Below is an excerpt from ISS ESG’s thought leadership paper: Cannabis Update: Regulatory Trends and Industry Developments. The full paper is available for download from the Institutional Shareholder Services (ISS) online library.
For an update on the cannabis industry, we turn to Jay Simpson, Associate Vice President of Sector-Based Screening at ISS ESG, who leads ISS ESG efforts in monitoring trends and developments in the industry.
In our discussion, Jay remarks on three key trends in relation to cannabis investments:
- At the international level, there are clear indications of a potential shift in how cannabis is viewed within United Nations drug controls, including the potential advancement of medical cannabis and decriminalization. However, these international controls currently remain rooted in a prohibitive legal regime.
- At the national level, countries are increasingly looking to adopt or trial different approaches that emphasize regulation over enforcement – often seemingly at odds with the international regime.
- At the industry level, companies are straddling medical opportunities and commercial opportunism depending on the varied legislative landscape for medical and recreational cannabis.
With recent developments towards deregulation around the world what is the status of international drug controls?
JS: In recent months, we saw some international initiatives towards decriminalization of cannabis and recognition of its therapeutic effects. However, under current international treaties, cannabis remains among the list of drugs with “particularly dangerous properties.”
International controls, made up of three United Nations (U.N.) drug control treaties currently in force, compel signatories to establish as a criminal offence the possession, purchase, or production of narcotic drugs, including cannabis. In January 2019, the World Health Organization (WHO) released a scientific assessment of cannabis, following the review undertaken by the WHO’s Expert Committee on Drug Dependence (ECDD) – the first of its kind since 1935. The report found that cannabis is not liable to produce ill-effects similar to the effects of the other “dangerous substances” under Schedule IV of the 1961 Single Convention on Narcotic Drugs (such as heroin). In addition, the assessment acknowledged that preparations of cannabis have shown therapeutic potential for pain treatment and for other medical conditions such as epilepsy and spasticity associated with multiple sclerosis. The report recommended cannabis be removed from Schedule IV of the 1961 Convention (the most restrictive category) and placed in Schedule I (the second most restrictive category). Additionally, the report recommends drugs containing tetrahydrocannabinol (THC) to be added to Schedule III (the least restrictive category), recognizing the low probability of abuse.
The WHO findings and recommendations formally acknowledge the medical usefulness of cannabis. However, the ECDD recommendations are nonbinding and must be voted by the 53 member countries of the United Nations Commission on Narcotic Drugs (CND), which has a history of rejecting such scientific reviews.
While the most current recommendations have not been adopted, the knock-on effects from this proposed policy revision are already visible at national and regional levels. In February 2019, the European Parliament passed a cannabis resolution to help advance medical cannabis. The nonbinding resolution seeks to incentivize EU countries to increase access to medical cannabis, prioritizing scientific research and clinical studies. In March, the U.N. Chief Executives Board (CEB), which represents 31 U.N. agencies including the U.N. Office on Drugs and Crime (UNODC), adopted a position stipulating that member states should pursue science-based, health-oriented drug policies – namely, decriminalization.
However, the International Narcotics Control Board (INCB), the monitoring body for the implementation of the drug control conventions, continues to publicly condemn not only legalization for non-medical use but also the legitimacy of certain medical uses of cannabis. The INCB is highly critical of medical programs in the U.S. and Canada and claims that weak regulation of medical usage has allowed the diversion of cannabis to non-medical use.
What drives countries to legalize cannabis in apparent conflict with existing international prohibitions? And what challenges do countries face in regulating cannabis?
JS: In recent years, an increasing number of countries have taken steps to relax legislation surrounding cannabis use or to outright legalize the use of cannabis, primarily for medical purposes, while some jurisdictions may tentatively allow for recreational use also. At the core of these moves lie an oft-stated desire to protect public health and welfare and a dissatisfaction with existing international controls. Some countries appear frustrated by the bureaucratic and political barriers presented by the U.N. international drug control system. These frustrations reflect disagreements at a medical level, while they also suggest concerns about the inefficacy of the war on drugs concerning recreational use.
The challenges regarding administering cannabis regimes in the promotion of public health are twofold: how to safely and responsibly ensure the legitimate medical benefits of cannabis and how to effectively combat the illicit market and trafficking by allowing for regulated legal adult use.
What are we seeing from the industry itself? Are there any early trends?
JS: The cannabis industry is still an industry in its infancy, and it is made more volatile by regulatory frameworks that range from ambiguous to progressive to openly averse. Moreover, the industry faces great uncertainty, as it hovers between medical opportunity and commercial opportunism.
Few companies currently dominate the market, with a strong trend towards consolidation. The ten largest companies by revenue accounted for more than 50 percent of total reported sales. The majority of large companies are producers of whole plant cannabis and derivatives. Here, it is important to distinguish between genuine pharmaceutical companies and those that are ostensibly part of the industry but have a clear eye on the recreational market. A significant number of companies have not only made their intention to enter the recreational sphere quite explicit, but they have also actively sought out partnerships with big alcohol, tobacco, and soft drinks companies to better achieve market penetration.
|COMPANY NAME||COUNTRY||MARKET||KEY PRODUCTS|
|Canopy Growth Corp.||Canada||Medical and recreational||Dried plant, oils|
|Aurora Cannabis, Inc.||Canada||Medical and recreational||Dried plant, oils|
|GW Pharmaceuticals plc||United Kingdom||Medical||Sativex, Epidiolex|
|Aphria, Inc.||Canada||Medical and recreational||Capsules, Sprays, Syringes, Vapes|
|Cronos Group, Inc.||Canada||Medical and recreational||Dried plant, oils|
|HEXO Corp.||Canada||Medical and recreational||Capsules, oils, sprays, powder, dried plant|
|CannTrust Holdings||Canada||Medical and recreational||Dried plant, oils|
|OrganiGram Holdings, Inc.||Canada||Medical and recreational||Dried plant, oils|
|Terra Tech Corp.||United States||Medical and recreational||Dried plant, oils, edibles|
Recent trends in the industry have boosted optimism over the considerable opportunities available. However, significant risks still exist. What are some of the key considerations for investors?
JS: The emergence of a potentially highly lucrative new market does indeed present considerable opportunities, but investors are presented with similar questions as policymakers; namely, how to best ensure public interests while regulating risks.
Above all, in light of the contentious nature of cannabis and the disputed health benefits and risks of certain of its applications, there remains an overarching ethical consideration in terms of public health. This consideration places cannabis in a similar category as alcohol and tobacco, where despite the maturity of those markets, there are parallels to be drawn between substances that are intoxicating and have the potential to form dependency. Some stakeholders raise concerns around how legalization may affect the frequency of consumption and the age of consumers.
For investors that view the potential health benefits of cannabis as outweighing this risk, there are important reputational questions around whether the investee companies are genuinely medical in nature. Further, given the lack of clarity around the controlled delivery of whole plant cannabis, a further distinction may be sought to identify companies involved in the development of clinically trialed and approved pharmaceutical grade products. ISS ESG continues to monitor the key developments, distinctions and direction of this industry as part of our cannabis sector-based screen.