy votes to display their impact, passive managers, for the most part, are just entering the impact investing arena.

“We’ve made better impact reporting one of our priorities, and we think that’s an area of improvement that the industry needs to focus on,” says Eames. “That’s a necessary step towards attributing a portion of these returns to ESG factors.”

Because it is such a nebulous category, ESG metrics and reporting are also fraught with subjectivity, notes Nimeri. “It is as yet unclear which elements of ESG are meaningful, and which elements are not as meaningful.”

Treating ESG like another smart beta factor also converts an ethical or moral judgment into a simple quantitative decision, separating the investor from the impact.

At this early stage, most adherents to ESG investing are still more driven by an interest in creating environmental, social and governmental change than they are in creating greater investment returns. As ESG rating methodologies and the products built on top of them mature, investors seeking alpha, or at least better beta, may turn to the ESG investing universe.

Advisors should be prepared.