How Green is Your Pot?

On October 17^th, Canada became only the second country in the world (after Uruguay) to legalize cannabis for recreational use - although, of course, certain US states have moved towards legalization despite a prohibition at the Federal level. Several cannabis producers, notably Aurora, Canopy and Tilray, are now public companies with multi-billion dollar market capitalizations. Cannabis is clearly an emerging investment opportunity for institutional allocators (and, as it’s the first paragraph, we will make our one and only reference to the potential for “high” returns!)

However, how does legal cannabis production and usage integrate with investors as they implement their ESG programs? Just as responsible investors are divesting from tobacco products, will they jump on the cannabis opportunity or will they avoid this industry?

Like tobacco products, inhaling the smoke produced by the combustion of marijuana harms the health of users. Further, similar to alcohol, cannabis consumption increases the risk of accidents when driving under the influence: most Canadian provinces have implemented rules which regulate pot as if it were tobacco or alcohol. Ethical investors that have negative screens on companies involved in the sale and production of tobacco and alcohol may perceive pot stocks as a sin stock due to its public health impact.

However, marijuana is also used to improve the lives of people suffering from cancer, glaucoma and other conditions. Due to its low addictive and analgesic properties, some regions are also considering allowing marijuana to replace the prescription of opioids with medical cannabis. Medicinal marijuana may, therefore, match with Socially Responsible Investment criteria: funding the production of a substitute to highly addictive drugs that have caused an epidemic in North America.

More broadly, Canadian politicians supporting legalization have argued that legalization of cannabis has societal benefits. As one perspective, convictions for cannabis consumption may be argued to have unduly impacted lower income groups and visible minorities. For some investors, therefore, rectifying these biases may have a valuable “S” benefit within their ESG programs.

Equally, while it is at an early stage, the cannabis industry faces ESG challenges related to energy, pesticide, and water use. Plants must be cultivated indoors to control the temperature, lighting and humidity, which is extremely energy-intensive. Further, there are product safety and quality management concerns. Recent legal action has involved firms like Mettrum Ltd. and OrganiGram Inc. in relation to myclobutanil, a chemical that when combusted is believed to lead to serious health issues.

It is difficult to predict how responsible investors will approach the cannabis industry. Cannabis is, certainly, an intriguing example of where ESG criteria may lead to potentially contradictory assessments when considering investment opportunities. Perhaps the near term priority for ESG focused investors is the opportunity to actively engage with cannabis firms. Engagement and communication from investors can, in this emerging industry, add considerable value to shape future best practices.