| America's biggest ESG fund has no direct investments in renewable energy companies. Yes, you read that right. Instead, the $25 billion Parnassus Core Equity Fund holds stocks like Linde Plc, an industrial gas company, Deere & Co., the largest manufacturer of agricultural machinery, and Xylem Inc., which makes water and wastewater pumps for municipal customers. It also owns big stakes in technology behemoths Microsoft Corp. and Amazon.com Inc. Managers of many environmental, social and governance funds were slammed in 2020 for running what amounted to index-trackers that relied on tech stocks to beat their market benchmarks—albeit with shiny green labels. While Ben Allen, co-manager of the Parnassus fund, doesn't dispute this critique of the ESG industry, he said his fund is different. Its assets are concentrated in 40 stocks that are measured against ESG metrics. He said publicly traded renewable energy companies aren't big enough or mature enough to meet Parnassus's investment criteria. In September 2018, Parnassus decided to sell its one remaining holding in fossil-fuel companies. The firm also said it avoids direct investments in any energy-focused company unless management has a comprehensive plan to address their carbon-intensive businesses. "It's true that we don't own any pure-play solar manufacturers, but the portfolio is full of companies that are committed to the transition away from carbon," said Allen, who's also chief executive officer of San Francisco-based Parnassus Investments, which oversees about $41 billion for clients. The Parnassus fund has risen at an annual rate of 17.2% during the past three years as of Feb. 26, outperforming the 13.2% advance of the S&P 500 Index including reinvested dividends.  Linde is a company in which the Parnassus fund held a $704 million stake as recently as Jan. 31. Its products are designed for "industrial applications to be as clean as possible," Allen said. Linde is a leader in the hydrogen market and looking to triple its clean-hydrogen production, and has earmarked more than one-third of its annual research and development budget over the next decade to decarbonization, Allen said. Microsoft, another large Parnassus holding, has pledged to remove all of its historical carbon emissions by 2050, Allen said. "In effect, Microsoft is winding back the clock to the 1970s," Allen said. "It's as if the company never existed." Until recently, Amazon was considered a pariah of the ESG industry, Allen said, having waited until 2019 to publish its first sustainability report. Amazon subsequently pledged that it will zero out its carbon footprint by 2040, or eliminate the greenhouse-gas emissions caused by its activities. Last March, Parnassus decided to invest in the giant shipper (when its shares were a bargain). The Core Equity fund held a position in Amazon worth about $1 billion at the end of January 2021. "We were waiting for the company to make a serious commitment," Allen said, though he added that its path to net zero won't be easy.  Deere & Co. tractors for sale at a dealership in Shelbyville, Kentucky, in November. Photographer: Luke Sharrett/Bloomberg Parnassus also had a $956 million stake in Deere, best known for its distinctive green-colored tractors (which tend to run on fossil fuels). The company is investing in so-called precision agriculture, an approach to farm management that uses information technology to ensure crops and soil get exactly what they need. It involves much less water and fewer pesticides so it's better for the environment and Deere's bottom line, Allen said. Parnassus also owns shares of Xylem, which works with municipalities and governments on the distribution of clean water and the treatment of wastewater. It has 15- to 20-year servicing contracts, so half of the company's revenue is recurring. While there's an argument to be made that rewarding any company focused on sustainability is a reasonable focus for an ESG fund, there's little chance Amazon and Microsoft would otherwise have a hard time finding investors. Purists would say ESG funds should invest in startups on the cutting edge of renewable technologies—companies that really need the money. "We hesitate to overplay the ESG hand," Allen said. "We have a responsible large-cap investment approach. We use the 'E' to help us discover what we want to avoid, and also to help us find stocks that we want to own." Sustainable finance in brief Jane Fraser, chief executive officer of Citigroup Inc. Photographer: Bloomberg Bloomberg Green publishes the Good Business newsletter every Wednesday, providing unique insights on climate-conscious investing and the frontiers of sustainability. 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