Why the Cannabis Industry Should Adopt ESG Investing

Suppose your company is in the cannabis industry and is considering going public or formally looking to attract institutional and retail investors. In that case, you should consider a marketing approach based on social or ESG investing.

This is because socially responsible (SRI) or ESG investing is a distinct and proven sector in the investing world that attracts individual and institutional investors worldwide who want their investment to generate positive social change. In return, ESG corporations that meet strict financial criteria and have a demonstrated commitment to the community make a more substantial case about how their economic performance and business models create a benefit for the greater community.

To gain the attention of major investors, ESG companies must have written guidelines and comply with various environmental, social, and governance (ESG) requirements. They also need evidence that they have achieved these social goals. When this is demonstrated, SRI corporations have a better story to tell investors than companies presenting financial data.

ESG investing today is a $21 trillion sector of the global investment world. This is a 61% increase from 2012, when SRI invested $21 trillion. This impressive growth rate has grown 30% faster than professionally managed, non-SRI assets, according to a very inclusive and detailed white paper produced by the Global Sustainable Investment Review.

In the U.S., mutual fund companies, such as Calvert, Domini, Walden Equity, Parnassus, and Appleseed, have dedicated their businesses to investing in companies that combine exceptional financial performance with producing social goods, and they use this later activity when making their decisions to include companies in their socially responsible portfolios.

SRI or ESG companies are also included in SRI Exchange Traded Funds.

While SRI used to exist in the shadows of companies that were concerned about the environment, social justice, labor conditions, and racism as economic externalities, recent studies have shown that SRI companies outperform the market while also making good on delivering social change. A study by Allianz, a German insurance company, found that between 2006 and 2010, investors could have added 1.6% a year to their investment returns by allocating to portfolios that invest in companies with above-average ESG ratings.

The Basics of ESG Investing

SRI is the investment process in which “investors weigh the social and financial returns they expect from an investment in different ways. They will often accept lower financial returns to generate greater social impact.”

Another more upbeat definition is: “SRI is an alternative investment philosophy and strategy that seeks to encourage responsible behaviors, including those supporting positive environmental practices, human rights, religious views or what is perceived to be moral activities (or to avoid what is perceived to be amoral by the SRI society, such as alcohol, tobacco, gambling, firearms, military relations, or pornography).”

The first fund to adopt a socially responsible investment policy was the Jane Addams Hull House in Chicago in the early 1980s. This alternative investment philosophy gained traction during the anti-apartheid movement in the late 1970s. At about that time, Leon created a set of guidelines in 1977.

Sullivan, a Baptist minister, civil rights activist, and board member of General Motors, became a leading proponent against the apartheid policies in PW Botha’s South Africa. Sullivan reasoned that GM’s pension money, then ranked as one of the nation’s most significant pension funds in the U.S., would have political and economic clout if it took a social stand on racial policies, attracting worldwide attention.

In 1999, his Sullivan Principles were formalized to include racial non-segregation on the factory floor and in company eating and washing facilities; fair employment practices; equal pay for equal work; training for blacks and other nonwhites so they could advance to better jobs; promotion of more blacks and other nonwhites to supervisory positions, and improved housing, schooling, recreation, and health facilities for workers, according to the New York Times.

To Sullivan’s credit, his timing was excellent. He capitalized on the combination of assigning a new form of public political activism with investing, which became an explosive combination. This set the stage for a much broader social investing movement that, over the past approximately 33 years, has embraced such social issues as equal wages for women, environmentalism, anti-slave working environments, workplace safety, anti-child labor policies, anti-smoking, anti-defense weapons, and the humane treatment of animals.

Take the Cannabis Sector Seriously

The number of companies in the cannabis industry is small, but to its credit, it already has established a price-weighted index, the MJX Marijuana Index, comprised of about 44 companies, most of them very small. Realistically, these companies cannot be included in any institutional portfolio until they have about five years of financials.

However, it is not too early to start positioning some of these firms as companies that can be included in an SRI portfolio due to their beneficial impact on society. It would be up to each firm to position itself as a transformational force.

Reasons Why the Cannabis Industry Should Adopt ESG

So, now it is time to advance ESG investing in the cannabis industry as an ESG investing participant for a few reasons:

–It will work to reform the harsh sentencing of people who trafficked and sold   marijuana and now face exceptionally long incarcerations;

–It will focus attention on other forms of long-accepted social practices—drinking and smoking—which have apparent health-related diseases associated with their long-term use, which cost society billions in health care and could be easily eradicated by not using them in excess.

