Canada’s fledgling cannabis companies should implement strong governance protocols and show they’re attempting to address material environmental and social risks to grow their base of institutional investors.

Speaking on Friday at a panel discussion on cannabis companies and governance practices nearly a year after legalization, Michelle de Cordova, a principal at ESG Global Advisors Inc., noted the Canadian cannabis industry has emerged alongside ESG factors becoming increasingly important to institutional investors.

“Just as cannabis prohibition was lifted, that was the moment when Canadian institutional investors who are using ESG in their processes actually became the majority of assets under management in Canada,” she said.

Read: Is it time for institutional investors to consider the cannabis sector?

Since legalization, institutional investors have had to determine how involved they want to be in the cannabis sector. Also speaking on the panel, Rosa van den Beemt, a senior ESG manager at NEI Investments, said the firm had to decide where it stood. It also co-authored a paper comparing cannabis to similar types of products, including alcohol, tobacco and prescription drugs. “We decided, for us, it doesn’t fall into the exclusionary because there are significant benefits that cannabis can bring and it’s not as harmful as, for example, tobacco can be.”

However, investors are still cautious about the industry. During the panel, Jonathan Hackett, managing director and head of sustainable finance at BMO Financial Group, said that, while all the ESG risks facing the industry are equally material to investors, cannabis companies should prioritize strong governance in the early days to win over institutional dollars.

“Getting certain pieces of governance in place gives you more trust that the board is thinking of [environmental and social] risks as well,” he said.

Read: CPPIB not yet interested in cannabis investments

Hackett noted the difference between what makes a good board of directors for an early-stage company undergoing rapid growth and a good board for long-term growth and attracting institutional investors. In the latter case, diversity is important.

“Having homogeneity can be a solution . . . but when you say, ‘No, I want to attract long-term stable capital, I want trust in what we’re doing,’ it requires shifting to a board that can give the right kind of advice . . . and can help you shift over in how you see your investor base.”

Van den Beemt agreed that strong corporate governance is necessary for institutional investors considering the sector. “Especially for responsible investors, the risk oversight element is really crucial here, particularly when it comes to environmental and social risks. Having that type of risk oversight that is strong and independent at the board level can help mitigate institutional investor concerns investing in an industry that’s already a little bit risky.”

Read: Has six months of legal cannabis changed the workplace?

Some of the most pressing ESG risks facing the industry include ethical business practices, social concerns around product quality, medical benefit and responsible consumption and environmental concerns around single-use plastics, energy use and greenhouse gas emissions. However, many of these risks also present opportunities for growth and profitability, such as reducing companies’ emissions by investing in renewable energy.

“Investors are pushing all these cannabis companies toward profitability and not many cannabis companies are really making any profits,” said Avjit Kamboj, managing director of KAM Consulting Corp, during the panel discussion. “Companies are looking to include in their strategy to move profitability social and environmental factors, and that includes looking at renewable energy as a source for electricity. A lot of companies we’re looking at are looking at solar power or wind power . . . and that not only helps the environment but also helps the bottom line.”

Cannabis companies don’t have to take an “all or nothing” approach to addressing ESG risks, noted Hackett. “There are steps you can take. There’s information you probably have and need to run the business that disclosing to institutional investors would allow them to see your [risk exposure].”

Read: Medical marijuana ETF to trade on TSX

He also cautioned companies against fearing the active investor. “It’s not the story of ‘activist’ active investors that are trying to tear down a company or radically change its thesis . . . it’s really a value creation effort at its core,” he said.

Van den Beemt noted NEI isn’t currently invested in any cannabis companies but if it was evaluating one it would look at how the company is positioned to manage its ESG risks. “On the engagement side . . . that could mean we reach out to the company prior to investing in them because there just currently is not a lot of publicly available information, so just to further understand how companies are managing various ESG risks.”

Copyright © 2019 Transcontinental Media G.P. Originally published on benefitscanada.com

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