ESG Lessons for the Cannabis Industry

By Phil Denning & Dan McDermott

Medicinal marijuana is legal in 30 states and as the cannabis industry continues to mature and more companies are publicly traded, there will be an increased focus on their environmental, social and governance (“ESG”) practices.

Global spending on legal cannabis is expected to grow 230% to $32 billion in 2022 as compared to $9.5 billion in 2017, according to Arcview Market Research and BDS Analytics.

ESG Cannabis quote 1 There are a range of cannabis companies vying for their share of this growth – cultivators, medicinal, biotech, recreational, services, and a range of ancillary businesses that benefit from the cannabis industry – as are investors.

As cannabis companies look to raise institutional capital through public listings, cannabis entrepreneurs need to consider the ESG factors like energy and pesticide use as well as standard corporate governance best practices like independent board oversight, shareholder rights and performance-aligned executive compensation. Not only will ESG best practices help attract additional capital, good governance lays the foundation for a culture of transparency and accountability. The failure or success of corporate governance- and company culture- often begins at the top.

Lessons from Purdue PharmaESG Cannabis quote 2
Recently, the Attorney General of Massachusetts filed a suit against Purdue Pharma for its contribution to the opioid epidemic. The suit alleges that through the sale of its premier drug, OxyContin, the company deceived doctors and patients to boost OxyContin prescriptions including higher doses over longer periods of times. The suit also alleges that Purdue peddled falsehoods to keep patients from safer alternatives while knowing that addictions and deaths related to the drug was rapidly increasing.[1]

The aggressive and deceptive sales tactics of OxyContin were allegedly driven by the Sackler family, the owners of Purdue Pharma. For example, in one email, Richard Sackler, a former president of Purdue, personally directed sales representatives to push doctors to prescribe extremely high doses of opioids despite knowing that higher doses put patients at higher risk.

In 2017, there were 47,600 opioid-linked drug fatalities in the United States.[2]

Failed corporate governance can have dire consequences. The lawsuit further contends that “Eight people in a single family made the choices that caused much of the opioid epidemic”.[3] On March 4, 2019, Purdue Pharma announced that it is exploring bankruptcy to address significant liabilities from over 2,000 lawsuits.  The repeated failure of big pharma’s accountability in the opioid crisis provides an opportunity for acute pain therapy alternatives- namely medicinal marijuana.

ESG Action Required
Cannabis companies face an uphill battle against a historical stigma surrounding cannabis use as well as a murky regulatory environment. Despite those headwinds, the cannabis industry is growing at a rapid pace for many reasons, including the need for an opioid alternative. As investment flows into this blossoming industry, it is critical to remember the lessons learned from big pharma’s mistakes.

ESG Cannabis quote 3Successful corporate governance starts at the top – in the boardroom and the C-Suite – and flows through an organization and its culture. Not only is the board and C-suite responsible for instilling a strong corporate culture, but they are also responsible for adopting best corporate governance practices including shareholder rights, shareholder engagement, risk oversight, executive compensation and addressing environmental and social risks and opportunities.

Given the aforementioned headwinds facing the industry, it behooves cannabis companies to adopt best corporate governance practices including maximum transparency into material ESG (environmental, social, governance) issues facing the industry such as energy, pesticides, water and land use. Full transparency not only resonates with investors but will also help alleviate some of the stigma associated with marijuana use.

Sustainable, long-term growth begins with a foundation in strong corporate governance. Just as the risks of poor governance can be massive, so can the benefits of good governance on the long-term outlook of a company and an industry.

Phil Denning is a Partner leading ICR’s Special Situations Group:
Dan McDermott is a Senior Vice President in ICR’s Special Situations Group and is a former Senior ISS Analyst:

[1] Commonwealth of Massachusetts v Purdue Pharma:

[2] Purdue Pharma sought secret plan to become ‘end-to-end pain provider,’ lawsuit alleges. CNN:

[3]   Lawsuit Claims Sackler family disregarded safety, opioid addiction in Purdue push to Profit from OxyContin. Washington Post:

[4] The budding cannabis industry: a first look at ESG considerations. Sustainalytics:

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