Marijuana’s Case for Ethical Investment

Marijuana legalization will always be a cause to some people, while for others it will never amount to more than a financial opportunity. But what about the middle ground? Can it pass muster with investors looking for a healthy return who nonetheless choose investments with an eye on certain ethical criteria? The question comes up now that the industry seems to be taking a step toward the big leagues with Peter Thiel’s recent multi-million dollar investment in Privateer Holdings. This is a whole new ballgame suddenly.

Thiel, himself, does not identify as an ethical investor, but an increasing number of big institutional investors, including pension funds and universities, do. When Harvard looks to invest a portion of its endowment where students have “invested” for decades, what will marijuana have to demonstrate?

No one suspects that this is imminent. There is the issue of federal legalization to be dealt with first. And every ethical investor will have an individualized list of priorities. Alcohol, tobacco and gambling frequently make their way onto the bad list. The city of Portland, Oregon, has recently begun divesting itself of Walmart holdings. Nonetheless, several common themes emerge in the world of ethical (also known as “socially responsible”) investing.

There has to be a reasonable expectation that the investment will make money. Investing union pension funds in penny stocks could leave retirees in financial peril. Fund managers in this situation have a fiduciary responsibility to make financially sound decisions; their personal assets may be on the line if they do not.

The business model should work to the benefit of all stakeholders. The hardest part, sometimes, is identifying the stakeholders. These might include consumers, employees, investors and individuals even more tangentially involved. The marijuana industry is based on an agricultural product. Ethical investors are certainly going to look at the welfare of agricultural workers.

One of the strongest arguments in favor of a legalized marijuana industry is the high rate of incarceration for drug offenses. Those at risk from the criminal justice system might also be understood as less directly-involved stakeholders.

The business should be managed transparently. Ethical investors look for squeaky-clean management. The product should be promoted honestly and the internal operations should be consistent with the values the company and the investor embrace. A company that promoted its product as medicine, but struggled with consistent potency or did not test for pesticides and mold would be guilty of this kind of inconsistency.

The business should use natural resources in a sustainable manner. This may be a tough one for indoor agriculture, dependent on high-intensity lighting in the place of sunlight, not to mention lots and lots of water. There may be technological solutions to these problems, but they may not be cheap.

Some socially responsible investors will never embrace the marijuana industry, but some will never invest in pork processors, either. There is enough ethical investment money to go around, anyway.

With federal legalization not yet on the horizon, the industry still has some time to tackle the issues of profitability, addressing the needs of the wider world of stakeholders, transparent management and environmental sustainability. These are likely to be the issues that large, institutional ethical investors will examine. That could be a hefty chunk of investment money.

Anne Wallace is a New York lawyer who writes extensively on legal and business issues. She also teaches law and business writing at the college and professional level. Anne graduated from Fordham Law School and Wellesley College.

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