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Cannabis companies are under growing pressure to improve their corporate social responsibility – everything from environmental footprints to boardroom diversity – as they solidify positions in the mainstream investing world.

Unlike other emerging sectors in the past, the timeline appears to be shorter for cannabis companies to measure and report their environmental, social and governance (ESG) performance and targets, amid greater scrutiny from investors.

“The market has changed so much from 10 years ago,” says Dustyn Lanz, chief executive officer at the Responsible Investment Association. “ESG is no longer a niche approach. The largest, most sophisticated investors in the world are now looking at all investments from an ESG lens.”

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It’s why leading companies such as Canopy Growth Corp., Aurora Cannabis Inc. and Aphria Inc. are actively working on releasing official documents outlining their performance in areas such as water and energy use, community relations and management and board diversity.

While many of Canada’s leading cannabis companies have programs in place to increase their ESG track records, some have been called out for lack of disclosure.

A 2018 report from research company Sustainalytics B.V. looked at four major producers – Canopy Growth, Aurora, Aphria and MedReleaf Corp. (since bought by Aurora) – and described their performance as “underdeveloped." The report cited a lack of reporting on certain ESG measures.

"Without the disclosures, it’s hard to tell exactly how and when these risks will materialize,” says Martin Vezér, a manager in the thematic research team at Sustainalytics and lead author of the report. "Many of these risk factors can have immediate effects on business operations, and some effects can last a long time, such as controversies around pesticides and emissions.”

And while the industry is still relatively new and likely needs more time to improve its ESG performance and disclosures, Mr. Vezérsays investors and regulators may not be as patient as they were in the past with other sectors.

"In today’s market, with more investors integrating ESG factors into their decision-making process, it’s important for these companies to hit the ground running,” he says, adding they need to “prioritize the implementation of industry best practices and improve disclosures on exactly on what they’re doing and report any risks their business models present to the environment, their consumer base and society.”

Canopy Growth founder, chairman and co-chief executive Bruce Linton acknowledges his company needs to do a better job of disclosing its ESG performance, citing its rapid growth as a main reason why it hasn’t been a focus so far.

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“Disclosure improves with the stability of a platform,” Mr. Linton says. “Part of our disclosure process is simply continuously trying to catch up with a rapidly evolving engine of growth.”

He said the initiatives are in place, just not the communication. “For cannabis companies that are governed by Health Canada and compliance, we have such a good level of controls and incentive to be cost-effective, which is environmental, we just have to do a better job of translating it.”

Mr. Linton says his company is expecting to complete a document, described as a “white paper,” in the coming weeks that outlines its ESG performance.

“What I want to get to is actively including in our vocabulary those things we already do in the company because it’s fundamentally good business to be sustainable,” Mr. Linton says. “You are never done, but you should have the white paper and establish your position ... It seems time to do that now.”

Canopy Growth has one female board member, a number that Mr. Linton acknowledged needs to be increased. However, he says the industry has been challenged in the past to find board members in general given the stigma around cannabis companies. He says potential members have turned down offers, worried about losing positions on other boards.

“There has been a network bias against cannabis, which probably means it decreases the opportunity disproportionately,” he says, but says those attitudes are slowly changing.

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Jonathan Zaid, director of advocacy and corporate social responsibility at Aurora, says the company plans to put out its own CSR report in the next 12 months and joined the Global Reporting Initiative earlier this year to help guide it.

“As a new industry, there are still a lot of complexities to work out, but we are fully committed to a CSR report that aligns with material ESG performance and we’re setting ambitious targets to meet those goals,” Mr. Zaid says.

An Aphria spokesperson said the company plans to “report fully on all [of] our social purpose initiatives in our fiscal 2020 annual report.”

Charles Taerk, president and CEO of Faircourt Asset Management Inc. and UIT Funds, says governance and board composition are important considerations when investing in cannabis companies, as well as the makeup of the management team.

“It’s an early-stage sector, so the growth and vision that’s going to be achieved will be driven by management,” says Mr. Taerk, whose firm manages the Ninepoint-UIT Alternative Health Fund, which includes various marijuana stocks and health care companies,

For instance, his firm prefers management teams with experience in other regulated industries, such as pharmaceuticals and alcohol, and boards with independent members, which is often a sign of stronger governance.

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Having a lower environmental footprint and good community relations is also attractive when investing in cannabis companies, he says. “There will always be some issues, but it’s more about how you deal with them and negotiate successfully around them and are being a good corporate citizen,” Mr. Taerk says. “When there’s a finite universe of companies in the [cannabis] space, you have to pick the best.”

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