Environmental, Social and Governance in Cannabis: Not If, But When

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Embedding environmental, social and governance tenets into the core business is a must for cannabis companies.

August 31, 2022

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As the cannabis industry grows, so do stakeholder calls to address the pressing social and environmental challenges impacting the world. In response, cannabis leaders are increasingly adopting Environmental, Social & Governance (ESG) frameworks into their business plans.

Yet, actually developing a robust ESG report requires navigating legal and bureaucratic complexities that can be challenging to fully grasp and implement. Experts interviewed by Cannabis Business Times broke down the intricacies around ESG initiatives, while emphasizing the importance of these principles as the global cannabis economy takes shape.

What is ESG, and what does it include?

ESG refers to three central factors in a company’s sustainability and societal influence—Environmental, Social and Governance. Although technically non-financial in nature, these tenets help qualify companies for investment, even standing as predictors of future financial success.

With a market projected to reach nearly $200 billion by 2028—per a report from Fortune Business Insights—cannabis is becoming a flashpoint for investment. Combined with the connection to social justice issues due to the criminalization of the plant, there is an atmosphere rife for large-scale change, notes Leah Heise, senior adviser at Kearney, a global management consultancy.

“We’re starting to see requests for environmental impact statements in applications for cannabis licenses,” Heise says. “Lots of businesses in the mainstream have to apply for environmental statements to do business in certain states. For cannabis, how are you getting rid of waste? What is your methodology for reducing packaging?”

On the environmental end, an ESG report may take into account water shortages in cannabis-producing regions, then lay out goals around energy efficiency, water reduction and use of sustainable resources.

Social impacts revolve around organizational culture, with stakeholders taking a close look at pay equity and additional metrics. Investors will also ask how proprietors are fostering social justice amid inequitable prohibition enforcement.

Governance is another critical facet for modern industries. Are cannabis companies building diversity in their ranks, or running their operations transparently?

These questions represent a small sample of what stakeholders are expecting in today’s industry ecosystem. “Investors are savvy—they not only want to invest in a company with a large footprint, they want to make sure those businesses are diverse and have environmental controls,” Heise says. “People are looking at those initiatives to see how a company is investing in the community.”

Why should cannabis businesses consider developing ESG standards?

Trulieve released its inaugural ESG report last fall, setting forth standards around sustainability while underscoring achievements to date. Executives felt an ESG report would provide a more concise description of what the company stands for, as sustainability is essential to its business model.

Additionally, the multistate cannabis operator set targets around carbon reduction, establishing a board committee and broadening its diversity, equity and inclusion (DEI) activities. In the area of energy use, Trulieve optimizes delivery routes to dispensaries to reduce overall carbon emissions. In its ESG publication, the company also noted an LED-based lighting system that reportedly consumes 60% less energy than other lighting systems.

Christine Hersey, Trulieve executive director of investor relations and leader of the company’s ESG initiatives, says such reportage continues to change apace with an industry on the precipice of legalization and, therefore, increased visibility.

“Cannabis is unique because it’s at an intersection of health, wellness and consumer retail,” Hersey says. “It’s also a growing industry, and a relatively new one with people investing publicly in the space. At Trulieve, we had to look at the community we operate in and activities around packaging, distribution, retail and patient engagement.”

Nascent marketplace or not, cannabis has fallen short in key areas including board diversification, notes Heise. Now that NASDAQ-listed companies are expected to follow diversity disclosure requirements, cannabis executives are wise to set these goals via a comprehensive ESG plan.

“We’ll start seeing boards that look more like the communities they serve,” Heise says. “I’ve talked to a lot of mainstream and cannabis companies, and they are all aware of this.”

What metrics should I be measuring?

The Trulieve report uses scoring frameworks from the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the United Nations Sustainable Development Goals, Hersey says. Agricultural standards from GRI, as one example, may apply to cannabis cultivation practices. By the same token, general packaging rules can be utilized to develop best practices around the sale of pre-packaged edibles.

