How ethical are you?

It's a loaded question because ethics are a complex and personal issue.

When it comes to investing the issue adds another layer to an already complicated decision-making process.

For markets and in the financial community the focus has increasingly gone on the concept of Environmental Social Governance (ESG) reporting.


It is something that investors and boards could focus on with a bit more clarity precisely because the term ethical is so subjective, says Pie Funds chief executive Mike Taylor.

It is a system which meant companies could be rated on environmental initiative on the social issues such including payment and conditions of staff and governance issues like the diversity of the board.

Traditionally there is a trade-off to be made between returns and ethical choices, Taylor says.

But as more and more companies - partly due to consumer and shareholder pressure - have moved to an ESG model the returns have improved.

"So fast forward to 2018 and the ESG index is actually outperforming the broader market, Taylor says. "The main reason for that is some of the big household names are adopting ESG policies. For example Microsoft has been carbon neutral since 2012."

There is also a growing weight of capital flowing into ESG stocks and funds.

Political moves have seen state pension funds moving out of tobacco and munitions stocks and increasingly into low carbon stocks.

"That is positive for stocks with high ESG ratings and that are carbon neutral because if there is less of them around then valuations go up because there is more money chasing it."


Ultimately though ethical investing does require some deep research into companies and sectors, he says.

Mining stocks are a case in point, while there was a need to move away from fossil fuels like oil and coal, the mining of elements like lithium was going to be crucial for the shift to a lower carbon world.

"It might be acceptable to have a copper mine somewhere in a desert in Australia but was it appropriate to invest in a company mining in a national park in New Zealand. They are two different prospects."

Taylor says he has noticed that the investment trend increasingly being driven by millennials who were much more focused on doing the right for the planet and the environment than older generations.

"The younger generation are definitely driving this movement."

- The Market Watch video show produced in association with Pie Funds