investing responsibly in canadian cannabis - placements nei · 2018-09-24 · nei position paper...

NEI Position Paper

Investing Responsibly inCanadian Cannabis

NEI Position PaperInvesting 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:

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.

Where cannabis fits under our evaluation process by comparing it to products with some similarities, including tobacco, alcohol and prescription medicine. The state of the regulatory and market environments.The environmental, social and governance (ESG) risks that are most material to cannabis companies.

1.

2.3.


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 medicine

Medical cannabis

Recreational cannabis

- High - Medium to High - Medium to Low - Low

How should we view cannabis?

Regulated

Production

Marketing

Sales & Distribution

Impact

Direct No safe level of exposure

Safe level of exposure

Safe level of exposure as

prescribed by a doctor

Safe level of exposure as


Safe level of exposure

IndirectPassive smoking has no safe level

of exposure

Driving or operating heavy machinery while

under the influence

None, assuming exposure as


None, assuming exposure as


Driving or operating heavy machinery while

under the influence and passive smoke

Potential for Addiction

Potential to misuse

Engagement

Potential for engagement

Purpose Recreation Recreation Health Health Recreation

Legal Yes Yes Yes Yes Exp. Q3, 2018

Prescription Required No No Yes Yes No


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.


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 levelof 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.


Key ESG Risks of investing in Medical and Recreational Cannabis

Research Manufacture Distribution Marketing & Sales

Post Marketing

Safety of clinical trialparticipants

Clinical trial datatransparency

Responsibleanimaltesting

Innovation

Employeehealth &safety

Quality management

Drug & sideeffect safety

Resource efficiency& wastemanagement

Employeehealth & safety

Compliance

Quality management

Packaging& product safety

Resource efficiency

Ethicalmarketing

Fair pricing

Bribery andcorruption

Salesincentives

Investigationand correctiveaction (e.g. recalls)

Counterfeitdrugs

Access tomedicine

Adverse drugreaction monitoring

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•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

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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 thesocial licence to operate. We agree and, as such, identify responsible marketing and postmarketing co-vigilance policies and practices as another key issue for cannabis producers.

Governance: As stated earlier, cannabis companies have experienced unprecedented growth overthe last year and, as a result, have found it challenging to scale up their corporate governancecontrols to keep pace with that growth. As the industry will be heavily scrutinized by regulatorsand may be prone to criticism from the public, cannabis companies need independent andqualified board oversight to provide accountability to stakeholders, including investors. Propercorporate governance controls can assist in bridging the credibility gap in this new industry.


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, TelecommunicationsTishya 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.


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 Mail4 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.pdf7 https://www.ncbi.nlm.nih.gov/pubmed/198372558 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.pdf10 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-sales17 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-dispensaries19 http://healthycanadians.gc.ca/recall-alert-rappel-avis/hc-sc/2017/61750r-eng.php20 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.html

Sources and Footnotes:

investing responsibly in canadian cannabis - placements nei · 2018-09-24 · nei position paper...

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