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ESG in the Cannabis Industry

2020-11-18


The business landscape is changing at a breakneck pace. Stakeholders are increasingly concerned about the consequences of their consumer, investment, and employment decisions. As people understand more about their place in an interconnected world, the demand for your organization to act in a more responsible, equitable and sustainable way is becoming ever louder. But how to do that in a meaningful way that still makes for profitable and innovative business decisions?

MNP Maturity Model

Table of Contents

  1. What is ESG?
  2. Why care about ESG?
  3. Advantages of a sustainable business model
  4. Why ESG reporting is critical
  5. How MNP can help
  6. Frequently Asked Questions


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What is ESG?

Environmental, social, and governance (ESG) are the three pillars stakeholders are increasingly using to measure the degree to which your organization is benefitting your community. They are also strategic imperatives to drive long-term, sustainable value in our changing world.

ESG business drivers

Environmental

  • Energy efficiency
  • Carbon footprint
  • Water consumption
  • Waste management
  • Packaging
  • Biodiversity management

Social

  • Employee attraction and retention
  • Diversity and inclusion
  • Pay equity
  • Customer data privacy
  • Social acceptability of projects / business
  • Organizational culture

Governance

  • Climate change
  • Cyber security
  • Corruption and bribery
  • Responsible taxes
  • Compensation
  • Reliable financial disclosure
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Why care about ESG?

Organizations are facing increased demands from:

  • Investors
  • Regulators
  • Community stakeholders
  • Employees
  • Boards of directors

A growing body of evidence is also revealing the long-term, intergenerational benefits of ESG — as well as the risks of not acting now.

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Advantages of a sustainable business model

A growing body of evidence suggests the long-term benefits of ESG initiatives far outweigh the initial costs. Since many of these advantages accumulate as the program matures, the real risk is in delaying getting started.

Increased competitiveness - Create distinct value propositions for clients, partners and consumers — and offer a clear reason to choose your business over a competitor.

Greater resilience - Absorb the costs of socio-environmental changes over your own timeline, rather than face them abruptly when these measures eventually become legal requirements.

Scalability - Realize measurable benefits as you continuously invest in ESG policy and practice maturity.

Resistance to commoditization - Deliver cultural, social, and economic value which extends beyond your product or service offerings.

Sustainability - Escape zero-sum business planning and shift toward more circular, longer-view economic thinking.

Better value for investors and stakeholders - Reduce investor risk and provide a more reliable return on investment.

Reshape value chains - Support network effects which enhance the impact and benefits of ESG efforts as they become more commonplace.

Create surplus - Reduce your dependence on finite resources and increase your ability to do more with less.

Clearer purpose and brand identity - Build strong relationships with employees, customers, investors, and stakeholders who resonate with your values and are loyal to your objectives.

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Why ESG reporting is critical

Consider that ESG is really two equally important activities: (1) the sustainability initiatives themselves, and (2) reporting on those activities.

Effective ESG reports are critical to communicate the urgency your organization places on sustainability, as well as quantification and validation of your sustainability efforts. Well formed ESG reports will:

  1. Compliment your financial reporting by providing a fuller picture of your value creation potential and enterprise risk landscape.
  2. Demonstrate your commitment to driving sustainability and competitive advantage along dimensions of cost leadership, product / service differentiation, and intellectual capital development.
  3. Measure and disclose intangible (yet financially material) factors such as strategy, innovation capacity, human capital management, reputation management, commercial risk mitigation, and resource efficiency.
  4. Disclose and discuss certain risks, uncertainties, challenges and trends that may affect financial performance.
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How MNP can help

No matter where you are on your ESG journey, our team can assess your initiatives and help you move toward maturity.

Financial materiality and alignment

We can help you identify financially material ESG factors which may have a serious impact on your business and ensure they are aligned to your values, stakeholder concerns and societal norms.

Supporting your journey to sustainability

ESG is not a destination, but an iterative and ongoing process which your business must embrace over its entire lifecycle. To realize the advantages requires a commitment to continuously invest in, manage and monitor ESG efforts.

