‘ESG’: If You Lead a Cannabis Company, Make It Your Business to Know What Those Initials Mean

That was the likely reason for the recent conference at the U.N. in New York, whose mission is detailed in a new report, ESG + Cannabis: The Promise and Path to a New Paradigm.

As the forward to that report, from New Frontier Data, defines it, “ESG is a framework for performance measurement…used by socially and environmentally-conscious investors to identify and vet value – and values-based investments.” ESG, the report cautions, is not to be taken lightly, as the Securities and Exchange Commission (SEC) has announced impending ESG-disclosure rules.

In short, if your cannabis company is touting its impressively moderate carbon footprint, you can’t be simultaneously draining the water resources in your grow area. If you claim concern about social justice and progress on diversity, you’d best have the evidence to back it up.

For their report, the researchers examined three categories of social responsibility and sustainability for companies. Enroute, they emphasized the need cannabis startups have to establish a solid ESG framework, even if they’re playing “catch-up” with traditional industries that are ESG veterans.

For cannabis companies embarking on ESG, the challenges that the New Frontier report recommends are:

Address the legacy of discrimination in cannabis arrests: The industry needs to take responsibility for, and work to redress, the consequences of 17 million marijuana arrests (1985-2020) of Black Americans — who were, and often still are, four times more likely to be detained as are white Americans.

Take action against the often-acute water shortages in cannabis’s most productive growing regions. With 40 percent of the U.S. under drought conditions, companies need to investigate and implement resource-use efficiency.

Recognize the influence North American has internationally: Since they comprise nearly 97 percent of global legal sales (2020 data), U.S. and Canadian cannabis businesses need to regard the ESG practices they take as significantly influential worldwide.

Addressing these challenges, John Kagia, chief knowledge officer for New Frontier, wrote in an email: “This report, and the Regenerative Cannabis Live event at the U.N., addressed why [ESG] is so important, and how stakeholders can integrate these themes into their work. We hope this is just the beginning of a comprehensive and sustained industry-wide reorientation toward ESG, even as the seeds for a global industry are being planted.”

Towards that end, the report lists specific goals under its three categories. “Environmental” includes, among other considerations, electricity use, greenhouse gas emissions, fertilizer and chemical waste runoff. “Social” includes product safety and traceability, responsible marketing, diversity/equity in employment and restorative justice. “Governance” considerations include ethics, compliance and supply chain management.

“Surging interest” in cannabis worldwide underlies the need for ESG, the report states, noting that already, 74 percent of Americans live in a state legal for medical or adult use. Germany’s impending legalization and that of countries across Africa, Latin America, Asia and Oceania are additional factors. The $51 billion in yearly legal sales forecast for cannabis by 2025 is obviously important, too.

Looking at population data, under the category of Sustainability, the report notes the usage of cannabis by race: 12 percent for white adult Americans, 15 percent for Black adults, 10 percent for adult Hispanic Americans and 5 percent for adult Asian Americans. Then there are those disturbing arrest percentages (compiled by the American Civil Liberties Union).

“The cannabis industry will have an outsized role to play in helping advance restorative justice for those impacted,” the report says. Challenges ahead include the prohibition by some jurisdictions against individuals with criminal records working in the cannabis industry – “inequitable enforcement,” the report calls this — because of the historical impact on those individuals by that same industry.

Under the category of environment and sustainability, the report states that considering that the United States is the world’s largest producer, “climate change is having a significant impact on the country’s most productive cannabis cultivation regions.” In the second quarter of 2022, the U.S. passed its 69th week – the record had been 68 percent — in which at least 40 percent of the country was in a drought.

Such conditions significantly increase water costs and competition for producers. Fire risks and contaminating ash from off-site blazes are other business challenges. And there are more, like the rising cost of electricity in hydroelectric-powered communities, and the risk of blackouts and brownouts.

Stakeholders in the solutions to these problems and their missions are also detailed by the report. They include:

Government/regulators: This means the leaders at all governmental levels, including international ones. In the latter category, 193 nations have committed to the U.N. Sustainable Development Goals covering 17 impact areas, many of them relevant to cannabis. “Local” government of course means municipal zoning commissions. “State” government can mean efforts like California’s Comeback Plan, which offers $100 million in grants to local governments for environmental studies and mitigation. “Federal” government, meanwhile, refers to the G20 countries emitting 75 percent of the world’s greenhouse gas emissions. These 20 now have a roadmap of 400 milestones for decarbonizing the economy, moving from fossil fuels to clean tech.

Investors: More and more investor emphasis is focused on “socially responsible” investment, meaning target companies’ ESG accomplishments (or failures). Groups here include the Climate Action +, which brings together investor networks focused on zero emissions; and the P8 Group of the world’s largest pension funds developing anti-climate change actions.

Companies: Companies, both public and private, concerned about their ESG profile can investigate their management systems, KPIs, accounting and disclosure – especially considering those upcoming SEC rules announced in March.

Shareholders; The activists among them are another factor here, as are the tools available to them, such as the Value Reporting Foundation, which provides guides to investors; the CDP (formerly the Carbon Disclosure Project), the Global Reporting Initiative; and the Dow Jones Sustainability Index.

What should cannabis companies be doing to ensure good ESG frameworks. The report lists identifying stakeholder expectations, evaluating their practices against recognized standards, and creating appropriate ESG policies and systems for disclosure and third-party verification.

“Fortunately, the industry has the opportunity to stand on the shoulders of many thousands of organizations which have come before, and to appreciate the particular chance to make both a good first impression and even more vital lasting legacy,” the report concludes. The remaining question, of course, is whether cannabis companies will take those learnings seriously.