Investors could help Canada's cannabis industry improve its social and environmental record, experts say

Investors who've shied away from cannabis out of concern about whether legalization will be good for Canada should consider buyingin to help shape the industry and how it operates, say experts in so-called impact investing.

While there's been no shortage ofexcitement around pot stocks as the legalization of recreational cannabis use approaches on Oct. 17, uncertainty aroundissues such as thelegal implications around crossing the U.S. border have kept major players out of the game, saidVinayShandal, managing director of the Boston Consulting Group (BCG) in Toronto.

"You have banks that are refusing to lend into the space in part because the U.S. has a very different regulatory framework for it. The states are all over the place in terms of the degree to which it is or is not permitted, so banks that have business dealing in these markets are being careful," he said.

Other important investors including Canada's bigpensionfunds may stay away out of concernthat legal cannabis poses potential health risks tied toaddiction or thatitgobbles too much energy.

But they won't be able to address those issuesby holding their noses ortheir wallets, saidShandal.

What's impact investing?

Impact investing is the practice of using investor influence to advance progress on environmental, social and governance matters,hence it's often referred to as ESG investing.

These kinds of investmentsexiston a spectrum.Some areonly slightly less altruisticthan pure philanthropy for instance, some might invest in low-cost private education in the developing world that nets only a small returnbut a big sense of purpose.

On the other endof that spectrum arethe investor-influenced business practices that benefit boththe bottom line and environmental or social outcomes.

Take the example of ahigh energy-consumption business that needs to lower costs, saidShandal. It coulddo so by laying off workers,squeezingsuppliers, usingcheaper materials or by becoming more energy efficient.

"If I'm an ESG focused investor, I'll push the company to prioritize the cost lever that's based on energy efficiency as opposed to a head count reduction or procurement savings."

A July report on the cannabis industry bySustainalytics, a firm that rates the sustainability of companies,gave failinggrades on energy use and emissions to what were Canada's four biggest cannabis companies at time:Canopy, Aurora,AphriaandMedReleaf. (Relative newcomerTilray, which went public in July,has since surpassed Canopy to become the world's most valuable cannabis company.)

But it would be a miss for Canadian pension funds to stay awaybecause of this poor track record, says Shandal. "The biggest risk for investors is to say we're not going to get in," he says. Investors would miss out on good returns from a highgrowth industry inwhich Canada is poised to be a global leader, and they also won't be able to hold companies to account.

He said companies who want to see the cannabis industry improve its energy efficiency and promote responsible distribution and use of the product won't influence its development by "standing on the sidelines."

DustynLanz, CEO of Canada's Responsible Investment Association (RIA), said he expects to see investors asking tougher questions of cannabis firms.

"As institutional capital starts to flow into cannabis companies, I would expect to see greater shareholder scrutiny of their corporate governance, energy use, waste management, and otherESGmetrics," he said in an email to CBC News."A company is more than just the numbers, and these factors can help to identify resilient, well-managed companies."

Because recreational cannabis is still illegal,most institutional investors haven't yet taken a public position, he said. "As the space evolves, responsible investors who invest in cannabis companies will integrateESGfactors into their valuation models, and some may go a step further by engaging with these companies to strengthen their sustainability performance."

Adam Spence, director of SVX, a non-profit social impact investing venture in Toronto, saidevery successfulbusiness needs to consider its social, environment and economic performance. Following a "triple bottom line," one that measures environmental and social returns along with financial performance, is proven to yield stronger financial performance, he said.

"At this early stage thereis an opportunity for [cannabis] investors to ask these companies to report on their impact, including their energy usage, their water usage, their hiring practices and their impact on community," said Spence.