ESG and Cannabis is No Easy Task Right Now

by Hilary Bricken, Principal Harris Bricken

Socially responsible and “sustainable” investing is picking up in popularity across retail and institutional investors alike. According to Wikipedia, “[i]n less than 20 years, the ESG movement has grown from a corporate social responsibility initiative launched by the United Nations into a global phenomenon representing more than US$30 trillion in assets under management.”

When it comes to cannabis though, implementing environmental, social, and (corporate) governance (“ESG”) initiatives may be very difficult to pull off. This could be an issue for future investors looking for more environmentally and socially conscious industries in the U.S. (and even abroad).

If you’re new to the concept, ESG is a scored evaluation of a company’s awareness around various environmental and social/cultural issues when it comes to how it governs itself internally and does business externally. Usually, intangible assets of the business help make up a company’s ESG score, which can seriously increase its future valuations. These intangible assets may include a company’s corporate culture, attention to environmental and social initiatives like climate change and human rights, employee treatment and relations, educational programs around diversity, support of consumer protection, etc.

NerdWallet lays out nicely, into a few categories, your typical ESG factors for companies to consider when integrating the concept:

While cannabis remains federally illegal, I have to question whether overall ESG integration is even possible for certain cannabis licensees on a state-by-state basis (and I’m not talking about cannabis ancillary goods and services that are not subject to the onerous requirements of state and local cannabis licensure).

Regarding environmental ESG considerations, certain cannabis producers/cultivators, depending on state, are in a bit of a catch-22. Even though, for example, cultivators in certain states can grow outdoors and therefore reduce their carbon footprint and potentially their overall environmental impact (especially through adherance to state environmental protection acts), there are other states where outdoor cultivation is entirely prohibited. This forces licensed growers into hugely expensive, energy-intensive, environmentally insensitive indoor grow facilities that produce year round.

Further, given federal policy, growers may have to do all kinds of inefficient things when it comes to water usage given that the Bureau of Reclamation essentially refuses to assist cannabis cultivators when it comes to federally regulated water. Also, lots of green initiatives under federal law likely cannot even extend to federally illegal cannabis businesses (state-based ones may be fair game though).

The regulated cannabis industry is actually well aligned in other ways on some of the ESG social factors, especially when it comes to social justice awareness. Cannabis is uniquely positioned to address and remediate the impacts of the War on Drugs. We see these efforts already through the implementation of various social equity programs on the state and local levels. Further, the cannabis industry has a great opportunity to set itself aside from the perceived societal and public health impact sins of the alcohol, tobacco, and pharma industries by learning from the pitfalls of regulators, stakeholders, and businesses therein and improving on them.

On the governance side, cannabis companies are currently hamstrung by a variety of state and local regulations that adhere to 2013 Cole Memo principles, whereby barriers to entry for company owners, managers, directors, financiers, etc. still focus on a candidate’s criminal background and/or things like residency.

Some states are also married to merit-based point systems where if an applicant lacks an eminent executive board (in, let’s say, pharma or other highly regulated industries), the applicant won’t have a shot at securing a state (or even local) license. This doesn’t allow for a lot of diversity at the executive level when it comes to experience and skillset.

Finally,  states with highly competitive licensing programs are going to amass a ton of special interest groups, and the lobbying around those groups and their goals will be business as usual: you either have a seat at the table or you’re on the menu when it comes to regulations and the industry’s future.

In the end, the overall main issue with ESG investing and cannabis is the federal conflict. Because of federal illegality, cannabis is highly regulated at the state level and those state regulations all too often focus exclusively on federal enforcement mitigation. This means states are more focused on barriers to entry that prevent criminal conduct, narrowing the number of players, and product diversion rather than on industry development, growth, and progress.

As we approach the end of federal prohibition, though (and maybe the States Reform Act can get it done!), I am very confident that many cannabis companies will fully embrace ESG concepts. These companies finally will be able to dive into ESG implementation without threat of loss licensure, regulatory sanction or consequence.

Re-published with the permission of Harris Bricken and The Canna Law Blog

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