Investing Responsibly in Canadian Cannabis - NEI Position Paper - NEI Investments
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Investing Responsibly in
Canadian Cannabis
NEI Position Paper
NEI Position Paper
Investing Responsibly in Canadian Cannabis
On June 20, 2018, Bill C-45 – The Cannabis Act – was passed,1 with the expectation that Canadians will be
able to legally consume recreational cannabis without criminal penalties by October 17, 2018. Canadian
cannabis stocks surged on the news, with Canopy Growth gaining almost 6% in one day. Year to date,2
Aurora Cannabis Inc. and Canopy Growth Corp. have been the second- and fourth-most active stocks,
respectively, on the TSX.3 Over the same period, stock prices for both companies have been volatile —
Canopy’s price has ranged from as high as $47.76 to as low as $24.11.
All this suggests that investors should exercise caution before jumping onto this bandwagon. But beyond
concerns about volatility and returns, should responsible investors climb aboard?
NEI’s ESG Services Team has developed a position on cannabis by examining:
1. Where cannabis fits under our evaluation process by comparing it to products with
some similarities, including tobacco, alcohol and prescription medicine.
2. The state of the regulatory and market environments.
3. The environmental, social and governance (ESG) risks that are most material to
cannabis companies.
As responsible investors, we seek to generate sustainable value for shareholders and other company
stakeholders, as well as for society as a whole. As such, we need to determine whether the cannabis
industry has the potential to create sustainable value, which ESG risks are inherent to the industry and
whether cannabis companies are adequately positioned to be responsible stewards of their products and
services.
Exclusionary Screening
While we do not exclude most so-called “sin-stocks,” we exclude companies that provide certain products
or services based on science-based evidence of harm, violation of international law or inconsistency with
widely accepted societal norms. Tobacco is such an industry. Due to the product’s harmful nature and
lack of any broader societal benefits we don’t believe it can bring sustainable value to our funds in the
long term; and engagement with tobacco companies would be futile, as the only acceptable outcome
would be to cease operating their primary business.
NEI Position Paper
Investing Responsibly in Canadian Cannabis
How should we view cannabis?
In Table 1, based on available information, we compare direct and indirect health impacts, addictiveness
and the potential for misuse of tobacco, alcohol and medical and recreational cannabis. We also compare
the levels of regulation and the potential to engage each industry.
Table 1: Comparing Medical and Recreational Cannabis with Tobacco, Alcohol and Prescription Medicine
Tobacco Alcohol Prescription Medical Recreational
medicine cannabis cannabis
Purpose Recreation Recreation Health Health Recreation
Legal Yes Yes Yes Yes Exp. Q3, 2018
Prescription No No Yes Yes No
Required
Impact
Safe level of Safe level of
No safe level Safe level exposure as exposure as Safe level
Direct
of exposure of exposure prescribed by prescribed by of exposure
a doctor a doctor
Driving or
Driving or
None, assuming None, assuming operating heavy
Passive smoking operating heavy
exposure as exposure as machinery while
Indirect has no safe level machinery while
prescribed by prescribed by under the
of exposure under the
a doctor a doctor influence and
influence
passive smoke
Potential for
Addiction
Potential to
misuse
Regulated
Production
Marketing
Sales &
Distribution
Engagement
Potential for
engagement
- High - Medium to High - Medium to Low - Low
NEI Position Paper
Investing Responsibly in Canadian Cannabis
When we examine the health implications of the compared substances, we note that tobacco has
adverse impacts on health, has no health-enhancing qualities and has no safe level of exposure. In
contrast, studies show that cannabis can have a therapeutic effect for a range of conditions, including
chronic pain.4 However, studies comparing cannabis and tobacco smoke indicate that the former can
contain some of the same carcinogenic chemicals found in tobacco smoke.5 The Dutch Office of Medical
Cannabis states that inhaling any type of smoke is inherently unhealthy and damaging to the lungs,
and recommends inhaling cannabis using a reliable vaporiser.6 To date, no concrete evidence has been
found linking long-term, heavy cannabis use to cancer, but studies show that, like alcohol, heavy use of
cannabis during adolescence can have adverse effects on mental health and psychosocial development.7
Misuse of certain prescribed medicines can be fatal (through overdose or drug interactions) or lead
to addiction.8 Medical cannabis is already consumed as a prescription medicine or as an ingredient in
prescription medicine, and medical cannabis producers have to adhere to regulations set by Health
Canada and the Food and Drug Administration (FDA) for monitoring and testing. There is no evidence
that medical cannabis used in high dosages can lead to overdose death.
