Aug 13, 2021
One of the biggest themes of 2021 has centered around companies that have an environmental, social, and governance (ESG) component. So far this year, we have seen Wall Street banks and institutional investors really start to take ESG factors into account when investing or financing a business.
According to ESG Global Advisors, investor interest in companies with an ESG component is driven by evidence that operators which are effectively managing material ESG issues are less risky, have a lower cost of capital, and better financial performance across a range of operational measures. The firm also attributed the higher interest in companies with an ESG component to rising client demand and global regulatory initiatives.
According to the US SIF Foundation, the amount of US domiciled assets under management that utilize sustainable investing strategies increased by 42% from $12.0 trillion to $17.1 trillion in 2020. The firm expects the amount of assets that utilize ESG strategies in 2021 to surpass the record amount that was reported in 2020 and we find this to be an important trend.
According to McKinsey, there has been an incremental increase in ESG investing and reported that there is more than $30 trillion focused on global sustainable investment initiatives. The amount of capital that is focused on ESG initiatives has increased 68% since 2014 and tenfold since 2004 (source is Global Sustainable Investment Review 2018, Global Sustainable Investment Alliance, 2018, gsi-alliance.org.).
In the cannabis industry, the ESG investing theme is becoming increasingly important and we expect this trend to continue to become more significant on a year-over-year basis. From an environmental standpoint, many cannabis investors are highly focused on firms that are addressing climate-change related risks.
Another important ESG theme in the cannabis industry is related to the amount of cardboard and plastic that is used to package products. We believe that investors will be putting a larger focus on companies that are trying to reduce their carbon footprint and that address social and governance issues.
Today, we want to highlight 3 cannabis companies that have an ESG component and that should benefit from the increasing amount of institutional investor interest in these types of operators.
Khiron Life Sciences is a Leading Play on the ESG Theme
Khiron Life Sciences Inc. (TSX Venture: KHRN) (OTC: KHRN) is a cannabis company that is highly focused on the ESG theme and is an opportunity that is flying under the radar. The ESG initiatives the Latin American cannabis company is focused on are centered around improving people’s quality of life, while strengthening its commitment to implementing sustainable management practices.
Khiron is capitalizing on the cannabis industry in the European Union (EU) and Latin America. By being a global operator, there are several important ESG themes that Khiron can focus on, and we find this to be significant. The company will be launching its inaugural ESG report on August 10, 2021, showcasing the various ESG-related initiatives the company is pursuing.
To promote the sustainable growth, the management team is executing on a strategy that is focused on operating with the highest level of ethical standards and transparency, while minimizing the negative headwinds that are associated with making the operation more sustainable.
Khiron’s corporate culture aligns with several crucial ESG components, and we are favorable on how the story has advanced as a result of these initiatives. We believe the Latin American cannabis company is executing on a differentiated growth strategy and expect to see increased interest from institutional investors due to the performance of the business and the focus on important ESG related initiatives.
From an environmental perspective, since Khiron uses greenhouses to cultivate, the business requires less energy than indoor facilities. In addition, the company has commissioned a solar park at its cultivation facility, which is expected to reduce its energy consumption by an additional 40%. The company has also implemented initiatives to measure and reduce waste and to protect water, land, and wildlife. We expect the market to start catching onto this trend and the company continues to scale.
From a social perspective, the company’s mission is to improve lives, including those of patients, employees and other stakeholders. In 2020, Khiron was deemed a Project of National Strategic Interest by the Government of Colombia given the company’s potential to create jobs and promote economic growth. Additionally, the Government of Colombia became one of the first countries in the world to extend national health insurance for medical cannabis as a first line therapy, largely due to clinical evidence provided by Khiron.
In the wake of COVID-19, Khiron donated COVID-19 testing equipment, delivered hundreds of care packages, and assisted with COVID-19 medical education and support. The company employs a large number of local residents and secured 88% of its supplies from national vendors and 11% from local vendors in 2020. With a diverse and inclusive workplace, the company achieved wage parity between men and women in its workforce.
At current levels, we believe Khiron has a compelling valuation and a favorable risk-reward profile. We believe the market is discounting the growth prospects that are associated with the business and will continue to closely follow how it benefits from the ESG theme.
Rubicon Organics Publishes an ESG Report
Rubicon Organics Inc. (TSX Venture: ROMJ) (OTC: ROMJF) is a licensed cannabis producer that is focused on cultivating and selling organic certified and premium cannabis. Last month, the company published its inaugural ESG report and the announcement caught our attention.
The report reflects Rubicon’s determination to embed sustainability through its operations and supply chain. Going forward, the company plans to communicate its progress with the market in a transparent and authentic manner and we will monitor how the management team lives up to this goal.
Some of the important ESG themes in the report include: 1) how Rubicon is using LED grow lights in the facility, which are up to 60% more energy efficient than traditional greenhouse grow lights; 2) joining Climate Smart which is committing to measuring its carbon footprint and setting ambitious reduction targets; 3) the business achieved 78% diversity across its employee base; and 4) reducing the amount of waste that was sent to landfills by building an outdoor nursery.
Rubicon’s report is informed by sustainability and reporting frameworks such as the Global Reporting Initiative (GRI) Standards, the Ten Principles of the United Nations Global Compact (UNGC), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-related Financial Disclosures (TCFD).
Rubicon is a mid-tier Canadian Licensed Producer (LP) and we have been following the opportunity since it commenced trading on the TSX Venture Exchange. Although we are favorable on how the business is focused on the ESG theme, the business has not grown as fast as we have expected and will monitor how the management team continues to drive the story forward.
HEXO is an ESG Focused Company
Last month, HEXO Corporation (TSX: HEXO) (NYSE: HEXO) announced a commitment to offsetting its operational carbon emissions and making the business 100% carbon neutral from September 2021 onwards.
As part of the announcement, the Canadian LP reported to be committed to offsetting the plastic used in their pouch packaging through Plastic Bank® through a partnership with Dymapak, HEXO’s primary packaging supplier. These steps show the company’s initial focus towards a long-term commitment to important ESG initiatives.
Through a partnership with Offsetters, in support of the Great Bear Forest Project, HEXO will be measuring and offsetting the company’s corporate carbon emissions starting with the 2020 calendar year. The Great Bear Forest Carbon Project reduces carbon emissions by protecting forests previously designated, sanctioned or approved for commercial logging.
In conjunction with HEXO’s primary packaging supplier Dymapak and its partnership with Plastic Bank, the company has offset 63,000 kilograms of plastic in 2021. Going forward, the company will continue to counteract the use of all plastic in its packaging.
We are favorable on the steps that HEXO has taken toward reducing its carbon footprint. The company is partnered with a large alcohol company and we expect to see further ESG related developments as the partnership continues to advance.
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