ESG Risks For Cannabis Companies Will Impact Directors And Officers

• Published date: 24 February 2022
• Subject Matter: Corporate/Commercial Law, Environment, Cannabis & Hemp, Corporate and Company Law, Directors and Officers, Corporate Governance, Environmental Law, Diversity, Equity & Inclusion
• Law Firm: Wilson Elser Moskowitz Edelman & Dicker LLP
• Author: Mr Jonathan E. Meer and Ian A. Stewart

Corporations are increasingly responding to environmental, social and corporate governance (ESG) concerns, driven by evolving public sentiment and investor demands. This has taken the form of corporate pledges of action on ESG issues, sometimes from the directors and officers (D&Os). Cannabis companies have been trailblazers on social equity, inclusion and environmental issues, highlighting their importance long before ESG gained traction in the wider corporate world. Despite its well-intentioned words and actions, however, the cannabis industry is not free from potential ESG-related exposures that may lead to additional risks for cannabis executives in the years to come.

The Impact of ESG
The growing importance of ESG is reflected by the emergence of shareholder resolutions around environmental and social issues. There was a record number of these shareholder demands in 2021, nearly doubling the prior record set a year earlier. This included proposals on environmental and climate change matters such as setting reduction targets for greenhouse gas emissions, as well as proposals on diversity at all corporate levels.¹ The Securities and Exchange Commission has echoed these concerns, reflected in proposed rules that were announced in 2021 on corporate disclosures related to board diversity, climate change, governance and cybersecurity risk management.²

There is increasing competition between companies to attract capital by making and following through on ESG goals. As noted by the Global Sustainable Investment Alliance, ESG investments grew to more than $30 trillion in 2018,³ and these assets were poised to reach $41 trillion by the end of 2021.⁴ ESG pledges have become an important mechanism for D&Os to raise capital and increase profits. Even a company's ability to purchase insurance is now impacted, with certain carriers providing favorable pricing, policy retentions and limits if the company is advancing ESG initiatives.⁵ Although the cannabis industry has recently benefitted from multiple new insurance products for D&O and other management liability, it remains a hard market with risks that are difficult to adequately insure.

Cannabis and ESG
Cannabis companies have made their own ESG pledges, such as HEXO Corp's pledge to be carbon neutral, which was achieved in September 2021.⁶ Cannabis giant Trulieve announced in November 2021 the publication of its first ESG Report, highlighting the company's ESG achievements to date and establishing targets on environmental and diversity, equity and inclusion (DEI) initiatives.⁷ Similar ESG pledges from cannabis companies soon will be commonplace and even expected.

Although ESG messaging and disclosures can...