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 The $8 trillion U.S. socially responsible investment industry is
grappling with that question as more states approve the recreational
use of cannabis, pushing consumption closer to "sin" stocks like
alcohol and tobacco that ethically focused investors avoid.
Ten U.S. states and the District of Columbia have legalized the
recreational use of marijuana for adults over the age of 21, and New
Jersey lawmakers on Monday proposed legalizing it.
No U.S. public companies are directly selling marijuana, but
Canadian marijuana producers like Tilray Inc and Canopy Growth Corp
are on U.S. exchanges. In mid-October Canada legalized recreational
cannabis and that is leading fund managers and their clients to
decide if they feel comfortable investing in marijuana if it is not
for medicinal use.
Marijuana is used to treat a range of conditions from epilepsy to
migraines.
"There's a lot of mixed feelings about cannabis, whereas with
tobacco there's a lot of consensus that tobacco is not safe in any
amount," said Jennifer Sireklove, director of responsible investing
at Parametric Portfolio Associates, which oversees $220 billion in
assets under management.
Faith-based investors, including some Christian college endowments,
are more likely to eschew cannabis completely, while other socially
focused clients avoid companies that produce marijuana but will
tolerate companies that may sell it as part of their larger
business, she said.
"If there's a standardized product you can find at a corner store,
you may not want to eliminate big parts of the investment universe
when cannabis is a small part of a company's revenues," she said.
Funds that do not pass ESG (environmental, social and corporate
governance) screens like those by index providers such as MSCI Inc
will have a narrower list of potential investors, potentially
leaving their stock trading at lower price-to-earnings multiples.
Tilray, for instance, has already been a target of investors betting
its stock price will fall because of its high valuation.
INDEX INVESTING
The question of cannabis underscores the wide range of investment
philosophies in the rapidly growing ESG sector. While nearly all ESG
investors avoid industries that could negatively impact society like
weapons, gambling, pornography and tobacco, some will invest in
companies that sell alcohol if it is a small portion of their
overall businesses.
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Neither Parnassus Investments nor Calvert Funds, the two largest ESG-only
firms, have current positions in cannabis companies, each firm said.
Calvert is a subsidiary of Eaton Vance Corp.
Yet firms such as MSCI, which maintains screened lists of companies
that pass certain ESG criteria, say they currently include cannabis
companies in their broad lists of ESG-compliant companies. That
could change, however, if a major tobacco firm such as Altria Group
Inc or Philip Morris International Inc were to acquire a cannabis
company such as Tilray or go into the marijuana market itself.
Institutional investors that pay to create their own proprietary
lists of excluded companies may still opt to avoid cannabis, said
Joseph Williams, vice president of MSCI ESG Research.
"Some clients take a zero tolerance with cannabis regardless of the
use case, while others are more nuanced and only want to restrict
companies that are focused on the recreational use market," he said
in a recent interview.
As ESG investors focus on the question of marijuana's social impact,
Jordan Waldrep, fund manager of the $164 million USA Mutual Vice
Fund - which specifically invests in the companies that ESG funds
avoid - is making a big bet on the sector.
"Cannabis puts a growth potential on alcohol and tobacco companies
that hasn't existed in a long time for them," he said.
Among cannabis companies themselves, he is focusing on companies
such as Canopy Growth that have started to establish their own
brands, rather than betting on pure growers, he said. Canopy's brand
lineup, for instance, ranges from hipster-lifestyle division Tweed
to its high-end DNA Genetics, which focuses on award-winning
strains.
"The recreational market will be all about brands," Waldrep said.
"The opportunity for growth is just too strong."
(Reporting by David Randall in New York; Editing by Jennifer Ablan
and Matthew Lewis)
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