MNP Sustainability Chart showing increase in strategic value and maturity with defined ESG efforts

Sustainability Milestones



Sustainability Milestones: 0 Baseline assessment, Outline current disclosure of and appetite for sustainability. 1 Awareness, Identify and prioritize sustainability issues; establish metrics for measurement. 2 Integrate and report, Quantify, proactively manage and monitor key sustainability issues. 3 Embrace and measure, Integrate sustainability and risk / opportunity analysis into strategy setting and planning. Implement a robust sustainability framework. Measure and benchmark metrics. 4 Mature and evolve, Disseminate a sustainability-based mindset within and across the organization. Embrace full stakeholder transparency and make disclosure a leading practice.

Building your business case

We can help you review any existing ESG reports, filings and initiatives, and assess your requirements. Together, we will identify opportunities and risks, and assess engagement requirements across board, management and other stakeholder groups. We will then compile our findings into a forward-looking document, including the potential costs and benefits of a formalized ESG strategy.

Defining and executing your ESG strategy

Once you decide to formalize your ESG program, we can help you define the value proposition, desired outcomes, and desired level of maturity. We’ll then drill down on specific ESG factors, targets, and key performance indicators to define a measurement, monitoring and reporting framework.

This includes building a resourcing strategy which defines:

  • Key internal stakeholders and their responsibilities
  • Ideal governance structure and board and executive involvement
  • Desired tracking and reporting framework (i.e. internal, external, hybrid)
  • Process for verifying progress and results (i.e. internally or via a thirdnparty)
  • Technology requirements for program monitoring and data visualization
  • Stakeholder engagement process and best practices

We formalize these objectives into an overarching ESG strategy document, support you through the process of securing external stakeholder buy-in, and report on your progress throughout the implementation.

Maturing and optimizing your ESG program

If you already have an ESG program in place, we can work with your team to optimize the effectiveness of your ESG program, measure how well it is integrated with existing organizational, cultural, and enterprise risk management strategies, and evaluate the quality of your reporting.

Some common steps we will take through this process include:

  • Implementing measurement and reporting frameworks for investors and stakeholders
  • Evaluating board and management involvement in ESG strategy and initiatives
  • Evaluating the degree to which ESG benchmarks are informing organizational actions
  • Auditing and validating ESG factors and disclosures

Additional measures we can help you take in this phase include:

  • Outlining processes and benchmarks to help your organization become ESG leaders in your industry / sector
  • Recommending best practices for continuous engagement with ESG stakeholders (e.g. annual reporting, digital collaboration)

Frequently asked questions

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There is a broad and somewhat confusing array of options to consider.

Many institutions have adopted the Morgan Stanley Capital Index (MSCI). Alternatively, screens like Sustainanalytics, Refinitiv and Thomson-Reuters rank companies’ risk along ESG factors and overall quality of governance / management.

However, results can vary widely when comparing the same company across each of the rating agencies based on the screening filters applied. These filters are set by the end user based on individual preferences, values and perspectives on topics (e.g. greenhouse gas emissions). Investors and asset owners can also shape screens to their own preferences.

Regardless of the screening filters used, it’s essential to keep the six principles for responsible investment (PRI) in mind, as these provide a framework for activities — including active ownership, ESG integration, and reporting.

There are some factors in each of the categories that might seem easier to address, simply because noncompliance is illegal (e.g. responsible taxes). It is also easier to undertake initiatives that we call binary. In other words, the company either does or doesn’t do something. 

An example of this might be a grocer deciding to:

  • Ban plastic bags
  • Give to local charities
  • Provide PPE to front line employees
  • Publish a code of conduct for its staff

An investor can look at the company and note whether it’s taken the action or not.

But looking for the easiest route may result in ESG being a compliance exercise as opposed to a culture changing imperative. ESG is supposed to reshape the way your organization conducts business, so we advocate for an approach which considers the organization’s progression along an ESG maturity model. 

The best starting point is to undertake a baseline assessment of ESG factors you’ve already identified as critical to your business — and which you are currently managing, measuring and reporting. Once you know your current ESG status, begin benchmarking your initiatives in relation to your peers. Note the gaps: These might include approaches to diversity, equity and inclusion, consideration of environmental impacts associated with product packaging, or employee safety in the context of COVID-19. 