It is estimated that smoking- and drinking-related diseases cost the U.S. government $434 billion annually. By category, this breaks down as the annual smoking-attributable economic costs in the United States estimated for 2009–2012 were more than $289 billion. This included at least $133 billion for direct medical care of adults, more than $156 billion in lost productivity, and $5.6 billion (2006 data) for lost productivity due to exposure to secondhand smoke, according to the Centers for Disease Control and Prevention.

Excessive alcohol and alcohol-related medical expenses cost states a median of $2.9 billion in 2006, ranging from $420 million in North Dakota to $32 billion in California, according to a CDC study.

Despite years of anti-smoking public education, millions of Americans remain addicted to nicotine and alcohol and cannot break the habit. Marijuana does not cause addiction, according to the most reliable and repeatable studies.

Positive Benefits of Cannabis

On the positive side, marijuana has the following benefits;

–Marijuana can be socially transformational. Without becoming exuberant, the marijuana industry is now emerging with a very new set of independent, young entrepreneurs who come from a variety of backgrounds and have been well-exposed to America’s counter-culture for years. While it may be an exaggeration, it is safe to say the marijuana industry today is not Brooks Brothers, wing-tip corporate America. While I have not seen any formal studies, I would guess it is decidedly democratic or leaning towards libertarian, multi-racial, and multi-gender.

Like the fracking industry, which took the Five Sisters oil monarchs by surprise, the cannabis industry is primarily comprised of the office equivalent of wildcatters who worked in the shadow of the big oil companies devising revolutionary oil drilling techniques, such as horizontal drilling and experimenting with compounds to break apart shale thousands of feet under the surface to extract oil and natural gas. In the process, the wild caters of the fracking industry revolutionized oil exploration and did a complete end around the major global oil companies.

Without overextending this analogy, the cannabis industry can propel pharmaceutical research, the entertainment, music, and food industries, as well as environmentalism. In the process, they will rely on grassroots social participation to reshape the nation’s antiquated anti-marijuana laws at all jurisdictional levels. This alone represents a major political coup, which has more potential impact on the country than all the smoke the Tea Party has made thus far.

–Pharmaceutical research. Cannabinoids, an active chemical compound found in marijuana, have been used in medical treatments for thousands of years. However, since federal law states that the possession of marijuana is illegal in the United States, most states have enacted laws to prevent its medical use. Taking its cue from the Justice Department and federal law, the U.S. Food and Drug Administration has not approved Cannabis as a treatment for cancer or any other medical condition.

According to the National Cancer Institute (NCI), cannabinoids have beneficial properties which can aid cancer patients. Specifically, the NCI said: “The potential benefits of medicinal Cannabis for people living with cancer include antiemetic effects, appetite stimulation, pain relief, and improved sleep.

Although few relevant surveys of practice patterns exist, it appears that physicians caring for cancer patients in the United States who recommend medicinal Cannabis predominantly do so for symptom management. The active ingredient for medicinal use is Cannabinoids, a group of terpene phenolic compounds found in Cannabis species (e.g., Cannabis sativa L.). Research into this new family of pharmaceuticals is happening in other parts of the world, particularly Israel. Still, research is being hampered in the US for political and legal reasons.

Get Socially Responsible Fast

So, what should a company in the cannabis industry with a demonstrated (possibly) five-year financial track record that is seeking individual or outside investments do next to attract the attention of SRI investors?

I suggest they copy the formal model developed by the Global Sustainability Review and gather all of the needed data and evidence to make a top-quality institutional presentation about how their company hits every one of these SRI goals.

This can be copied from the Review found here.

The presentation must be perfected before it is presented to any outside serious investors. Only then are you ready for prime time?

Once this is prepared, practiced, and perfected, it is time to make a concerted pitch to the nation’s socially responsible mutual funds (Domini, Calvert, Parnassus) and fund companies that have stand-alone SRI funds (Vanguard, Fidelity, Appleseed Fund, Walden Social Equity Fund, for example.)

This pitch should resonate inside this genre of investment firms. While many cannabis companies are new and have no long-term track records to be included in a portfolio, the time to prepare the socially responsible case is now so that companies can be included in research reports, performance summaries, and news updates.

Socially responsible investing took years to even appear in the investment industry. Economists used to dismiss non-financial activities as externalities or as not fundamentally crucial to the ongoing data gathering, investment research, and performance delivery process.  Today, it is a $3 trillion investment category widely popular with Millennials.

But now that shareholder activism and transparency have become accepted, after being resisted by the investment and financial services industry for decades, including the marijuana industry into the asset mix is a grand possibility and one which can be done by individual investors tomorrow if some more mature companies put together the right package of financials, industry innovation, and social transformational possibilities.

After all, what is investing all about if it cannot make people and their society more positive, conscious, upbeat, just, and profitable? And it is all organic and natural, too.