Is cannabis ESG positive or negative?

We examine whether the new industry is an alternative to opioids, or a sin stock

Andrew Willis 26 September, 2019 | 8:28AM
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This article is part of Morningstar Canada's ESG Special Report week

Andrew Willis [Light Blue Shirt]: After marijuana was legalized last October, it’s become one of the most interesting sectors in Canada – and has room to grow. Our analysts have found that by 2030, the Canadian cannabis market is likely to be 9 times larger than it is today. We also forecast that the Canadian recreational market will dwarf the medicinal market, becoming nearly 15 times larger by 2030. What does this mean from an ESG perspective?

[Red Shirt]: It means that Cannabis is ESG negative.

[Blue Shirt]: But it can also be ESG positive.

[Light Blue Shirt]: How can it be both? Let’s look at both sides of the debate.

Graphic Plate: Environment

[Red Shirt]:Cannabis has environmental risks – indoor cultivation is energy-intensive, leading to a large carbon footprint. Plus, the sector uses pesticides, and plastic packaging.

[Blue Shirt]But. As responsible investing firm NEI points out, Canadian cannabis companies have acknowledged these risks, and have already undertaken certain environmental disclosures. As NEI’s Rosa van den Beemt says, the good news is the industry is keenly aware of its still fragile social license to operate and is tackling CSR matters early and collaboratively.

Graphic Plate: Social

[Red Shirt]:Recreational cannabis is considered a ‘sin stock’ – like tobacco or alcohol. It is addictive, though to a lesser extent, and just like with alcohol, can cause impaired driving.

[Light Blue Shirt]:On the other hand, medical cannabis can be used to treat several conditions, including chronic pain. It could be an alternative to highly addictive opioids – that’s ESG positive.

Graphic Plate: Governance

[Red Shirt]:Let’s not forget governance concerns. Canadian cannabis companies lag on issues like independent board oversight, shareholder rights and diversity. And Michelle de Cordova at ESG Global Advisors points out that since the industry is so new, individual companies can run the risk of demolishing the reputation of the industry as a whole.

[Light Blue Shirt]:True, and Rosa points out that the cannabis industry started out as somewhat of a boy’s club. But again, several companies have already started to acknowledge and address gender diversity issues at the board level, which is an ESG positive move.

[Blue Shirt]: The fact is that cannabis has ESG risks – but it also is moving to minimize them. Whether you think it is responsible or not comes down to your individual convictions. But there is a compelling case on both sides.

[Light Blue Shirt]: For Morningstar, I’m Andrew Willis.

[Red Shirt]: No, I'm Andrew Willis.

[Light Blue Shirt]: I’m Andrew Willis.

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About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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