Key Takeaways:
- The recently released IPCC Report shows irreversible harm to the global ecosystem.
- Fund managers focused on ESG criteria will have an increased focus on environmentally conscious companies and substantial sums of investment dollars will likely flow into companies that commit to more aggressive ESG plans.
- Cannabis companies could benefit from looking at how industries like the wine industry have embraced sustainability.
- In an industry where competition for capital is fierce, adopting ESG principles is an effective way for cannabis companies to not only foster good will, but to foster investment.
On Monday, August 9, 2021 the United Nations Intergovernmental Panel on Climate Change Sixth Assessment Report (the “IPCC report”) sent shock waves through the financial markets and the world in general. This report, the most comprehensive of its nature released since 2013, made it abundantly clear that much of the damage incurred by the global ecosystem will be irreversible and the harm is accelerating at an alarming rate. This has catalyzed investment funds and asset managers focusing on ESG investments to rethink their approach. According to Bloomberg Law, Chris Meyer of Praxis Mutual Funds, a well established socially responsible investment firm stated that the report “…changes the calculus. We will need to have a sharper focus. This report shows that investors are not moving quickly enough.” Financial investment itself may not be able to curb the problem, however, what is certain is that fund managers focused on ESG criteria will have an increased focus on environmentally conscious companies and substantial sums of investment dollars will likely flow into companies that commit to more aggressive ESG plans.
What is ESG and does it matter to cannabis companies?
ESG is an acronym for Environmental, Social, and Governance criteria and it is a set of standards applied to a company’s operations that attuned investment firms use to analyze potential investments. In recent years, more and more investment firms have focused on ESG as a means of attracting investors. Investment firms also increasingly believe that companies exhibiting a commitment to ESG principals will be better situated to deliver outsized returns in the future.
How will this effect the cannabis industry? Frankly, for all the high-minded talk, our industry is lagging on all ESG metrics. The cannabis space is currently a hot investment market, but not all operators are reaping the benefits. There is increasing disparity between cannabis companies that can attract investment and those that cannot – and this trend will only intensify in the coming 18-24 months as we see federal cannabis regulation (perhaps) become a reality. Cannabis companies that can demonstrate a commitment to ESG (in their financials, in their contracts, in the corporate books, and in their company culture) will be better positioned to receive sophisticated, value-add investors and at better valuations.
Regulators in some states have already begun to develop specific environmental and sustainability requirements for the industry. The California Department of Food and Agriculture has already mandated that beginning January 1, 2022 renewal applications for all cultivation operations will need to include records regarding total electricity supplied by the local utility providers, total electricity supplied by a zero net energy renewable source, onsite power generation, total electricity supplied from other sources, as well as the greenhouse gas emission intensity from each source. Starting January 1, 2023 all indoor, tier 2 mixed-light license types of all sizes, and nurseries using indoor or tier 2 mixed-light techniques, will be required to ensure that electrical power used for commercial cannabis activity meets the average electricity greenhouse gas emissions intensity required by their local utility provider pursuant to the California Renewables Portfolio Standard Program. In addition, the California Energy Commission’s (CEC) proposal for new efficiency standards for indoor and greenhouse cannabis facilities will require all indoor cultivation operators, to transition away from common grow lights to LEDs by January 2023.
Meanwhile in New York, environmental concerns are a key component of the rule making process. The Marijuana Regulation and Taxation Act of 2021 (the “MRTA”) effectively legalized adult use cannabis and created an overhaul of the medical marijuana regulations. The MRTA created the Cannabis Control Board to develop regulations for the implementation of the adult-use licensing program. The MRTA mandates that the Cannabis Control Board to work in conjunction with the New York State Department of Agriculture and Markets and the Department of Environmental Conservation in developing regulations that take into consideration environmental and energy concerns.
In addition to the regulatory requirements placed on cannabis companies, there can be significant costs to cannabis companies that cut corners with respect to environmentally conscious issues. For example, in July of 2021 the Broiler Fire in Mendocino County California was caused by a lawnmower used by a Flow Kana employee. Flow Kana, a cannabis company backed by significant venture capital investment and traditionally known for their sustainable practices, took responsibility for the fire. The good will enjoyed for the honesty may be short-lived, according to the Mendocino Voice who received a letter from a woman who had previously contracted with the company to bring her livestock to graze on the property prior to the company (a sustainable practice used in the area) switching to machine lawnmowers. The letter condemns the company for failing to implement a sufficient fire safety plan and fulfill their ethical responsibility to the land.
“You attempted to deal with the fuels problem rather than treat the land as a complex series of relationships that foster life and death. You reduced your relationship to the land to one of control. I wish it didn’t have to happen this way, but my hope is that this fire is a wake up call for all of you, to assess your impact and dig deep for root causes of the harm you have caused. This fire reflects larger truths about your organization, with yet another chapter of bridges burned in this community.”
Cannabis companies already face more scrutiny than businesses in other spaces, and the focus on responsible business practices by consumers and investors is intensifying. These companies are increasingly being held responsible for their impact on communities and their environmental risks.
Benefits of ESG
While there are substantial risks to cannabis companies that fail to implement sustainable practices, there are also significant benefits to be had for those that embrace it. The attention garnered by the financial markets as a result of the IPCC report are an indication of where investment dollars will flow. In an industry where competition for capital is fierce, adopting ESG principles is an effective way for cannabis companies to not only foster good will, but to foster investment.
Currently, there are studies underway evaluating water use and alternative lighting, however, cannabis companies could benefit from looking at how industries like the wine industry have embraced sustainability. The wine industry has been using sustainable practices such as regenerative growing to attract investment and consumer support for decades. Consumer demand for sustainable products continues to grow and investment into those companies has increased as well. Companies like Fetzer have implemented sophisticated systems to treat 100% of winery wastewater with regenerative filtration, worms, and microbes. In 2016, Verizon partnered with several vineyards in Monterey County and the Napa Valley in the utilization of an analytics engine to optimize every part of the growth state of the vines. Wine growers continue to develop innovative ways to benefit the environment. The cannabis industry is now following suit.
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