There are an increasing number of publicly-traded companies in the evolving North American cannabis sector, all vying for attention.
Yet for this industry to grow, it must embrace the principles of Environmental, Social, and Corporate Governance (ESG) Frameworks and navigate the risks and opportunities inherent in ESG issues.
Corporations embrace ESG standards for a variety of reasons including access to capital, enhanced risk mitigation and value creation, greater social “license to operate,” customer acquisition, and employee retention.
Greater recognition of the competitive advantage linked to this approach is increasingly making ESG a business fundamental for companies across industry sectors.
The risks of climate change have brought environmental management to the forefront as a business imperative.
For the cannabis industry, energy and water stewardship are two critical environmental issues all companies must be actively managing.
Estimated at approximately 40% of operational expenses, the energy required for plant cultivation, temperature control, and product manufacturing makes energy management a vital cost consideration.
As global temperatures and the frequency of severe weather events rise, so will the risks associated with energy stewardship and resilience.
Similarly, global water scarcity and its material impact on a wide range of industries make water stewardship a vital component to controlling costs and ensuring business continuity in the future.
Cannabis companies must implement a systematic approach to environmental management and resource stewardship across the value chain, from seed to storefront.
As the multi-industrial applications for cannabis and hemp become better understood, the range of social risks and opportunities increase.
From a human capital perspective, companies will need employees with a broad range of skill sets and backgrounds to capitalize on the range of potential opportunities.
Developing a clear talent acquisition and retention strategy will become increasingly important.
Similarly, engagement and collaboration across stakeholder groups provide a range of opportunities.
From advancing economic inclusion for marginalized populations to revitalizing distressed rural farming communities, focused stakeholder engagement can mitigate reputational challenges while addressing operational needs and product commercialization.
Cannabis companies need a methodical and consistent approach to governance, especially given the rapid evolution of the industry and its regulatory landscape. A focus on governance prioritizes long-term business continuity amongst managing these risks. To manage the complexity inherent in engaging ESG issues across an enterprise, the composition of the board and management team, and their associated experiences, credentials, and effectiveness, can have a profound impact on ensuring ESG becomes a source of competitive advantage.
Regennabis and Summit Strategy Group have partnered to provide a range of services that address the most pressing risks and opportunities facing the cannabis industry and the changing business landscape at large. The approach is based on a series of specific steps that all companies should follow when developing an effective ESG program; fig. 1 highlights some of the most critical: (see Fig 1. ESG Framework: a 5-Step Process). ϖ
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1. Understanding why ESG is critical to commercial success
• Identify the relevancy of ESG trends to your business model, industry, and stakeholder groups.
• Assess the competitive landscape and expectations from your key stakeholder groups.
2. Mapping an ESG journey that leads to desired business outcomes
• A materiality assessment uncovers ESG threats that present financial risk to the business and opportunities to strengthen engagement with stakeholders.
• Assess and understand what you are already doing to address these issues and clearly articulate your desired objectives moving forward.
• Create a shared vision of success and engage the stakeholders most relevant to this success to participate in the process.
3. Gauge how you are being perceived
• Evaluate how you are being assessed on ESG performance.
• What is your current reputation with stakeholders? What are the potential risks associated with these stakeholders?
• Assess what is working well with your current reputation, what could be developed to support both perceptions of investment risk and ESG maturity, and the actions that must be taken and communicated to your key stakeholder groups.
4. Develop an ESG strategy
• Integrate material ESG issues into corporate strategy and risk management, ensuring clear targets and performance indicators are established, and the internal systems are in place to track that progress.
• Embed the ESG strategy into daily operations and stand up an internal governance structure to oversee enterprise implementation.
5. Communicate and Disclose
• Determine your priority audiences and the most important stakeholders to your business.
• Determine the right messages and methods for communicating this progress that speaks to the relevant issues and in the language known to your stakeholders. Identify and align around the disclosure frameworks and communications cadence preferable to your key stakeholders.
• Communications, specifically with credible disclosure frameworks like SASB and TCFD, ensures the ESG strategy and accompanying narrative is clear, credible, and accurate, which in turn fortifies stakeholder trust and positively impacts corporate reputation and valuation.