A Sustainable Cannabis Market: Where the Grass needs to be Greener
Even for people outside of our industry, cannabis is synonymous with green, and by the same token, green is a word associated with sustainability. On the other hand, brown is the color associated with practices in any industry deemed dirty or unsustainable. So, it begs the question: what do you get when you combine the two hues? A greenish-brown color called “olive” that is tempered by your sustainability status.
This sustainability hue notion is put forth by Gillian Tett in an opinion piece in the Financial Times just over a week ago. While the argument supports the climate change fight, the crux is that moving towards sustainability is NOT an overnight color change, but a journey of incremental change.
At CohnReznick, we have seen the color change as two of our primary industry foci - renewable energy and cannabis - have collided, and energy clients have pioneered solar power financing products for cannabis cultivators. The impetus? Lighting, ventilation, and air conditioning systems of grow houses consume an enormous amount of electricity. To convert this factor from brown to olive, cultivators add solar panels to offset electricity bills. The benefit? Trends point to a premium on companies moving fast across this “olive yield curve.” But this comes with a need for a credible system to measure progress.
The “olive framework” is also reflected in Blackrock CEO Larry Fink’s recent communication to investees. Fink focused on accelerating the shift to sustainability-focused companies, the importance of data and disclosure, and the need for standards.
As every cannabis business considers what sustainability means to them, it is useful to reflect on the standards created by more mature industries. For example, the global green-building certification program we all know as LEED, was designed to promote healthy, highly efficient, and cost-effective buildings. LEED standards help investors meet their Environmental, Social, and Governance (ESG) goals by providing a robust and globally recognized green building framework for reduced energy use and carbon emissions. The certification program also provides metrics to help businesses measure and manage operational real estate performance and translates into financial outcomes.
The cannabis industry is craving standards – not surprising for any nascent industry, but something unique in a budding industry that is still coming out of the shadows. The easy work for the SCC is convincing the marketplace that sustainability is something that should be a significant priority. It is not difficult to appreciate the societal value of an ESG focus. However, ensuring the proper response to the various stakeholder pressures is very important and needs to be more proactive than reactive.
As a coalition, it will be necessary to encourage standardization, if not standards. This movement is the hard work, but rather than reacting as a response to government-imposed regulation, it will require a collaborative effort among the coalition and the larger market, focusing on the data and the science (sound familiar). We need to begin now. We can help set the table that makes the meal so much more satisfying.
Speaking of food, the power of analogizing our sustainable cannabis business case to other industries could easily start with the food system. Stephen Mancini, an advisor within our Strategy and Innovation team, shared his experience working with organizations like Share Our Strength and The Chefs Collaborative for context. These organizations help preserve local farming and fishing, minimize food waste, provide meals for students, and support education and legislative action.
These organizations are an excellent example of combining environmental concerns with social considerations to positively disrupt the supply chain – farm to table at its best. The less sexy but valuable side of this effort is that farmers have practiced crop rotation for centuries to improve soil health and balance nutrients such as nitrogen, phosphorous, and potassium.
Analyzing soil nutrients has become increasingly critical to understanding what’s going on beneath the topsoil and providing actionable insights into improving sustainable farming practices. A comparable approach can be applied to cannabis cultivation.
Data and analytics: The cannabis jackpot
To further affirm the relevance of the SCC work, one more recently published piece is worth a read. The Harvard Business Review of February 3rd discussed specifics around ESG measurement in its article, “Reimagining the Balanced Scorecard for the ESG Era”. The article shares that the primary challenge of the triple bottom line (financial, social, and environmental), is overcoming the limitations of accounting and control systems that prioritize only financial outcomes.
More to the point, according to a 2020 environmental sustainability report published by the National Cannabis Industry Association, companies that focus on sustainable practices can reduce their resource dependence and associated costs, helping them outperform their competitors in the long term.
Additionally, processes can help cultivators achieve operational and supply-chain efficiencies while driving down costs.
This has been our sustainable cannabis coalition soapbox and the place we think translation between operational excellence and financial performance is desperately needed. The common language is data.
As cannabis businesses continue to mature, it’s clear that data is critical to planning and managing production, reducing costs, building operational efficiencies, complying with state regulatory requirements, and creating effective metrics to analyze the business. That’s true of most industries, of course.
However, cannabis presents a particular challenge because it’s an emerging segment that lacks historical data to forecast and manage disparate, complex regulatory requirements, according to our colleague, Paul Ricci, CohnReznick’s Enterprise Technology Solutions leader. “Further compounding matters, many cannabis companies lack mature business systems, data governance policies, standardized IT processes and controls, and robust IT resources.”
While robust data analytics support the collection, analysis, and reporting of ESG data, many smaller and younger firms lack data literacy, analytical tools, and capabilities. Similarly, businesses typically lack timely, accurate data to evaluate ESG performance. What’s more, ESG areas like climate change and social impacts rely on quantitative as well as qualitative data sets, which are intrinsically difficult to measure.
Taking full advantage of ESG will require that CFOs skillfully merge and manage the business’s operational and financial aspects. The analysis of data and systems becomes the method through which these issues are translated and communicated. Ultimately, this can lead to greater enterprise value and a collective sense of corporate purpose.
High Time for M&A
It will be interesting to see the effect the sustainability focus will have on the growth and likely consolidation of the cannabis industry in the coming year. Cannabis M&A activity is strong and is forecast to remain robust throughout 2021. Consider, for instance, that more than $600 million in M&A deals were announced in the last two weeks of 2020 alone. Many analysts forecast that 2021 will be a banner year for cannabis M&As.
Cannabis companies will need to update their due diligence, which has traditionally focused on tax and financial issues. But as sustainability is increasingly woven into the fabric of the business, companies can focus on a careful and comprehensive assessment of commitments and results. Doing so can help ascribe value to and integrate the target businesses after the deal is closed.
A clear reflection on the industry's growing maturity, investors are starting to assess cannabis companies with the same sober scrutiny as they do traditional businesses. They are looking to invest in well-operated companies with differentiated brands, protectable intellectual property, and highly skilled employees – where sustainability and socially conscious initiatives are a driving factor.
“As we go into 2021, we’re seeing renewed investor interest in cannabis driven by the political climate and consistent increase in demand for the product. Maturity in financial infrastructure and a longer-term view with an eye towards sustainability could be a game-changer”, says our colleague Greg Chin who heads up the cannabis M&A effort.
Flower to the People
The social aspects of ESG are among the most important factors for consumers and, as such, should not be overlooked. Many consumers prefer to buy products from companies whose corporate ethos is based on making a difference across the spectrum of ESG.
In fact, a survey conducted by CGS found that 68% of consumers consider sustainability when making buying decisions and that almost half (47%) are willing to pay a premium for sustainable products. Today, Millennials dominate cannabis purchases, accounting for 51.5% of total sales, followed by Generation X, which accounts for 25.7% of sales. These groups put high value on ESG.
Building sustainable infrastructure with a sustainability focus is good practice and incorporating the right policies and procedures will create a culture in which doing well by your business in turn does good for everyone.
