ESG & The Cannabis Industry: Growing a Competitive Advantage — From Cultivation to Consumption
There are approximately 470 publicly traded companies in the rapidly evolving North American cannabis sector, all vying for the attention of consumers and B2B customers. Yet for this industry to grow and capture the legitimacy it seeks, it must embrace the principles of ESG frameworks and navigate the risks and opportunities inherent in environmental, social and governance 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, especially in disruptive and rapidly evolving ones like the cannabis industry. While all companies must pay attention to industry-agnostic issues like transparency and disclosure, climate change management and board governance, there are specific ESG risks the cannabis industry cannot ignore.
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 for industry players. 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 makes 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 medical, commercial, and industrial applications for cannabis and hemp become better understood and accepted, the range of social risks and opportunities also increases. From a human capital perspective, companies will increasingly need employees with skill-sets and backgrounds that combine agricultural sciences, sustainable business acumen, and product development to capitalize on the range of potential opportunities. Developing a clear talent acquisition and retention strategy will become increasingly important in this emerging industry. Similarly, engagement and collaboration across stakeholder groups provides a range of opportunities for the industry. 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 will need a methodical and consistent approach to governance, especially given the rapid evolution of the industry and its regulatory landscape. A patchwork of local, state, national, and international cannabis regulations leave companies exposed to a range of direct and indirect risks. A focus on governance prioritizes long-term business continuity amongst managing these policy risks. Similarly, supply chain management is a material issue for most industries and particularly relevant to the changing conditions of cannabis industry supply chains. Shifting regulations, evolving distribution models, product quality testing and labeling pressures mean that supply chain risks are more complex and breakdown is increasingly more probable. Cannabis companies must optimize supply chain engagement, collaboration, and oversight to reduce these risks as the cannabis market expands globally. 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.
