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The Ethical and ESG Issues Relating to Cannabis Investment

3 May 2019

As its legal status is shifting around the globe, with Canada the latest country to legalise its recreational use, there is growing interest in the newly-legitimate cannabis market. With FTSE Russell moving to include marijuana producers in the Industry Classification Benchmark (ICB) pharmaceuticals and biotechnology sector later this year, and several companies listing publicly in 2019, the cannabis market is certainly seeing growth. But it is still classed as a controlled substance by the UN, and there are potential legal issues in different jurisdictions. Still, projections for sales of recreational and medical marijuana range between $60-80 billion by 2030. So how do investors deal with this new area, without their investments going up in smoke?

Issues of Concern

As with other legal drugs like alcohol and tobacco, recreational use of cannabis may present ethical issues for investors simply due to the social impacts of potentially addictive recreational drug use. But there are other impacts that may also be of concern.

Environmental - an area that is perhaps less considered than social impacts is the environmental impact of cannabis. The plant is indigenous to Central and South East Asia, and requires warm and humid conditions for its cultivation. Therefore, where these conditions are not naturally present, such as in much of Canada, a large quantity of water, and energy for heating, are required for its successful production. There is little research available into the effects of over-extraction of water for the purposes of cannabis cultivation, but even less on the effects of excretions of the drug entering watercourses, if use is set to increase. As with any commercial crop, considerations relating to pesticide use, genetically-modified variants and waste generation and disposal need to be made.

Social - as recreational cannabis use is legalised in a jurisdiction, questions arise over how to deal with those individuals with prior cannabis-related convictions, or indeed those serving time in prison for them. Some jurisdictions, such as the city of San Francisco has simply deleted federal convictions from records; however in Canada the situation is slightly more complex. Drug offences are not recorded stating the substance in question; therefore more manual handling is required and individuals currently have to make an application to have their records amended. What's more, offences are being 'suspended' rather than expunged or deleted, meaning that they could be reinstated in future, or potentially disclosed by mistake.

Another issue for those with prior convictions is that in many cases, state or federal laws actually ban people from working in the newly legalised cannabis industry if they have a cannabis-related conviction. And there is racial inequality at play here, where research has shown that black and other minority people have disproportionally been arrested and convicted for cannabis-related crimes in the US and in Canada. Justin Trudeau, Prime Minister of Canada, admitted as much when he stated that the influence and power of his father (who was also Prime Minister of Canada) made his brother's cannabis-related charges disappear. Meanwhile, those who policed these communities are free to sit on the boards of cannabis production companies. There is a question of social justice here.

Governance - Cannabis products have several legal classifications and statuses across different jurisdictions. In the UK, cannabis was rescheduled as a substance that can be used as a medicine in November 2018. However despite this, patients hoping for access to this have complained of frustrating bureaucracy when it comes to getting a prescription. Meanwhile, as recreational cannabis is legalised in more jurisdictions, how do investors deal with investing in activities that may still be illegal in their own? In the UK, The Proceeds of Crime Act 2002 defines criminal conduct to include acts that would be illegal if conducted in the UK (even if legal where it occurs). Legal opinions are beginning to illustrate the potential for further complexity:

"The effect of that provision is that the activity of the Canadian business (for example) may be 'criminal conduct', and doing anything with (even just receiving or possessing) the proceeds of it may therefore amount to 'money laundering'. Importantly though, there are various other provisions of the Act that may prevent that offence applying, including a facility to apply to the National Crime Agency (NCA) for consent."

Until this is tested in the courts, a clear resolution is still somewhat up in the air.

To date there are a small but growing number of publicly listed companies that are involved in cannabis production or use. Interest in cannabis has come from the tobacco industry, unsurprisingly, since their traditional product is facing greater regulation, cannabis is seeing a loosening of regulation. The versatility of cannabis products has also seen interest from alcoholic beverage companies looking to use cannabis as an ingredient to expand the range of intoxicating drinks. Cannabis and its related recreational products, therefore, have similar ethical issues associated as these other 'sin' stocks.

As we've seen, cannabis is a complex product both legally and ethically, in terms of its impact on the environment, society and governance issues. It is a potentially exciting new area for investment, but the above issues should be considered by investors.

Lisa Whitaker - Senior Researcher


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