Sustainable investing priorities known as ESG – short for corporate environmental, social and governance – took center stage this fall at the United Nations Climate Change Conference in Glasgow, Scotland.
ESG financing has become inextricably tied to companies’ performance on these issues.
Climate change now tops the list of most important ESG issues, according to a survey of private investors by the Association of Investment Companies, with 56% saying that it matters to them.
The issue is followed by:
- Transparency and disclosure (51%).
- Pollution (46%).
- Human rights (43%).
The research also found that nearly two-thirds of private investors (65%) consider ESG issues when investing, with a marked difference between investors younger than 45 (77%) and those 45 or older (61%).
What does all this mean for the nascent cannabis industry, and how does a company get started in measuring its ESG impacts?
Materiality is starting point
Materiality refers to the effectiveness and financial relevance of specific measures as part of a company’s overall ESG analysis.
Material factors are financial elements deemed fundamental to the long-term success of a company’s ESG strategy.
In other words, materiality reflects what matters most to a company and where its greatest exposure might exist vis-a-vis various stakeholders.
For instance, if you have a cultivation facility in a drought-stricken area, water supply is material to the operation of your facility.
Drought restrictions and supply limitations would cause a spike in operational expenses.
Another example would be if you set up a dispensary or retail store in a location with an active registered neighborhood association but didn’t have a strong plan to proactively engage the community.
Such a situation could result in costly complaints to governmental entities and public relations issues.
Conducting a materiality assessment
Developing a strategic and effective ESG program begins with conducting a materiality assessment.
This will identify the ESG issues your company should spend the most time measuring and upon which it can create action plans and report.
Materiality assessments should include the following five steps:
1. Create a well-rounded team: Professionals working within a company often have a narrow field of vision, focusing primarily (or, in some cases, exclusively) on the tasks and roles related to their specific positions or responsibilities.
A robust materiality assessment can provide a more comprehensive view by including participation from a wide range of departments, such as:
- Key operational functions.
- Government relations.
- Diversity, equity and inclusion.
- Environmental, health and safety.
- Investor relations.
- Community affairs.
- Human resources.
This process is often led by a skilled, internal ESG champion.
But, in the absence of such a professional, it can be helpful to retain an outside consultant to facilitate this process, avoid corporate politics and give internal stakeholders an equal say.
This can cost anywhere from a few thousand dollars to tens of thousands of dollars.
2. Stakeholder mapping: Use your well-rounded team to identify internal and external stakeholders who can impact your business on any given day.
Examples of stakeholders include:
- Executive leadership.
- Regional managers.
- Rank-and-file employees.
- Trade associations.
- Nongovernmental organizations/nonprofits.
- Community groups.
- Governmental agencies and officials.
- General public.
3. Engagement: Engage with a sample of each stakeholder group to determine their most pressing interests or concerns regarding your operation (or proposed operation).
These could involve environmental issues, human capital, supply-chain sourcing, diversity, executive pay, business ethics, corporate governance, community engagement, employee engagement, financial transparency and a whole host of other issues.
4. Prioritize: After you engage with stakeholders, hear their concerns and consider the full spectrum of materiality issues, you should identify which stakeholders and issues could most directly and dramatically impact your business.
5. Measure: Once you have determined which issues are most material to the operation of your business, you can begin measuring them with an eye toward reporting on those matters to a third-party framework.
The goal is transparency, which offers stakeholders (including shareholders and potential investors) a better sense of your company’s strengths and exposures.
Reaping the benefits
A thorough materiality assessment is the starting place for a strategic, integrated and authentic ESG program.
It can produce a wide range of benefits. In addition to identifying business risks and opportunities, it will:
- Enable your company to create an integrated ESG or “Corporate Social Responsibility or Sustainability” report and report its ESG impacts through third-party frameworks.
- Identify opportunities for more efficient allocation of resources.
- Serve as a useful tool for persuading senior leadership to take action on certain ESG deficiencies.
- Enable your marketing and communications team to promote ESG success stories to internal and external stakeholders.
- Aid in satisfying the needs of a variety of stakeholders.
ESG might seem like the latest buzz term in the world of marijuana and hemp, but – as we’ve seen extensively in a variety of industries – companies that commit to action in a holistic, thoughtful and strategic way will outperform competitors, identify cost-saving measures and compliance issues as well as insulate the company from negative events that could impact reputation.
More important, there continues to be internal and external stakeholder forces pressing more companies to get on a path to reporting ESG metrics.
Companies that fail to start on an ESG journey risk lagging behind industry leaders who already see ESG as a pathway to increased success in the industry.