How thoroughly do investment managers screen the companies in their environmental, social and governance funds? Not very, if the example of videogame company Activision Blizzard is typical.

Activision—maker of “Call of Duty,” “World of Warcraft” and “Candy Crush Saga”—has drawn numerous complaints from employees and regulators of sexual misconduct, retaliation and discrimination, yet it’s included in many prominent ESG funds. In July the company was sued by the California Department of Fair Employment and Housing. Among other...

Illustration: Chad Crowe

How thoroughly do investment managers screen the companies in their environmental, social and governance funds? Not very, if the example of videogame company Activision Blizzard is typical.

Activision—maker of “Call of Duty,” “World of Warcraft” and “Candy Crush Saga”—has drawn numerous complaints from employees and regulators of sexual misconduct, retaliation and discrimination, yet it’s included in many prominent ESG funds. In July the company was sued by the California Department of Fair Employment and Housing. Among other things, the state alleged “women were subjected to constant sexual harassment, including groping, comments, and advances,” and “the company’s executives and human resources personnel knew of the harassment and failed to take reasonable steps to prevent the unlawful conduct, and instead retaliated against women who complained.” One employee committed suicide after male co-workers allegedly passed around a picture of her genitals at a holiday party. Activision says the lawsuit is “meritless and irresponsible.”

The Securities and Exchange Commission has also begun investigating how the company handled these complaints and whether it properly disclosed them. In September, the Equal Employment Opportunity Commission made public a complaint that employees endured “sexual harassment that was severe or pervasive to alter the conditions of employment.”

The Journal reported last week that Activision CEO Bobby Kotick didn’t inform the company’s board about complaints of sexual misconduct, including a female employee’s rape accusation against a male supervisor. Its stock has plunged by a third since July.

These controversies suggest significant problems with Activision management of human capital and board oversight, which should be paramount to “social” and “governance” investing concerns. Yet the company is included in BlackRock, Vanguard and Fidelity ESG and sustainability funds.

The asset managers at these companies don’t explain in any detail how they review companies in their ESG funds. When asked about the apparent Activision contradiction, representatives from each of the three said their funds track an index established by and licensed from another firm, either MSCI or FTSE Russell. MSCI says Activision will be deleted from its ESG index as of Nov. 30. FTSE Russell said it was unable to respond to inquiries before deadline.

BlackRock’s fund brief says that it screens companies for their involvement in five businesses: controversial weapons of war, civilian firearms, tobacco, thermal coal and oil sands. It also says it “screens out companies with very severe E, S or G controversies.” In BlackRock’s eyes, are Activision’s controversies less problematic than involvement with fossil fuels or guns?

Vanguard also claims its ESG fund “specifically excludes stocks of certain companies in the following industries: adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power,” “certain companies that have violations of labor rights, human rights, anti-corruption and environmental standards as defined by the UN Global Compact principles” and “companies that do not meet certain diversity criteria.”

To be sure, Activision talks a great ESG game. In its 2020 ESG report, it explained that it is “working to create the most diverse games in the world by creating innovative tools, training, and practices to ensure our players see themselves reflected in our games, including through characters of color, characters from the LGBTQ+ community, characters of differing abilities, and non-binary characters.” It also says that it stands “with Black Americans and with all those fighting against systemic inequality and violence.” As for the environment, it is “reducing packaging waste by 50% over the next five years and bringing our greenhouse gas emissions to net zero by 2050.”

None of these ESG boasts are material to Activision’s financial performance and risks. How Activision’s board oversees its management and handles sexual misconduct, however, is. Instead of making these disclosures to investors, Activision boasts that 20% of its directors are women and 20% are underrepresented minorities. It also boasts that it has a 100% rating on the Human Rights Campaign’s 2020 Corporate Equality Index and was named by the liberal outfit as one of the “Best Places to Work for LGBTQ Equality.”

Asset managers claim that board diversity improves governance and corporate culture. Nasdaq recently mandated that companies listing shares on its exchange (including Activision) have at least two “diverse” board members or disclose why they don’t. The exchange claimed that board diversity promotes investor protection by enhancing a company’s financial reporting, internal controls, public disclosures and management oversight. Yet board diversity objectives—whether mandated or self-imposed—may have the opposite effect if they cause companies to appoint individuals to boards who are not qualified or engaged enough to supervise management.

It’s hard to argue that Activision has operated in a socially responsible or sustainable manner. But as long as a company talks woke and isn’t in an industry progressives have labelled taboo, ESG investment managers don’t seem to care.

Ms. Finley is a member of the Journal’s editorial board.