The biggest indirect health impact from cannabis consumption is impaired driving. Similar to alcohol,
cannabis can slow reaction times, lower the ability to pay attention and affect coordination. A Columbia
University study9 found that the chance of a fatal traffic incident increases up to 14 times when under
the influence of alcohol, compared to up to two times when under the influence of cannabis. When
alcohol and cannabis are combined those rates increase significantly.NEI Position Paper
Investing Responsibly in Canadian Cannabis
Is cannabis addictive? Long-term regular use of cannabis can be. It is estimated that 9% of cannabis
users become dependent,10 compared to 15% of alcohol users, up to 26% of prescription opioid users11
and 32% of tobacco users.12
Our analysis shows that the profiles of recreational and medical cannabis share the most similarities
with alcohol and prescription medicine in terms of risks, health-enhancing opportunities and the level
of regulation required to ensure safe use.
Regulatory & Market Environment
As of January 2018, there were 88 licensed producers of cannabis for medical purposes in Canada.13
Upon coming into force, The Cannabis Act will allow adults (18 years and older) to purchase, possess
and share up to 30 grams of legal recreational cannabis.14 The sale and distribution of cannabis
products is to be provincially regulated. In Ontario, Quebec, Manitoba, New Brunswick, Nova Scotia,
PEI and Newfoundland the sale and distribution will be conducted through the current provincial liquor
authority15, while BC and Alberta will allow private operators, but retailers would be required to purchase
their supply from the government’s wholesale distribution system.16 It is important to note that the
patchwork of legal frameworks in the U.S. and other countries suggests that it is crucial for cannabis
companies to implement strict governance structures (see below) to ensure that their products do not
become part of the illicit drug trade in other jurisdictions.
At this stage, the market is relatively small but growing rapidly. The growth strategy of many companies
seems to rely on mergers and acquisitions to gain size and operational assets. Certain companies —
including Canopy Growth — have created separate subsidiaries for recreational and medical cannabis.
The beverage sector has also signalled interest in recreational cannabis. For example, Constellation
Brands acquired a stake in Canopy Growth, aiming to diversify into cannabis-infused non-alcoholic
drinks,17 and Second Cup has partnered with National Access Cannabis (NAC)18 to apply jointly for
licences for Second Cup stores in Western Canada, where cannabis-based products are expected to be
distributed by private operators. If it receives government approval, Second Cup plans to convert some
of its coffee shops into cannabis cafes and dispensaries.NEI Position Paper
Investing Responsibly in Canadian Cannabis
Key ESG Risks of investing in Medical and Recreational Cannabis
Marketing Post
Research Manufacture Distribution Marketing
& Sales
• Safety of • Quality • Quality • Ethical • Adverse drug
clinical trial management management marketing reaction
participants monitoring
• Drug & side • Packaging • Fair
• Clinical & product • Investigation
effect safety pricing
trial data safety and corrective
transparency action
• Resource • Resource • Access to (e.g. recalls)
• Responsible efficiency efficiency medicine
animal & waste • Counterfeit
testing management • Bribery and drugs
corruption
• Employee
• Innovation
health & • Sales
safety incentives
• Employee
health & • Compliance
safetyNEI Position Paper
Investing Responsibly in Canadian Cannabis
Material ESG risks that cannabis companies should prioritize
Environmental: Growing cannabis requires optimal conditions of temperature, humidity and
light intensity; hence the bulk of cannabis is grown indoors (without natural sunlight) or in
greenhouses. Both methods are extremely energy intensive, resulting in potentially large carbon
footprints; and water intensive, resulting in environmental and social risk from wastewater
discharge and drawing excessive groundwater in water scarce regions. Most cannabis companies
that acknowledge ESG risk in their MD&A disclosure focus on environmental and climate change
risks, which we view positively.
Social: Quality control and product safety are the most significant social risks for cannabis
producers. Cannabis has to meet certain quality standards — tested and monitored by Health
Canada and the FDA — and must not contain pesticides, heavy metals, fungi or bacteria.
Product safety has been under greater public scrutiny since medical cannabis provider
Organigram (recently acquired by Canopy Growth) had to recall some of its products because of
contamination with a banned pesticide.19 The company faces several class-action lawsuits as a
result, after patients reported suffering from severe nausea after daily use of the contaminated
product.20
The nature of the product presents a second significant social risk. The Canadian Medical
Association has stressed the need for access to substance abuse and mental health services
to be expanded.21 The federal government has committed $62.5 million to cannabis education
programs for youth.22 In addition to federal and provincial contributions, cannabis producers will
likely be required to contribute to education and addiction treatment programs, in the way that
producers of alcoholic beverages participate in and spearhead programs for alcohol addiction
and impaired driving education.
Thirdly, cannabis companies state that a positive public perception is crucial to achieving the
social licence to operate. We agree and, as such, identify responsible marketing and post
marketing co-vigilance policies and practices as another key issue for cannabis producers.
Governance: As stated earlier, cannabis companies have experienced unprecedented growth over
the last year and, as a result, have found it challenging to scale up their corporate governance
controls to keep pace with that growth. As the industry will be heavily scrutinized by regulators
and may be prone to criticism from the public, cannabis companies need independent and
qualified board oversight to provide accountability to stakeholders, including investors. Proper
corporate governance controls can assist in bridging the credibility gap in this new industry.NEI Position Paper
Investing Responsibly in Canadian Cannabis
Conclusion
What does this mean for Responsible Investors? Based on our analysis, we believe that manufacturers of
both medical and recreational cannabis have the potential to be responsible stewards of their products,
provided they implement risk management systems that ensure minimal individual, environmental and
societal harm and maximum safety in a market where they have the social and regulatory licence to
operate.
