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Medical Cannabis | ESG Portfolios

Medical Cannabis ETFs and ESG Portfolios

Cannabis has been used as a medicinal herb for over 5,000 years, but has only in the last decade come out of the shadows and into the mainstream as a powerful tool in modern medicine as Cannabis use and views surrounding the plant have become more liberalized. Changing attitudes have fuelled the growth of a new legal industry of producers, refiners, pharmaceutical manufacturers, equipment suppliers and specialist technology providers; combining to form a global medical cannabis market estimated to be worth north of $150B over the next 10- 15 years. [1]      

With numerous medical studies now in place and regulatory easing occurring globally, there are multiple positive catalysts to push the industry forward. As interest in the sector rises, many investors want to understand the ESG profile of the medical cannabis business before they allocate medical cannabis ETFs.

Many funds rely on a third-party data provider to provide an independent review of the companies they hold and grade or score their compliance with ESG standards. Unfortunately, data isn’t yet available for the medical cannabis sector given how new it is and the companies involved are. As a result, investors have to make their own views. In the case of looking at companies that have both medical and recreational cannabis exposure, this can be even more complicated given the laws governing the plant and operations are very fluid and change depending on the country.

Moreover, deeply embedded social attitudes towards Cannabis are clouding the minds of some investors when it comes to assessing the investment potential of the legal, regulated medical-use cannabis industry, providing investors with a way to clearly delineate the medical-use and adult-use Cannabis markets would assist in helping these attitudes to evolve.

Examples are being set by institutional investors, many of which have strong ESG investing credentials, The Church of England Pension Fund [2] and CALPERS [3] are among a growing number of pension funds that have made allocations, even as they dump tobacco and other ‘sin’ stocks from their portfolios.

Medical cannabis ETF: ESG Principles

ESG is ultimately a subjective matter – different investors want different values embedded in their portfolios, but at HANetf, we believe we have one of the best approaches to ESG integration in a medical cannabis ETF- The Medical Cannabis and Wellness UCITS ETF (CBDX). With a strict and multi-tiered constituent review and selection process, the methodology can help allay investor’s concerns about ESG risks, particularly in relation to corporate governance and the social supply chain.

Firstly, all constituents must be listed on a major stock exchange in US or Canada and follow the same strict exchange rules, reporting standards and tax and audit standards as any other listed company.

Additionally, the index methodology and ongoing reviews screen out all companies engaged in adult-use, recreational cannabis sales. In our screening process, any company that makes any sales of THC on a recreational basis, regardless of the rules of the country that company is operating in, is excluded.  What that leaves us with is a fund entirely consisting of companies that while involved in the cannabis industry are focused on the medical applications of the plant.  An example of this would be GW Pharma which has an FDA approved drug derived from the cannabis plant, that is being sold globally to help with epilepsy.

Within ESG one of the more powerful tools to add value has been focusing on the ‘G’ of governance.  We expect to incorporate this even deeper into our screening process as better data is made available for the sector and we gather more information and history on the companies.

Where the fund does have exposure to retail operations, it is entirely focused on the CBD wellness side.  We view this as more of a natural medicine or health additive that as a society we are just beginning to understand. The uses of CBDs can range from pain management, to sleep, to skin care and many other benefits.  These products are sold throughout the world in respected pharmaceutical and beauty chains.  As the world looks to distance itself from harmful chemicals and additives, CBD can fill this void and provide a bridge.

Rules and regulations are constantly changing in all sectors, but few are seeing so much change in a short period as cannabis. Having a product that can offer exposure to the fast-growing field of cannabis while avoiding the negative connotations that some associate with the sector should have its benefits as it opens the door to a wider investor base. The Medical Cannabis and Wellness ETF, Cannabis ETF ticker: CBDX, focusing on medical cannabis and CBD products offers a solution.

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