Follow the money as Tiffany Kary shows you how once-illegal drugs like marijuana and psychedelics are becoming big business.
This week, guest writer Peyton Forte takes a look at the cannabis industry’s ongoing difficulties in winning over institutional investors. It’s an issue that will be coming up more frequently as the market grows and more states legalize marijuana use.
An abundance of caution
Even as the cannabis industry touts potential social benefits like freeing prisoners arrested for marijuana use in the past, firms focused on sustainable investing are largely steering clear of cannabis companies.
The cannabis industry has tried to make inroads with institutional investors by burnishing its image as an ethical and green investment.
But exchange-traded funds that target investments meeting environmental, social and governance standards have to consider pot’s precarious legal status, and its unknown health impacts as studies are ongoing into mental and physical effects of high-potency THC.
Advocates of cannabis tout its ability to relieve pain and say it’s safer than alcohol. Opponents argue more research is needed to assess any medicinal benefits of cannabis, and energy and water-intensive growing practices could make cultivating the plant an environmental threat.
The social case for legalization is also an active debate; some say the industry is working to undo the harm done to Black Americans who were disproportionately arrested for marijuana in the past by giving them licenses and other business advantages. Others claim the equity case depends on whether those businesses succeed.
Decriminalization at the federal level doesn’t appear likely soon: Bloomberg Intelligence puts the odds of this at just 30% before 2025.
Defining Sustainability
One key hurdle is determining exactly what constitutes a sustainable investment. Defining that concept — and who benefits from the investments — is up for debate.
Wall Street isn’t completely shying away from cannabis. EQM Indexes introduced its Global Cannabis Index in 2019. It includes companies such as Canopy Growth, Curaleaf Holdings and Tilray Brands. The firm is in the process of building an index to cope with more stringent ESG guidelines in the European market, according to co-founder Jane Edmondson.
“Issues such as water resources, electricity use, waste, pesticides and the social impact of cannabis use are issues these companies will have to address to pass ESG screens and be considered green investments,” Edmondson says.
Investment management firm Emerge’s ESG metrics screen out companies that derive 20% or more of their revenue from recreational cannabis and other vice-related stocks. The firm points to health questions; a recent US study found that daily cannabis users were 34% more likely to develop heart disease compared with those who never used the drug.
“We specifically exclude recreational cannabis, which has been proven to have harmful long-term health effects,” says Avipsha Mitra, vice president of product development and sustainability at Emerge.
To help investors address these concerns, ESG advisory firm Regennabis offers services to companies seeking insights into how the cannabis, hemp and psychedelics industries align with the United Nations’ sustainable development goals.
Regennabis Chief Executive Officer Patrick McCarton says cannabis companies should tout renewable energy used in cultivation, while also using new technology to reuse water.
“That’s our goal — to help every company across the board from seed to sale build their business around regenerative and sustainable practices,” he says.
Justin Ort, CEO of cannabis-focused venture capital firm Measure 8, says cannabis will become known as an “exit” drug that helps wean addicts off of opioids. He also touts its uses in pain management and improving sleep.
“There is a general commitment among cannabis companies to being good stewards and not just focusing on profits at the expense of society,” Ort says.
Bloomberg Intelligence analyst Athanasios Psarofagis says the debate over legal weed is one that ESG managers may want to stay away from, given several high-profile greenwashing scandals have sullied the industry’s virtuous image.
“It’s going to be a touchy subject, similar to the debate on alcohol distributors,” he says.
US Uncertainty
Pot’s uncertain US future, with no timeline for federal legalization, has whipsawed fund prices. AdvisorShares’s Pure US Cannabis ETF (ticker MSOS), the largest cannabis-themed ETF in the US, is down about 50% from early December after rallying on an end-of-year push by Senate lawmakers to attach a marijuana banking bill to a must-pass government funding package. The measure ultimately failed.
H/T: Bloomberg.com
