The recent headlines around the health hazards of vaping marijuana—there have been reports of users suffering severe lung ailments from contaimenated oils—threaten to harm the budding, legal cannabis industry.
But sketchy supply chains and low-grade additives are not the only risk players in the space should be considering. Morningstar’s head of sustainability research Jon Hale argues in a new article that the industry needs to get ahead of several areas of concern, particularly if they want to build lasting businesses or are keen to tap public markets for financing.
“Cannabis companies should pay attention to their environmental, social, and governance risks and take steps to mitigate them early on,” Hale writes. “Doing so could result in operational and reputational benefits accruing to early adopters and improve public perceptions of the industry as a whole. Better for legal cannabis to be seen as sustainable than as just another ‘sin stock.’”
Energy intensity is one risk, especially for companies that cultivate marijuana indoors. The industry currently consumes 1% of the nation’s electricity, that will grow as the industry does, potentially opening up charges of heavy carbon consumption and potential risk from future regulatory mandates for energy efficiency or carbon caps.
Outdoor cultivation has its own issues, however, such as water use, pesticides and land use. One cannabis plant, for instance, that’s grown outdoors takes as much as six gallons of water a day during peak growing season, Hale says.
Hale also points to the potential negative health effects of cannabis use beyond the recent headlines, which may prompt regulators to impose limitations on the product as more scientific research surfaces.
It would also behoove cannabis companies to be transparent about their lobbying efforts and political expenditures, he argues, to ensure that industry advocacy in a highly regulated market does not fall prey to charges of corruption and influence-peddling.
He also suggests these companies makes efforts to have boards of directors that are not only diverse, but also have broader expertise in health, marketing and environmental impact to oversee the risks these companies may face.
“Sometimes in the chaos that happens with a fast-growing industry and a lot of new entrants, addressing sustainability issues gets put on the back burner, not regarded as central to building a business,” Hale says. “But there is a strong case to be made that those firms that establish themselves as sustainability leaders will have a stronger license to operate than those that are laggards.”