Now it’s possible to be far more strategic about ESG.

The most strenuous areas are those which address broad technical or people-related issues — and where key performance indicators and progress metrics are challenging to define.

Consider the grocer’s code of conduct in the previous FAQ. It’s one thing to have a code of conduct; another thing altogether to measure its efficacy. This requires tools such as whistleblower sites, exit interviews and regular employee feedback to determine how well it’s working. Diversity, equality and inclusion; carbon footprint; organizational culture; biodiversity management; and many other factors fall into this challenging basket requiring significant strategic and operational focus.

This underscores the need to link ESG directly to organizational strategy — forcing decision makers to commit to those factors which will have a financially material impact on the business. The tone at the top will ultimately drive the widespread adoption of ESG principles, their ultimate success, and the degree to which they change how organizations function.

Sustainable change will be all but impossible until the board of directors and senior leadership teams align on the importance of accepting and embedding ESG into the fabric of organizational culture. But this is easier said than done.

Securities regulators recognize the growing interdependence between sustainability issues and their core mandate to protect investors, reduce systemic risk, and ensure fair, efficient, and transparent markets. It’s also important to acknowledge the link between systemic risk and the United Nations Sustainable Development Goals (SDGs), which include both ESG and economic development issues and is fast becoming the go-to reference framework on policy creation.

Only 24 of 103 exchanges the 98-member Sustainable Stock Exchanges Initiative (SSE) tracks have mandatory ESG listing requirements. Closer to home, there’s a movement to push greater guidance into the reporting of non-financial disclosure requirements for public companies. While not yet mandatory, the trends point to a disclosure requirement not unlike the 2002 Sarbanes-Oxley Act.

International Financial Reporting Standards (IFRS) adherent countries have already seen changes originate in Europe, where new IFRS standards have been adopted for non-financial information. This will likely influence what is happening in Canada very soon, with reporting requirements linked to the supposed green recovery following the pandemic.

Diversity, equality and inclusion (DE&I) needs to start at the top with the CEO, not in human resources. The entire executive team need to be aligned and visibly demonstrate a unified commitment to DE&I.

Organizations can solidify DE&I by defining how supporting behaviors are directly linked to core values and principles. These behaviors must be directly applicable to the workplace ­— such as on the shop floor, in customer service centers, at bank wickets, in staff meetings, etc.  This will likely require a mix of role playing, the use of avatars, and leveraging other technologies (e.g. virtual reality). Sensitivity training programs are typically less effective than initiatives which help people understand implicit bias.

Similarity, quantitative DE&I targets rarely, if ever, resolves the underlying issues. Targets are important, but only when equal weight is afforded to evaluating what is best for the organization’s long-term sustainability with representation across all races, colors, and creeds. Decision makers must be able to describe how they embed this as part of their critical, strategic decision-making process at all levels of your organization.

Boards must deal with crises head on, with consideration for the unique factors involved and the potential impacts to the organization. Once having pivoted as necessary, it’s critical to return to the company’s purpose and re-align any actions accordingly. Disruptions may require careful strategic adjustments, including consideration for ESG factors that can materially affect financial health and risk. Any shift in focus must include the pursuit of operational, managerial and oversight plans.

Scenario planning is a particularly powerful tool for boards in times of crisis. In the context of COVID-19, many companies pivoted quickly to enable remote work arrangements. But how many planned for a 15- to 24-month shutdown? Would this have changed how they dealt with pay equity or cyber security?

To ensure ESG stays relevant boards must embed ESG into the greater enterprise risk management framework. Each pillar (E, S, and G) harbours risks and opportunities that directly impact strategic priorities. Long term value creation requires knowing the exposures and opportunities and making effective decisions accordingly. Setting targets and reporting on progress against globally accepted priorities such as the SDGs — as well as knowing how the organization is pursuing sustainability within its own operations, its communities, and with third parties across supply chains and capital markets — is the best way to create alignment.

Contact

Mary Larson | Partner Consulting Services | 514.228.7905 | [email protected]  
Kevin Joy | Partner Consulting Services | 514.228.7898 | [email protected]  
Edward Olson | Regional Leader Enterprise Risk Services & ESG | 250.718.8687 | [email protected]

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