In practice, the report demonstrates the company’s ESG approach while championing metrics such as c-suite representation and board diversity. Trulieve often notes that it is the only woman-led publicly traded multistate cannabis operator in the country.

Marc Ross, head of impact and ESG at cannabis law firm Vicente Sederberg, cites a “perfect storm” of social accountability for the uptick in cannabis-focused ESG. A recent Canopy Growth report is an industry benchmark, he says, offering insight into company support of record-expungement services for unjust cannabis charges.

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“Investors are looking for ESG metrics around water, carbon emissions, and energy and water usage,” says Ross, also co-chair of the law firm’s environment, health and safety practice. “Companies reporting these figures are leaner, more efficient and engage stakeholders better. They also have a millennial workforce and customer base that feels strongly about buying products bounded in environmental and social issues.”

Who should be part of your ESG advisory team?

Executives considering an ESG initiative should have a group of advisers on board, Ross says. Supporters can be an internal team of cross-functional finance, marketing and HR experts as well as outside professionals well-versed in sustainability and other ESG principles. Also consider sustainability consultants, environmental attorneys and accountants familiar with ESG.

“There’s no central clearinghouse for cannabis companies to call—it’s more generic companies that do these similar tasks,” Ross says. “You’ll need people who know about environmental compliance, health and safety, stakeholder engagement, and how to reach NGOs (non-governmental organizations). Plus people involved externally who understand cannabis operations.”

Trulieve connected with a NASDAQ advisory team on its materiality assessment, focusing on the probable impact of ESG on its organization and stakeholders. Although long-term goal-setting is a challenge due to rapid market growth, due diligence around expanded data and analysis can make the task easier.

“In an evolving industry, ESG is an ongoing commitment,” says Hersey of Trulieve. “We’re planning to publish an interim report before the end of this year, then a broader report after that.”

How do I get my team on board?

Rolling out any new initiative takes a level of buy-in from staff, Heise says. In the case of ESG, Heise first scrutinizes the motivation of a company’s board and executive team.

“If the team is finance-driven, we can talk about how an ESG plan can increase revenue because you’ll have a better reputation with the public,” Heise says. “An ESG report also gives companies more insight into their P&L (profit and loss) so they can increase profits and reduce costs. If you have a high employee turnover rate that’s costing you money, an ESG report will give you the full picture of what’s going on at your company.”

Ultimately, ESG must be integrated into corporate culture when communicating outcomes to employees and the outside world. Trulieve began a partnership with the Last Prisoner Project in 2020, sharing via its website a message of restorative justice in the face of discriminatory cannabis convictions.

“It helps if you have leadership at the top pushing for (ESG),” Hersey says. “But there’s also a growing push from external stakeholders and customers looking for companies to do better and be leaders. They are very vocal about what they want.”

What are some common mistakes around ESG?

Proposals like ESG that lack an obvious return on investment can be a hard sell internally, Heise says. Whereas ESG may not have the clear-cut benefits of a marketing campaign, an embrace of these principles has a substantial reputational value that can pay off down the line.

Incidents like Pennsylvania’s recent massive recall of cannabis concentrates for vaping necessitate a strategic response, one that ideally would be spelled out in detail by an ESG.

“The biggest mistake is not doing it until you have a crisis, or until you can’t open your stores because you don’t have enough employees,” Heise says. “You have to do it now.”

Meanwhile, cannabis companies factoring social goals into their business plans can’t make the mistake of “greenwashing” or inflating their sustainability ethos, Ross says. Astute investors will balk at exaggerated claims around a company’s environmental impact.

Nor can ESG reports be “a one-time-deal,” Ross adds. Updating documentation requires dedication, as stakeholders will expect purpose-driven action with every societal advancement in equity, community impact, and environmental sustainability.

“Plus, you can let people in job interviews know you’re a values-based company,” says Ross. “ESG can be your underlying foundation.”

Douglas J. Guth is a Cleveland Heights, Ohio-based freelance writer and journalist.