What To Know About ESG And Cannabis – Cannabis & Hemp & More News Here – Upjobsnews

Investors and lenders focused on environmental, social and
governance (ESG) principles will find opportunities for
“green” financing in cannabis, but risk abounds as the
truthfulness of ESG claims and disclosures are on the SEC’s
radar. Last month the SEC put out a proposed rule that if adopted
could lead to increased climate-related disclosures for companies
subject to SEC oversight.

While cannabis businesses can improve their prospects for
funding by emphasizing their ESG-related activities and achievement
of ESG standards, financiers must do their diligence before
incorporating an issuer’s or borrower’s ESG claims in their
own disclosures.

At a high-level, cannabis may be viewed as ESG-friendly given
its natural benefits to both mind and body, but each element of E,
S and G must be considered to determine if a given project or
company is holistically meeting ESG goals.

To help discuss the issues and best practices going forward, we
talked with Anthony Coniglio, President and Chief Investment
Officer at NewLake Capital Partners Inc., a leading provider of
real estate capital in the multi-billion dollar cannabis
industry.

Cultivating the “E” in ESG

The environmental impact of cannabis-related operations requires
careful management and monitoring. Climate change will likely
heighten sustainability issues further and investors and regulators
will increasingly take note. Challenges must be addressed related
to water usage, soil contamination, energy consumption and waste
management.

Indoor cultivation, used by many in the industry, provides
benefits in controlling against pests and weather, but these
facilities require tremendous amounts of energy that, in turn,
create a greater carbon footprint. For example, a group in Massachusetts reported that
indoor cannabis cultivation generated 10% of the state’s
industrial electricity use.

LED lights and outdoor growing could
reduce the dependency on electricity. The benefits must be weighed
against any increase in other negative factors, such as increased
use of pesticides.

Whether grown indoors or outdoors, however, the cannabis plant
requires water (about the same amount as tomatoes). Given that 19% of the contiguous United States faced
severe to extreme drought conditions in 2021, and 36% faced
moderate to extreme drought, water use could become a greater
concern as the industry scales up and agricultural industries
battle over resources. Hydroponic cultivation could help ease the
concern.

When it comes to potential contaminants, such as chemical
fertilizers and pesticides, which can have a downstream impact on
water and land, purveyors may need to consider growing their
cannabis under higher-cost organic principles, using
less pesticide and fertilizer.

Other environmental issues include cannabis’s emission of
natural volatile organic compounds (VOCs), which some fear
impact air quality and lead to pollution, and waste
issues related to regulatory child-proofing requirements and
single-use plastic medical packaging.

Identifying these issues and then responding to them are key.
Anthony Coniglio believes that the impact of cannabis on energy
consumption is a potential blind spot for the cannabis
industry.

“Not every location currently with cannabis operations is
hospitable or sustainable to cannabis cultivation, utilizing
wasteful processes, increased energy consumption, and higher carbon
emissions,” Coniglio notes.

During its underwriting process, NewLake considers these factors
and the long-term sustainability of a company’s operations. As
such, “NewLake is selective in partnering with the highest
quality operators and assets,” says Coniglio.

Opportunities To Repair Social Harms

Reparations

Many states are prioritizing cannabis business licenses based on
social equity criteria. For companies that qualify, this may help
to align ESG investor and lender values in social principles with
their company values.

For example, in New York proposed regulations provide that
the first retail licensees will be people who
have been convicted of a marijuana-related offense themselves or
who have a family member who has a prior offense. This is to ensure
that those who benefit from legalization are the people from
communities most affected by the war on drugs.

However, as always with regulated industries, companies must
follow the rules in their respective fields by, among other things,
making accurate disclosures in state licensing applications,
especially with respect to social equity criteria in the space.

Health Claims

Cannabis’s negative perception in some communities and
skepticism about its health benefits can make it difficult to
satisfy investor criteria required to prove that a cannabis
business benefits society. For example, though the impetus for so
many states to legalize cannabis was the medical benefits, one of
the drawbacks of cannabis being federally-illegal is the struggle
to conduct scientific studies.

It is possible that there are untold positive health benefits
that more research could unlock. But it’s also true that, with
more research, health harms could be discovered. There are still
questions surrounding the risks of vaping cannabis products.
Companies and investors will need to carefully watch for changes in
research findings that could impact their ESG disclosures.

Even where the state has legalized adult recreational use,
negative perceptions can lead to a “not in my backyard”
mentality at the local level, limiting location options and
impacting the profitability of dispensaries and other operations.
But cannabis companies can change the paradigm by focusing on the
health, safety and welfare of customers, communities and
employees.

This requires, among other things, closely monitoring and
following regulations related to pesticides, labor practices and
occupational hazards.

Anthony Coniglio acknowledges that “while many studies
demonstrate the benefits of cannabis to treat certain conditions,
more research is necessary to provide the significant empirical
evidence necessary to demonstrate to investors the long-term
positive impact on society that legal cannabis can
provide.”

Good Governance

In some ways, cannabis is ideally positioned for positive
governance.

As there is more investor activism around Equality, Diversity,
and Inclusion, board composition and company practices should be
reviewed for EDI factors. Cannabis companies need to approach their
lobbying efforts ethically.

Putting best practices in place and being responsive to an
ever-changing regulatory landscape will be important. Understanding
the unique requirements of each state’s laws and regulations
and maintaining good compliance practices will be necessary.

“Given the investment community’s often negative
perception of the legacy cannabis industry, it is of paramount
importance for companies in the sector to embrace strong corporate
governance,” Coniglio emphasizes. “Furthermore, while
social equity, diversity and inclusion has been a strong focus of
the cannabis industry since its inception, incorporating good
governance into a company’s DNA will enhance a company’s
ability to attract capital and differentiate itself in the eyes of
the consumer.”

Looking Ahead

For ESG-minded lenders and investors, the cannabis space offers
an attractive opportunity with the added bonus of funding the
growth of an emerging industry. Likewise, for cannabis-related
companies, conducting operations with ESG principles is good for
business and can help attract funding.

As laws regarding ESG disclosures take shape, we can expect
enforcement to focus on whether companies are actually doing what
they say they are doing. For cannabis companies and their
financiers, the evolving nature of the industry and the laws that
govern it pose additional challenges to compliance. A careful eye
is needed on regulations relevant to operations, health and safety
standards of the product and the concerns of local communities.

Coniglio points out that “the legal cannabis industry was
built upon many of the foundational principals within
‘ESG’. As the industry continues to scale up, redoubling
our efforts in advancing environmental, social and good governance
objectives will only serve to attract more capital, allowing a
multiplier effect on all the positive impacts the cannabis industry
provides to the communities it serves.”

Nicole Serratore, an attorney in the Insolvency + Finance
Practice Group of Davis+Gilbert, assisted with this post.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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