For our funds that incorporate ESG evaluation, rather than screening out cannabis stocks we will assess
cannabis-related companies based on their capacity and commitments to satisfy our expectations for
managing the previously described material ESG risks. We will also assess each company’s willingness to
engage in dialogue about enhancing its risk management processes and disclosure.
Publication authored by ESG Services Department:
Rosa van den Beemt - Senior ESG Analyst, Healthcare, Telecommunications
Tishya Ballaney - ESG Analyst, Consumer Discretionary, Consumer Staples
For more information on Responsible Investing, please visit:
www.neiinvestments.com
This document is provided for informational purposes only and it is not intended to provide specific advice including,
without limitation, investment, financial, tax or similar matters. NEI Investments endeavors to ensure that the contents
have been compiled or derived from sources that we believe are reliable and contain information that is accurate and
complete. However, NEI Investments makes no representation or warranty, express or implied, in respect thereof, takes
no responsibility for any errors and omissions contained herein.
Views expressed regarding a particular company, security, industry or market sector should not be considered an
indication of trading intent of any funds managed by NEI Investments.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund
investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change
frequently and past performance may not be repeated. Northwest Funds, Ethical Funds and NEI Investments are
registered trademarks of Northwest & Ethical Investments L.P. Northwest & Ethical Investments Inc., is a wholly-owned
subsidiary of Aviso Wealth Inc. (“Aviso”). Aviso is a wholly-owned subsidiary of Aviso Wealth Limited Partnership (“Aviso
Wealth LP”), which in turn is owned 50% by Desjardins Financial Holdings Inc. (“Desjardins”) and 50% by a limited
partnership owned by the five Provincial Credit Union Centrals (the “Centrals”) and the CUMIS Group Limited.NEI Position Paper
Investing Responsibly in Canadian Cannabis
Sources and Footnotes:
1 https://www.canada.ca/en/health-canada/news/2018/06/bill-c-45-the-cannabis-act-passed-in-senate.html
2 As of June 21, 2018.
3 Most Active Stocks of 2018-Globe and Mail
4 https://www.canada.ca/content/dam/hc-sc/migration/hc-sc/dhp-mps/alt_formats/pdf/marihuana/med/infoprof-eng.pdf
5 https://www.canada.ca/content/dam/hc-sc/migration/hc-sc/dhp-mps/alt_formats/pdf/marihuana/med/infoprof-eng.pdf
6 https://www.cannabisbureau.nl/Media/Default/PDF/5089-A5-BMC-Pat-ENG-web_35842.pdf
7 https://www.ncbi.nlm.nih.gov/pubmed/19837255
8 http://www.ccdus.ca/Resource%20Library/CCSA-Canadian-Drug-Summary-Prescription-Opioids-2017-en.pdf
9 https://www.cuinjuryresearch.org/wp-content/uploads/2013/10/Li-et-al-AAP-2013.pdf
10 https://www.canada.ca/en/services/health/campaigns/marijuana-cannabis/health-effects.html#a2
11 https://onlinelibrary.wiley.com/doi/full/10.1111/j.1360-0443.2010.03052.x
12 https://www.scientificamerican.com/article/the-truth-about-pot/
13 https://www.canada.ca/en/health-canada/services/drugs-health-products/medical-use-marijuana/licensed-producers/authorized-licensed-producers-
medical-purposes.html
14 https://www.canada.ca/en/services/health/campaigns/introduction-cannabis-act-questions-answers.html#a3
15 In July, 2018 reports emerged that the Ontario government may allow private retailers to sell cannabis products; however the government has not
officially announced this change.
16 http://business.financialpost.com/commodities/a-brief-look-at-provincial-approaches-to-recreational-marijuana-sales
17 https://www.reuters.com/article/canopy-growth-stake-constellation/constellation-brands-takes-stake-in-marijuana-maker-canopy-growth-idUSL4N1N545B
18 http://business.financialpost.com/business/second-cup-joins-marijuana-rush-with-plan-to-convert-some-coffee-shops-to-dispensaries
19 http://healthycanadians.gc.ca/recall-alert-rappel-avis/hc-sc/2017/61750r-eng.php
20 https://www.theglobeandmail.com/news/national/mettrum-organigram-medical-marijuana-proposed-class-action-lawsuits/article34216937/
21 https://globalnews.ca/news/3124025/marijuana-legalization-mental-health-canada/
22 https://www.thestar.com/opinion/contributors/2018/04/16/cannabis-debate-not-enough-is-being-planned-to-protect-youth-from-effects-of-marijuana.htmlYou can also read
