Wall Street’s big banks are becoming increasingly interested in sustainable investing. The most recent convert is Goldman Sachs: in June, it named Hugh Lawson, a partner and managing director, as its global head of environmental, social and governance (ESG) investing. This move was part of a larger trend: a month later, Goldman acquired Imprint Capital, a boutique investment firm that seeks measurable social and environmental impacts on top of financial returns.

“We think ESG is going, in essence, mainstream,” Lawson said. “A wider set of clients is interested.”

Those clients include public pension funds, insurance companies, universities and foundations that want their investments to take social and environmental issues into account. Given the size and scope of these large institutional investors, it’s not surprising that some of Wall Street’s major players are getting involved: Goldman and its rivals, including Morgan Stanley and Bank of America/Merrill Lynch, are following the money, as they always do.

In addition to attracting big clients, the sustainable investing initiatives being led by Lawson and others – including Audrey Choi, who leads Morgan Stanley’s global sustainable finance group, and Andy Sieg, head of global wealth and retirement solutions for Merrill Lynch – have the potential to steer more capital into investments that promote corporate sustainability. “Clients are telling us that they want their portfolios to reflect their values and help improve the world they live in,” Sieg has said.

Dropping oil without dropping returns

Lawson’s interest in sustainable investing emerged while he was serving as a trustee of the investment committee at the Rockefeller Brothers Fund. Last year, the foundation announced that it was divesting fossil fuels from its endowment. Because the Rockefeller Brothers Fund was created by heirs of oilman John D Rockefeller, this became front-page news.

After taking a deep dive into the relationship between divestment and financial returns, Lawson came to believe that eliminating fossil fuel holdings from the fund’s $857m portfolio would not necessarily limit returns. This was a controversial position: many prominent investors argue that fossil fuel divestment puts financial returns at risk.

In a statement explaining why Harvard rejected student demands to divest fossil fuels, Drew Faust, the university’s president said that it came down to dollars: “Despite some assertions to the contrary, logic and experience indicate that barring investment in a major, integral sector of the global economy would – especially for a large endowment reliant on sophisticated investment techniques, pooled funds and broad diversification – come at a substantial economic cost.”

That’s not necessarily true, Lawson told the Guardian in his first interview since taking his new job in June. By using sophisticated analytical tools, he explained, an asset manager can limit what’s called tracking error – that is, the gap between a fund’s returns and the returns of a benchmark index. Oil and gas investments, for example, can theoretically be replaced by other holdings in the energy sector, commodities or real estate that correlate with fossil fuel assets.

The Rockefeller Brothers Fund’s investment committee, which includes Morgan Stanley’s Choi and impact-oriented asset manager Adam Wolfensohn, came to the conclusion that the fund’s decision to divest wouldn’t come with a financial cost.

“We haven’t compromised our return profile or increased our risk,” Lawson said.

SRI: a shifting conversation

The debate between moral values and financial returns isn’t entirely new. So-called “negative screens” have always been part of what used to be known as socially-responsible investing (SRI). With roots in religious communities and the anti-war movement of the 1960s, SRI funds shunned investments in tobacco, alcohol, guns, nuclear power and companies that operated in South Africa during apartheid. However, with the notable exception of the anti-apartheid campaign in South Africa, there’s little or no evidence that these negative screens had much impact.

In many ways, the conversation has shifted. According to US SIF, an industry group, the term SRI has shifted meaning from “socially-responsible investment” to “sustainable, responsible and impact investment”. Today, SRI, ESG and sustainable investing – the terminology remains unsettled – is less about negative screens and more about steering capital towards companies or projects that generate positive, measurable social and environmental returns.

Goldman and its rivals say they can bring more rigor, sophistication and scale to the field. For example, Impact Capital, the firm acquired by Goldman, makes investments that are explicitly designed to improve the lives of impoverished communities, or to promote conservation or energy efficiency.

Lawson offers another hypothetical situation that could show the impact of SRI. An investor concerned about climate change could choose to overweight companies in any sector, including energy, that are the most carbon-efficient. At the same time, he could underweight those whose emissions per unit of revenue or profit are higher than average. Eventually, this could theoretically have an impact on how companies operate, by rewarding businesses with more favorable social and environmental profiles.

Such change would take time, of course. “It does have elements of redirecting a supertanker,” Lawson said. “But, cumulatively, one nudge here and one there start to add up.”