When activist shareholders want to make their feelings known about a company’s behavior on the world stage, whether  in regard to climate change or workplace diversity, they often do it at annual company meetings. “What ya gonna do about it?” is essentially the recurring question.

But more fund managers are engaging differently with the companies they invest in. San Francisco-based mutual fund company Parnassus is the largest fund company in the environmental, social and governance space in the United States, with $27 billion in assets under management. Parnassus doesn’t consider management at its portfolio companies to be either foe or friend. Instead, the fund manager pursues a collaborative relationship where symbiosis produces profits—or at least that’s the hope.

“We define engagement as meaningful dialogue with the companies and Parnassus itself to understand the [portfolio company’s] operations and also to give them some of our feedback on what we think are relevant ESG topics,” says Iyassu Essayas, Parnassus’s director of ESG research. “Ultimately what we’re trying to do is to help encourage the company to take some action or pay attention to matters that are important to our investors.”

To emphasize the importance of its engagement philosophy and action, Parnassus recently explained in its first ESG Engagement Report, “Today, as more and more people are choosing to use their capital to further ESG causes, we believe it is vitally important to continue sharing our perspective that ESG integration is beneficial for investors, companies and society.”

ESG investing is on the upswing. Approximately one out of every four dollars professionally invested in the United States is conditioned by some form of ESG screen, according to the Forum for Sustainable and Responsible Investment. That amounts to more than $12 trillion, according to US SIF’s 2018 biennial “Report on U.S. Sustainable, Responsible and Impact Investing Trends,” a jump of at least 38% from 2016, and more than 18 times as much as when data were first compiled by the organization in 1995.

This trend has prompted more companies to produce corporate social responsibility reports. Eighty-six percent of the companies listed in the S&P 500 now issue CSR reports, up from just 20% in 2011.

Jerome Dodson founded Parnassus in 1984 believing that companies embracing socially conscious initiatives and sound environmental policies would boast competitive advantages. The firm has grown from the $300,000 garnered from family and friends at inception to nearly a hundred thousand times that amount today.

“Our investors, they actually want to invest within their values,” Essayas says. “They do want their capital to help improve the E, S or G performance of the companies. And so having an engagement initiative on the company, our investors encourage us to do that. What we’re seeing is that the topics that we bring up, the ESG topics, are becoming more and more prevalent to other investors out there—the more traditional investors. And so these conversations that we’ve been having for years are starting to get easier and easier because companies are starting to recognize that investors are starting to take the sustainability and the ESG topics a lot more seriously, and that they need to be more transparent about what’s going on.”

Parnassus’s ESG Engagement Report is a fascinating read and a sort of behind-the-scenes look at how the investment firm conducts due diligence. It is rife with examples of corporate behavior gone bad and corporate behavior done good.

Take the discussion within the report’s pages about McKesson Corporation and Cardinal Health Inc., two of the largest drug distributors in the United States. In the midst of the opioid crisis, Parnassus has held talks with the two companies to address allegations that they neglected their legal obligation to monitor controlled substance distribution and prevent suspicious orders from being shipped. “Following these discussions, we concluded that the responses of both companies were insufficient and too slow given the growing scope and urgency of the problem—and we sold both holdings,” the report says.

But the fund’s opioid discussions with another major drug distributor, CVS Health, led to a different result: Parnassus held on to the position. Why? “The head of corporate social responsibility at CVS revealed that this company is addressing opioid abuse, both behind the pharmacy counter and with the patient community. CVS is monitoring and enforcing limits on prescriptions, training pharmacists and offering safe drug disposal receptacles to the public,” Parnassus said.

Parnassus says it looks at a company the way reporters would to get a 360 degree view. “Sometimes,” says Essayas, “the ESG team and I, we kind of joke about us being investigative journalists because we have to do a lot of deep dives on companies. Since the ESG data and ESG stories are not standardized, you can’t just go to the Bloomberg and say, ‘Give me the whole ESG story about a company,’ or ‘Let me get a sell-side report from J.P. Morgan on the sustainability aspect.’ And so we have to pull from a whole bunch of different sources. And sometimes the sources are media reports, sometimes they are the companies themselves, and a lot of times they are from journalists who are just covering the company, maybe at a local level. And so you have to do these deep dives to really get the granular information to come up with your assessment of that company.”

Before engaging the companies, the fund does its ESG analysis like this:

First it uses a screening process that filters out alcohol, tobacco and weapons companies; gambling operations; and companies generating electricity from nuclear power. Next the fund makes a qualitative assessment that takes into account key ESG factors: “On the environment,” says Essayas, “we’re looking at a company’s carbon footprint, we’re looking at a company’s energy and water usage, we’re looking at if the company has any kind of life cycle thinking of the product, we’re looking at the company’s waste stream.”

The fund also looks at a company’s workplace issues, such as employee retention, safety and executive compensation. “Once we’ve done that qualitative assessment on the companies, we’ll provide a formal recommendation to our chief investment officer,” Essayas says.

If the recommendation is accepted, the company’s stock is bought, and the ongoing monitoring process kicks in. “We’ll look for significant ESG positives, any kind of negatives such as controversy. And then just to double down to make sure we didn’t miss anything, we’ll actually do a formal annual review on the company going back one year. And then again using our ESG research to highlight engagement opportunities,” Essayas explains.

It’s during this process that red flags often appear. McKesson, for example, flashed warning signs when its management launched an executive retention program. “That took us by surprise,” Essayas says, “because we were knee-deep in this opioid crisis … and then you have McKesson coming in saying, ‘Hey, we want to introduce this brand new executive retention program.’” It would likely mean executives were planning on bailing from the company, and it prompted Parnassus to sell off more of its position.

As an intermediary, Parnassus carries a lot of weight with companies. It also is aware, however, that its shareholders are the ultimate ESG judges; the fund is beholden to them and that means it too must be as transparent as possible and show the steps it takes to keep companies honest. Just like Diogenes’s lantern that, according to legend, shined a light upon the wicked and the honest, Parnassus is looking to spotlight ESG issues for its shareholders.