Traditional "socially responsible investing" has been around for many years, often most noticeable in the form of firms wholly dedicated to this strategy. In its most familiar form, SRI involves screening a universe of companies and eliminating those that violate one of a number of ethical tenets, such as involvement in the production of tobacco products, weapons, or adult entertainment.

Recent articles in the New York Times and the Washington Post suggest that an SRI approach is tantamount to investing with your heart rather than with your head. Both pieces assert that investors necessarily sacrifice returns when following an SRI strategy.

However, it would seem that both articles miss the larger point when it comes to evaluating the way in which investors now seek to incorporate environmental, social and governance factors (ESG) into the investment process. This approach is no longer the exclusive domain of traditional SRI firms. Rather, a large, and still growing number of investment managers, representing the spectrum of institutional investors, are beginning to consider ESG as part of the research process—with an eye towards uncovering hidden risks as well as opportunities.

Instead of striking entire sectors (think utilities, energy, resources) from consideration, investors are as likely to focus on identifying leaders across all sectors and placing bets on those companies that have gone well beyond their peers in managing the risks associated with environmental and social issues. Indeed, there is growing sentiment that such companies will outperform over time.

This means that an analysis of ESG factors is shaping investment decisions for portfolios well beyond those labeled as "SRI Funds." Even among the traditional SRI community, longtime leaders have shifted from the traditional approach to one in which they are focused on identifying companies that are leaders in operating their businesses in a sustainable manner based on the notion that these companies will be long term winners—in both sustainability and performance.

Climate change, resource scarcity, human rights, and a host of other issues have driven many investors to undertake a broader evaluation of companies as part of a growing focus on the use of extra-financial indicators to uncover risk. As we are witnessing rapid change around the incorporation of ESG in the investment process, it will be interesting to see how this approach continues to evolve. And, just as we now recognize that companies ignore ESG issues at their peril, so it would appear that investors can ill afford to discount ESG when making investment decisions.