As I have written about before, the cannabis industry is uniquely connected to social and environmental issues. This is in no small part because of the historical criminalization and propaganda-driven stigma surrounding the cannabis plant, which disproportionately affected underprivileged populations. Further, the environmental promise of industrial hemp has been exemplified with the evolving conversation around hemp as an avenue to sequester atmospheric carbon dioxide (CO2).
Water, power, and social equity factor prominently in the cannabis industry. As such, the space has the opportunity at the micro-, meso- and macro-level to systemically set about creating shared value for all stakeholders through a focus on Environmental, Social, and Governance [ESG] factors. ESG refers to a trio of business measures used by organizations to demonstrate a “multi-capital” approach to delivering to their strategic, financial, and operational goals. While ESG is certainly a concept that has captivated the masses and has established itself as a baseline for investor evaluation and company performance, it is difficult, but possible, for a nascent heavily stigmatized industry – with 280e tax challenges as well – to affect and adopt change in this regard.
The U.S. Securities and Exchange Commission (SEC) has been evaluating the ESG principles for some time. On March 21st, 2022, the SEC introduced proposed rules to require public companies to disclose climate-related information. The proposal is currently open for public comment, and we encourage you to share your perspective on the rules. These recent pronouncements from the SEC have made it increasingly clear that ESG is not a fad.
In effect, this is the first step toward federal agencies insisting, if not mandating, that companies necessarily incorporate ESG principles into their structure and foundation. Numerous questions remain about the SEC’s legal authority to mandate such requirements, but these challenges will take place in the courts for years to come and, presumably, this issue will become increasingly politicized as elections come and go. In any event, it is incumbent on any business in the cannabis industry to understand and evaluate potential compliance with these forthcoming rules and business practice as they evolve and grow.
At the heart of ESG lies materiality. From a corporate perspective, it offers a performance measurement framework. For investors, it is a screening mechanism that can be used by socially and environmentally conscious investors to identify and vet value- and value-based investments.
The cannabis industry has taken this to an international level with the movement known as “Regennabis.” Its founders, Patrick McCartan and Geoff Trotter, bring industry and global business expertise to the table in a manner that has attracted a great deal of attention and momentum. Regennabis believes in building a disruptive and innovative community, driven by actions in alignment with the UN’s Sustainable Development Goals (SDGs). On May 5th, Regennabis will be hosting the first Regenerative Cannabis Live Conference at the United Nations’ headquarters in Manhattan which will feature multi-stakeholder perspectives tailored around authentic, action-oriented discussions on the most pressing and challenging issues facing the global cannabis and hemp industry aligned with the SDGs. I will be speaking at the event on the “Normalization & Regulation of the Cannabis Industry driven by Education.”
Regennabis offers a Materiality Assessment. This is the critical first step on the journey to understanding how a corporation will optimize their implementation of an ESG framework and strategy. Yet, once undertaken (and assessed at least annually) this Materiality Assessment serves as a map to identify, measure, manage, and report on progress. A successfully executed ESG implementation will be viewed by external parties as being an indicator of both superior risk management practices as well as the development of a competitive advantage in the marketplace. Ultimately a well-executed ESG Strategy will deliver enhancements in risk mitigation, commercial opportunities, brand value and both customer and employee acquisition and retention. Any, and all, of these performance indicators can be viewed as potentially providing a positive ROI on ESG.
Claims of being overburdened with yet more reporting tasks on top of an existing set of rigorous – and mandated – reporting requirements surface are causing rumblings of discontent from some corporate quarters. Some query whether the “E” in SEC now means environmental. Yet, the SEC’s recent pronouncements tell us that perhaps it could be an indication that they are not taking so-called Environmental and Social “non-financial” disclosures seriously – or seriously enough. That may raise a flag about their respective long-term position vis-à-vis risk.
It is not only companies in the cannabis industry that are scrambling to demonstrate their respective position on ESG, but regulators too. The SEC is in catch-up mode, as is the European Financial Reporting Advisory Group. We should expect to see yet further pronouncements from the SEC throughout the remainder of 2022 and well into 2023 as they seek to deliver new regulatory frameworks around climate-related disclosures.
The cannabis industry – like other, more established sectors – has produced several companies that have embraced the opportunity to demonstrate leadership in this space, including Rubicon Organics, Khiron Life Sciences, Trulieve, Canopy Growth and Ascend Wellness. Others are still playing catch-up. Corporations, in and outside of the cannabis space, will either undertake and consolidate leadership positions with respect to ESG or they will, begrudgingly, be merely compliant. The presence or absence of a robust ESG Framework – from which an organization’s sustainability narrative could be formed – will serve as an indicator. Stakeholders, including shareholders, of these leading corporations will see this as a clear demonstration of the long(er)-term view on value creation from executive leadership. The “Beyond Compliance” approach to ESG Framing is a bold strategy – and, for sure, Fortune Favors the Bold.
Furthermore, more specific environmental matters and energy-related issues are necessarily essential legal items for every cannabusiness to evaluate, understand and consider – no matter the age or size of such a business. As cannabusinesses evolve, and as this industry grows, companies will continue to attempt to distinguish themselves. As such, it is essential that they embrace the principles of ESG – for both survival and growth. It is further fundamental that these companies understand their rights and obligations surrounding water consumption, energy usage, and the like; and to evaluate varied opportunities to improve efficiency, decrease cost, and to fall in line with ESG objectives, globally. Commercial cannabis has a unique opportunity to make a substantial social impact, create good jobs, and be long-standing members of the business world. Don’t get caught in slow motion as others dash to the door of innovation.