Taking responsibility for your cannabis company’s environmental and social impact isn’t just a “nice to have.”
In today’s business environment, it’s becoming a “must-do” that can dictate a business’ long-term success.
That’s according to Marc Ross and Kim Napoli, two members of Denver-based cannabis law firm Vicente Sederberg’s new environmental, social and corporate governance (ESG) practice.
They say ESG is something companies need to measure and report. Regulators, investors and even consumers are starting to look more critically at the impact of companies’ environmental, social and ethical practices.
CSR before ESG
Before companies were measuring ESG, they talked about corporate social responsibility (CSR), which is the cross-section of sustainability, community engagement, employee engagement and philanthropy, Ross said.
“But missing from this is diversity, equity and inclusion, along with environmental compliance as part of sustainability,” Ross said.
Social movements have expanded the conversation to include workplace diversity, equity and inclusion.
“This is at the forefront of our culture right now,” Napoli said.
According to Napoli, profitability goes up for companies that are diverse and inclusive.
“Buying power among diverse consumers is going up exponentially, so you want to be able to represent the communities that you want purchasing from you,” Napoli said.
And with extreme weather causing droughts, water shortages and wildfires, environmental compliance is “starting to pop,” according to Ross.
“I don’t know of a single cannabis company, at least in the states, that has an environmental manager on staff who is well-versed in … the alphabet soup of environmental regulation,” he said.
Meanwhile, several cannabis companies have been fined in the past month for environmental violations, he pointed out:
- WellgreensCA, a San Diego cannabis extractor pleaded guilty in federal court to offenses related to the dumping of hazardous waste, including 55-gallon drums of waste ethanol, in San Diego County in early 2018. The company owners are facing a maximum penalty of two years in prison and a fine of at least $250,000. The defendants will be sentenced Aug. 3.
- Sira Naturals was fined more than $17,000 by the Massachusetts Department of Environmental Protection for air emissions violations and the storage of hazardous waste and industrial wastewater at its cannabis cultivation and manufacturing facility in Milford, Massachusetts. In announcing the penalty, the agency said Sira Naturals “subsequently addressed the violations.”
- A landowner in Calaveras, California, was ordered by a court to pay $680,000 in May for environmental violations that took place on property in connection with an unlicensed cannabis grow.
Companies of all sizes will realize significant bottom-line benefits from developing a thoughtful corporate responsibility program, Ross said.
- Winning new business and increasing customer retention.
- Attracting talent and maintaining a happy workforce.
- Positive media.
- Enhancing influence in the industry.
- Differentiation from competition.
- Saving money on energy and operating costs.
So … what’s ESG?
ESG goals are achievable by even small firms by breaking the concept down into different components:
- Environmental impact encompasses everything from a company’s greenhouse-gas emissions to resource depletion, nature conservation and waste and pollution.
- Social impact includes a corporation’s working conditions, employee relations and health and safety, along with the company’s interaction with local and Indigenous communities.
- Governance refers to the structures within a company, including its board of directors, diversity, pay equity, tax strategy, political lobbying, supply chain policies and executive pay.
“ESG is the measurement of all of these different aspects and then ideally benchmarking them and reporting them, which is going to become increasingly required,” Ross said.
Why ESG matters
Investors pay a premium on companies that have strong ESG policies, and those companies are seeing better valuations and market performance, Ross said.
Investors are also pressuring companies to measure, benchmark and report ESG metrics. Ross pointed out that those metrics are more important to cannabis investors because they tend to be younger, often millennials and Generation Z.
Governments are also pushing to require ESG metrics measurement and reporting.
Ross pointed to a nonfinancial reporting directive in the European Union that will soon require public and private companies to report metrics such as climate impacts and carbon emissions. Similar proposals have been made in the United States.
“So you’ve got these … stakeholder organizations, investors, employees, customers and governmental entities really starting to push for greater ESG disclosures. And it’s coming,” Ross said.
Getting started with ESG
Start building an ESG strategy by identifying the company’s material aspects, pain points and priorities, including who within the community is most impacted by the way the company does business.
The attorneys recommend developing an internal team with representatives from every department.
The taskforce should:
- Ask questions about the company and set specific goals.
- Identify a senior-level champion.
- Create an action plan that defines an initiative.
- Hold the company accountable.
“That way you can at least put some guardrails or narrow your focus as you start to measure your ESG impact, and then, of course, you want to measure, measure, measure,” Ross said.
Key performance indicators help companies measure accomplishments for specific goals, Ross said.
“Then you can start to develop your KPIs to set where you’re going and basically create your map for continuous improvement,” he added.
Laura Drotleff can be reached at email@example.com.