For most of his first two decades as a mutual fund manager, Jerry Dodson was something of a nobody in finance. The Warren Buffett–quoting stock picker had set up shop in San Francisco in 1984 to practice “socially responsible” investing, partly inspired by the anti-apartheid movement that called for divestment from South Africa. Even as his firm, Parnassus Investments, racked up some impressive returns, he maintained a reputation as a hippie do-gooder and, at worst, a kook.
Among his more outlandish hunches was that treating workers well could pay off for companies in the form of better stock returns. “I had no evidence,” he remembers. “Intuitively I thought it would work, but I had no idea.” But shortly after the new millennium, Dodson received a phone call that gave him the proof he needed. Milton Moskowitz, the former business journalist who had created Fortune’s 100 Best Companies to Work For list, had commissioned some research and found that the stocks of the ranking firms had repeatedly outperformed the broader market. Dodson, Moskowitz suggested, might be able to use the list to make money.
Today, Dodson, now 73, is one of the most successful fund managers of his era, overseeing $22.5 billion. And the portfolio inspired by that phone call is the foundation of his best-performing fund. Since its inception in 2005, Parnassus Endeavor (previously known as the Parnassus Workplace Fund) has delivered annualized returns of 12.2%, compared with just 8.5% for the S&P 500. (It has also beaten the performance of the publicly traded companies on the Best Companies list in all but two of those years.) Overall, Parnassus Endeavor is not only the top performer among so-called sustainable and responsible funds, but it’s No. 1 among all large-cap growth stock funds over every long-term period measured by research firm Morningstar, from one year to 10 years.
“Fortune has been a very important part of our success,” says Dodson, whose top criterion for the fund is whether a company is a good place to work. Adds Moskowitz, who consults for Parnassus today and also invests in the fund: “It’s great confirmation of the idea that we originally had, that these companies are quite durable if they treat their people well.”
The idea of earning strong returns while investing only in businesses that demonstrate care for the proletariat and the planet has become a holy grail in recent years. Money managers who incorporate environmental, social, and corporate governance (ESG) factors in their methodology oversaw $8.1 trillion in the U.S. in 2016, up nearly 70% from 2014, representing a fifth of American assets under management, according to US SIF Foundation, a nonprofit that tracks the industry.
But over the past decade, no one has consistently applied ESG principles and also beaten the market—no one, that is, except Dodson. Recent studies by TIAA and the Morgan Stanley Institute for Sustainable Investing have shown that ESG funds perform no worse than the average fund or benchmark indexes, but no better either. Indeed, of 206 ESG mutual funds tracked by US SIF, only 11 outperformed the S&P 500 over the past 10 years—and the top four are Parnassus funds. The firm “has shown that an ESG manager can do really, really, exceedingly well,” says Jon Hale, who heads Morningstar’s sustainability research.
Parnassus is now the biggest pure ESG firm by assets. But even Dodson has trouble putting his finger on how good corporate behavior translates into higher returns. Each of its six funds shuns tobacco, alcohol, weapons, and gambling—so-called sin stocks—as well as nuclear energy companies. And the $3.2 billion Endeavor Fund, with its additional, stricter employee happiness criteria, has the best record of all. Dodson posits that elements that define a good workplace—from benefits like health insurance and childcare to cultural collegiality, advancement opportunities, and faith in management—are linked to meaningful qualities that drive up stock prices, such as talent retention (leading to lower turnover costs) and increased productivity. “If you take good care of your employees, if you treat them well, if you pay them fairly, they’re going to work harder,” Dodson says. “If you don’t, there are many ways that they can sabotage your business.”
Today half of the 26 companies owned by Endeavor once ranked on the 100 Best Companies list. Relatively few firms on the list are publicly traded—only 38 this year—and Dodson ventures beyond the list, with help from Moskowitz, to unearth others that meet the same standards but may not have applied for Fortune’s ranking. Through interviews with employees and executives, Dodson and his staff tease out such hard-to-quantify metrics as the level of respect workers receive and how well they recycle.
Lanky and animated, with a Clint Eastwood rasp, Dodson admits that his eclectic way of vetting companies can seem subjective and squishy. A onetime Foreign Service officer who served in Southeast Asia during the Vietnam War, the investor occasionally moonlights as a walking-tour guide for the San Francisco Museum and Historical Society. “He’s not a Wall Street guy,” says Moskowitz.
Banks, in part because of their small carbon footprints, tend to show up disproportionately in ESG funds. But Dodson was so disturbed by some institutions’ ugly cultural norms revealed in the wake of the 2008 financial crisis that he swore off those with major trading floors. “The London Whale, I think, cured me from J.P. Morgan (jpm),” Dodson says. Still, he got burned recently by the one big bank that weathered the crash unscathed. Wells Fargo (wfc) was one of Parnassus Endeavor’s top holdings when it was caught last year creating phony accounts for customers. But Dodson, who met with Wells Fargo management as the scandal raged, is hanging on; he says he’s encouraged by its high ratio of women in leadership and its charitable contributions.
Dodson identifies as a value investor, someone who buys only when shares look cheap. But the Best Companies list often points him to pricier stocks that he wouldn’t have considered otherwise. Dodson never gave a second look to Google (googl)—a technology stock that has historically traded at high valuations—until it debuted on the list at No. 1 in 2007. Within three months, he had bought the stock. After several visits to the Googleplex, Dodson was wowed by its lavish benefits, from free meals, massages, and dry cleaning to 18 months of paid maternity leave. As Silicon Valley companies compete more on office luxuries in their fierce war for talent, they have become prime candidates for Parnassus Endeavor, whose heavy helping of tech, including Best Companies veteran Autodesk (adsk) as well as Alphabet, has been a boon to performance in recent years. Dodson currently sees greater upside in the shares of semiconductor firms such as Qualcomm (qcom) and Intel (intc). Intel particularly impressed him with its commitment to equal opportunities for women and minorities, having already eliminated the gender wage gap internally.
One of Dodson’s favorite stocks might as well be in the Best Companies Hall of Fame: Whole Foods (wfm), which has made the list each of the 20 years it has been published. The health-conscious grocery store embodies fair-workplace ideals, sharing profits with employees and reining in executive pay so that it can’t go up too much without also increasing what the average worker makes. Whole Foods has struggled lately against new rivals, sending its stock price on a roller-coaster ride. That created an attractive opportunity for Dodson to buy cheap. With a P/E valuation in line with the S&P 500 and below its historical average, Dodson thinks Whole Foods stock has hit a “floor.” The company’s expanding loyalty program and increasingly competitive pricing, he says, will spur an acceleration in revenue growth that could push its stock price higher.
In the meantime, Dodson rests easy believing he’ll be taken care of as well as Whole Foods takes care of its employees. Describing Parnassus’s ethos, he says, “It’s a good way to have a successful business and to make money in the stock market.”
A version of this article appears in the March 15, 2017 issue of Fortune with the headline “When the Best Workplaces Are the Best Investments.”