Environmental and social responsibility shouldn’t be an afterthought for marijuana businesses, but rather a core part of their operations if they want to ensure long-term profitability.
At least, that’s the take of Marc Ross and Kim Napoli, two attorneys with Vicente Sederberg’s new environmental, social and corporate governance (ESG) focused law firm, which is based in Denver. They argue that sound ESG is now critical as consumers have become more aware of harmful corporate practices, which investors are responsive to and which regulators are looking at with greater scrutiny than ever.
Before ESG, much of the conversation on promoting best practices among companies centered on corporate social responsibility (CSR), which is typically concerned with issues such as sustainability, community engagement, employee well-being and philanthropy. Ross believes in today’s world this is no longer enough.
“[M]issing from [CSR] is diversity, equity and inclusion, along with environmental compliance as part of sustainability,” Ross said.
Protest movements of recent years have come to assume an important place in the public’s consciousness, which has led to greater emphasis on workplace diversity, inclusion and equity. But for Napoli, responding to these changes isn’t just a matter of rebranding a company’s image. Engaging meaningfully with these issues actually drives profitability.
“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.
The fact that extreme weather events are becoming more frequent across the US and the rest of the world is also pushing consumers to take sustainability more seriously by scrutinizing the environmental track records of the companies they consider purchasing from. Ross claims, however, that many marijuana businesses are yet to catch up to this reality.
“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.
Violating environmental regulations isn’t just a matter of potentially losing business from environmentally-conscious consumers. It can also directly harm a company’s bottom line through the imposition of fines. In 2018, a San Diego marijuana processor was fined a minimum of $250,000 and the owner could still face a maximum penalty of two years in prison for dumping 55 gallons of hazardous waste. Meanwhile, a marijuana cultivation and manufacturing company in Milford, Massachusetts was fined in excess of $17,000 for violating air quality emission controls and for dangerous storage practices of hazardous materials.
But responsible ESG isn’t just about avoiding penalties. It can create new business opportunities and benefits. Examples Ross provides include attracting high-quality job candidates, greater customer and workforce retention, positive media coverage, competition differentiation and, crucially, long-term savings on energy and operating costs.
While the benefits of a well-considered ESG strategy may be manifold, what exactly do Ross and Napoli mean when they talk about it?
Their firm defines the term’s three concepts as follows:
- Environmental impact comprises the company’s impact on the natural world along its entire supply chain – from greenhouse gas emissions to resource use to waste and pollution management.
- Social impact refers to a company’s impact on the wider community, especially local and Indigenous people, but also to employee’s working conditions, relations and health and safety.
- Governance looks at a company’s structure and management, such as the composition of the board of directors, tax arrangements, lobbying efforts, supply chain practices, pay inequities and diversity.
“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.
Ross argues measurement of ESG criteria is crucial, as is seen in the increasing number of investors who insist on robust ESG policies and reports on their implementation. This is especially important in the marijuana industry, where a significant proportion of customers are younger and often socially-conscious.
What’s more, as Ross says, it’s likely the time will soon come when marijuana businesses can no longer choose whether or not to establish an ESG framework for the company. Increasingly, governments are looking to make it a legal requirement. While this may be at an early stage in the US, in the EU public and private companies will soon have to report on their environmental impacts and carbon emissions, among other metrics.
“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.
So what can a marijuana business do to stay ahead of the curve?
Ross and Napoli recommend first establishing an ESG taskforce in the company with a representative from every department. After setting specific goals relevant to the business according to ESG criteria and recruiting a senior-level supporter, the taskforce can then create an action plan and ensure the company is held accountable to follow it.
“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.