Pot problem brewing for ESG funds

Pot problem brewing for ESG funds

Pot problem brewing for ESG funds

When it comes to socially responsible investment, screens usually make for a straightforward strategy. Decisions to exclude so-called “sin” products like alcohol, pornography, and firearms, for example, are unlikely to elicit any questions from those investing in ESG funds.

But when it comes to cannabis, the US$8-trillion US responsible-investing industry faces a growing ethical dilemma, according to Reuters. While the substance can be used as a treatment for epilepsy, migraines, and other debilitating conditions, the growing acceptance of recreational pot use across North American could open the door to less positive societal impacts.

“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,” Jennifer Sireklove, director of responsible investing at Parametric Portfolio Associates.

Investors are likely to diverge in terms of how much they reject cannabis. Faith-based investors like Christian college endowments, for example, are more likely to exercise zero tolerance. Secular ESG investors, meanwhile, may accept companies where weed generates just a small portion of revenues.

Both Parnassus Investments and Calvert Funds, the two largest ESG-only firms, said they have no current positions in cannabis companies. Index providers like MSCI have not kicked out cannabis firms from their broad lists of ESG-compliant companies — though that could change if a major tobacco firm were to acquire a pot company, or wade into weed itself.

For institutional investors that pay for index providers to create a customized list of excluded companies, avoiding pot altogether is an option. “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,” Joseph Williams, vice president of MSCI ESG Research, told Reuters.

As more responsible funds become conflicted, one fund that invests in companies avoided by ESG funds has an opportunity to place a big bet.

“Cannabis puts a growth potential on alcohol and tobacco companies that hasn’t existed in a long time for them,” said Jordan Waldrep, manager of the US$164-million USA Mutual Vice Fund. Rather than focusing on pure growers, he’s looking at companies that are establishing their own lineups of brands.

“The recreational market will be all about brands,” he said. “The opportunity for growth is just too strong.”


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