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Recreational cannabis is now legal in Canada, which is going to create a massive new market for marijuana – the long-held dream of early investors.

But legalization raises a question: Will investors start to look at marijuana producers the way they look at tobacco companies, alcoholic beverage purveyors and other so-called sin stocks?

The question carries some importance because the nascent marijuana sector is keen to attract a base of institutional investors. But these large investors, who bring credibility and stability, are increasingly leaning away from stocks associated with harmful products and services.

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Canopy Growth chief executive Bruce Linton answers interview questions after legal marijuana went on sale at a Tweed retail store in St. John's on Oct.17, 2018.

CHRIS WATTIE/Reuters

Morgan Stanley estimates that environmental, social and governance factors (or ESG) are incorporated into 25 per cent of professionally managed assets globally. In its survey of 120 institutional investors, 70 per cent said they had integrated sustainable investment criteria into their decision-making.

Fossil-fuel generation is the biggest concern among ESG proponents. But companies that make profits from guns, gambling, cigarettes and even sugar-based drinks are having a tough time appealing to large investors.

Given that Canada’s marijuana sector is relatively new and still lacks the gargantuan profits and steady dividends generated by the more established sin companies, it may have even more difficulty attracting institutional backing.

Agreed, there is an argument to be made for marijuana stocks as ethically valid investments.

For one thing, there is a large medical market for cannabis products. In fact, the three marijuana stocks in the S&P/TSX Composite Index – Canopy Growth Corp., Aphria Inc. and Aurora Cannabis Inc. – reside in the health-care sector. Therefore, they are health-care stocks.

For another, the legalized market for recreational marijuana is supposed to deter criminal elements, bringing a product out of alleys and into a safe, regulated environment.

Looked at this way, virtuous investors might be able to embrace marijuana producers as companies that are bringing positive change to the world – the definition of an ethical investment.

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The trouble is that recreational marijuana use raises concerns. Some observers might see pot smoking as nothing worse than enjoying the occasional beer. But Health Canada warns that one in three consumers will develop a problem with the product: When a person smokes daily, there is a 25- to 50-per-cent chance they will become addicted.

This doesn’t necessarily vilify marijuana, but it’s probably not worthy of celebration either. That’s why marijuana stocks might become associated with other consumer products and services – gambling, tobacco, alcohol – that have passed muster with regulators but are often shunned by ethically minded investors.

That could leave marijuana-stock ownership confined to small retail investors, virtually ensuring that the sector will remain volatile and prone to corporate hype and market speculation. And if these small investors see marijuana producers as something less than health-care companies, the sector’s investor base could get squeezed even more.

The upside? If recreational marijuana use is a vice, vice investors might move in.

Yes, funds that focus on the stocks that make many ethical investors squeamish is a substrata of the investing world, attracting investors who are dazzled by the profits and dividends generated by established tobacco and alcohol companies.

Dan Ahrens, chief operating officer of AdvisorShares Investments LLC, which manages the Vice ETF, says that stocks associated with alcohol, tobacco and cannabis offer recession-resistant returns. While the fund doesn’t own any Canadian marijuana stocks because of U.S. laws, he’s watching the sector.

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“The valuations in some of the largest Canadian marijuana stocks are partly driven by the fact that the alcohol company Constellation Brands made a huge investment in Canopy Growth," Mr. Ahrens said, adding that more investments will be made if marijuana decriminalization or full legalization comes to the United States.

“I think we’re going to see the major tobacco companies and the major alcohol companies overlapping into the marijuana business,” he said.

The lines between them, in other words, are about to be blurred.

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