Environmental, Social, & Governance: The Perfect Storm For The Cannabis Industry

Vicente Sederberg LLP
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Vicente Sederberg LLP

With climate-driven, historic weather events, social unrest, and what is shaping up to be a record-breaking shareholder proxy season, stakeholder capitalism is now on the forefront of every company’s consciousness. The result is that the growth of Environmental, Social, and Governance (ESG) measurement, benchmarking and reporting has grown by leaps and bounds over the past few years. In fact, ESG has officially jumped from a niche Wall Street consideration to that of Main Street investors, employees, and customers. Meanwhile, the cannabis industry appears on track to be a $92 billion industry within the next year, yet all but a few companies have recognized this trend and now face the perfect storm of stakeholders demanding to see a company’s ESG receipts.

While institutional and family office investors are starting to take a serious look at the cannabis industry, the purpose-driven Millennial generation are simultaneously experiencing the greatest wealth transfer in history and are looking to invest their money in alignment with their values. Calls by investors for ESG data are growing louder.

Meanwhile, the cannabis industry is largely supported by these same Millennials. According to Flowhub, in 2020, nearly half of all cannabis customers were Millennials, with Gen Z overtaking Boomers and imminently poised to surpass Gen X in short order. Similarly, the industry’s workers are overwhelmingly Millennial. This combination of Millennial customers, patients, and employees demanding that the industry be more aggressive when it comes to sustainability practices and social equity is creating a business imperative for companies. Every cannabis company is feeling the pressure to start to address issues such as climate change, widespread waste issues, and an industry that, for moral and historic issues, must have a reckoning with the lack of minority representation in ownership and leadership.

Then, there is the movement by governmental regulators and financial oversight bodies requiring public companies to provide greater disclosure of material, non-financial ESG metrics. In fact, following the latest regulation in the European Union, the U.S. SEC has been intimating for months of the coming requirement for US-based, public companies. Not only will public companies be required to report on ESG metrics, but non-public companies will likely see advantages to doing so as well for a myriad of reasons.

Of course, companies can’t report what they don’t measure and the fact of the matter is that the cannabis industry, often consumed with more pressing issues around state and federal legalization, tax and banking law, branding, M&A, and compliance, is sitting in the eye of an ESG hurricane without so much as an umbrella. The risks associated with failing to start to measure one’s own ESG will not only place lagging operators in the cross-hairs of regulators, but they will miss out on savvy investors or exit opportunities, fail to attract and retain top talent, and run the risk of being marginalized by more thoughtful, future-looking and purposeful competitors.

The jury is out – companies that engage in ESG measurement and reporting are better run companies – and investors, the street, and Millennials know it.

The question is, when will the cannabis industry start to do it?

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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