Saint or Sinner: Asset Managers Divided Over Including Cannabis Stocks in ESGs
It is no longer a big secret that cannabis stocks represent a lucrative investment opportunity in what is certain to be a turbulent summer on the stock markets. But fund managers are tying themselves into ever tighter knots trying to work out exactly how these stocks should be classified.
Taking the traditional view of cannabis, it seems simple enough. Recreational cannabis products that can be consumed by eating or smoking are becoming legal in a growing number of states. When you scroll through the sort of products that can be bought online or in shops, cannabis looks like a classic sin stock that goes right next to those tobacco holdings in your portfolio.
However, look a little deeper, and you might think again. CBD products are the current darlings of the alternative healthcare world and are available in every natural food store and herbalist that you can think of. This has led some fund managers to argue that cannabis stocks can and should feature in ESG funds.
Before we dive into that particular quagmire, let’s remind ourselves what constitutes an ESG. The letters stand for Environmental, Social and Governance, and ESGs must only contain holdings that score high for sustainability, are responsibly managed, and can demonstrate good records when it comes to labor relations, pollution, and so on.
That definition might sound a little subjective, and therein lies the problem. Whether a particular stock meets the requirements of an ESG is entirely down to the asset manager. Each will have his own standards and interpretations, and nowhere is this more pronounced than in the question of cannabis stocks.
Banks Cannot Agree
The dilemma is brought into focus when you look at the ESGs offered by two of Canada’s biggest investment banks. Earlier this year, Bank of Montreal launched a Canada ESG Leaders fund that had three different cannabis companies in its 40-stock portfolio, Cronos (TSX:CRON) (NASDAQ:CRON), Aurora (TSX:ACB) (NYSE:ACB), and Canopy Growth (TSX:WEED) (NYSE:CGC).
Meanwhile, across the street at the Royal Bank of Canada, cannabis businesses are excluded from its Vision ESGs through an automated screening process. The difference here comes down to that matter of perception we mentioned earlier. RBC does not differentiate between recreational or medicinal cannabis and simply lumps them into the sin stocks category.
There is a growing wave of opinion that RBC is making the wrong call here. The CBD sector represents the largest proportion of the cannabis market, and most argue that its medicinal properties in treating conditions such as arthritis, pain, and anxiety make it a power for social good.
Conversely, some are of the opinion that regardless of the purpose to which it is put, the amount of water that is needed to grow cannabis plants will always mean these businesses struggle to meet the environmental requirements.
Given the nature of these funds, we should not expect consensus any time soon. This also means that those who wish to invest in ESGs and to take advantage of the growing cannabis market need to examine the different funds on offer and the way they are made up very closely.
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