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June 09, 2022

Carpe Diem: How the Cannabis Industry Can Seize the ESG Opportunity

When it comes to developing and integrating environmental, social, and governance (ESG) strategy for your organization, there is one consensus: to avoid doing so is to be left behind.

Cannabis companies, like companies across every sector and industry, need to be focused on the double bottom line concept. Specifically, companies need to commit to both financial (first bottom line) and ESG-focused outcomes (second bottom line) to ensure long-term success.

The evolving definition of value

For companies across all industries, there is an enhanced sense of finding, committing, and tracking to a higher purpose. Whether it is prioritizing environmental risks and opportunities or committing to social initiatives, establishing a purpose beyond financial returns is paramount to long-term success in today’s world.

Cannabis in United States has a long history tied to criminalization which has had a disproportionate impact on minority and underprivileged populations. As such, there is significant opportunity for both federal and state governments and the industry itself to focus on social programs which drive positive impact and change (CNBC: Cannabis is projected to be a $70 billion market by 2028 — yet those hurt most by the war on drugs lack access).

Overall, ESG initiatives have become ubiquitous with business strategy and growth — and because the cannabis industry is inherently diverse, environmentally-focused, and values-driven, there is a unique opportunity make a real impact.

And how does a company develop a strategy on driving impact? It starts with inventorying your material, non-financial (i.e., ESG-specific) risks and opportunities.

A focus on materiality: the environmental pillar

When it comes to environmental issues, there are several material risks and opportunities that cannabis companies can prioritize, including but not limited to:

  • energy management,
  • greenhouse gas (GHG) emissions, and
  • water and wastewater management.

For example, the western United States continues to experience historic droughts, which have forced local governments to restrict water usage (LA Times: Unprecedented water restrictions hit Southern California). As such, cannabis companies operating in the western U.S. are facing both a risk and an opportunity to re-think how they manage their water usage as part of the cultivation process.

A focus on materiality: the social pillar

As we previously mentioned, there are many social issues companies in the cannabis industry will find material to their businesses. These include:

  • product quality and safety;
  • access and affordability;
  • customer welfare;
  • human rights and community relations;
  • selling practices and product labelling;
  • employee engagement; and
  • diversity, equity, and inclusion.

Leaders in the cannabis sector are using their businesses and platforms to push for tangible social progress — this includes investing in and prioritizing minority-led companies in their supply chains, establishing policy documents to hold business partners to strict operating standards, and adding new jobs with competitive pay and benefits in communities which need it the most.

A focus on materiality: the governance pillar

The cannabis industry’s complex relationship with the legal and regulatory environments is well documented. Since 2012, 19 states and Washington, DC have legalized recreational use of cannabis by adults; however, the product remains illegal at the federal level. Because of this, cannabis companies also have a unique relationship with the governance pillar of ESG.

From MGO’s perspective, until laws change at the federal level, businesses operating in the cannabis industry will need to prioritize each of the criteria in the governance pillar to navigate evolving risks and to ensure the long-term success of their companies.

The criteria in the governance pillar includes:

  • management of the legal and regulatory environment,
  • systemic risk management,
  • competitive behavior,
  • business ethics,
  • critical incident risk management,
  • tax transparency, and
  • accounting policies and practices.

Opportunities in ESG

While many companies see ESG as a buzzword, integrating its concepts within the holistic business model is important to drive long-term value creation.

There are substantial competitive advantages — including employee acquisition and retention, reducing the cost and environmental impact of operations, and reducing the cost of capital (JP Morgan: ESG integration - building more resilient portfolios for the long term).

Like-minded companies can and are teaming up to build brand partnerships, adding to product lines with collaborations, and developing innovative ideas for the entire industry to benefit from.

Incorporating ESG into your cannabis company means taking a holistic look at where you currently stand — and then driving the necessary change across the entire organization and value chain.

Steps for developing an ESG strategy

Here are a few of the steps companies can take to get started with their ESG program:

  1. Perform an ESG program assessment for your business: determine what’s important (i.e., material) to your investors, employees, and communities, along with the gaps requiring your attention.
  2. Prioritize your material topics grounded in risk and opportunity: recognize that with opportunity comes risk — and you need to be prepared for both when focusing on value creation.
  3. Establish a go-forward strategy focused on your gaps to drive the most impact: Is your company growing and in need of financial statement and/or tax preparation? Is there a specific way you can lobby for legislation, or partner with another company to help minority or women-owned businesses thrive as part of a social initiative? Create a program that invests in and bolsters the community?
  4. Reporting ESG metrics, KPIs, and progress against commitments to investors and/or the board of directors: Keep everyone in the loop, especially those who want to see you succeed;
  5. Leveraging leading ESG frameworks and standards: A robust ESG framework will lay out the necessary programs, capabilities, processes, policies, procedures, and essential initiatives to accompany your go forward ESG strategy.

Looking ahead

Whether you have an ESG program in place, or you are looking to get started, the definition of value is evolving and cannabis organizations that keep pace are primed for long-term success.

If you are interested in learning more, schedule a conversation with our ESG team today.