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For years, cannabis companies have largely gotten a free pass about their social and environmental impacts. Indeed, cannabis’ progressive aura has made it a darling of the sustainability set, embraced as a natural product with multiple benefits for humanity.

But some critics are making a hash of that reputation.

A recent research paper has called out the investment and sustainability communities for paying insufficient attention to the ESG impacts of cannabis cultivation, notably its sizable environmental footprint.

This is no modern-day temperance movement. The criticisms have largely stayed away from scolding about the evils of "reefer madness," as it was once called. Rather, this goes to the heart of what’s generally considered material from an ESG perspective: the water, material, chemical and energy inputs; the carbon and other air and water emissions from all those inputs and processes; the health impacts on cannabis workers, as well as on poorer communities near cannabis growing operations; and the accountability and transparency, or lack thereof, of industry players.

As Evan Mills put it: "The cannabis industry has yet to come to grips with the tension between its productive and counterproductive ESG-related activities."

If a large multinational company misrepresented itself in these ways, it would likely be hounded by activists, sued by regulators and shunned by consumers.

Mills, an organic vegetable gardener and self-described energy geek who prefers gin and tonics to ganja, spent 40 years at the Lawrence Berkeley National Lab before retiring in 2018 as a senior scientist, although he remains an affiliate there. He participated in the work of the Intergovernmental Panel on Climate Change, which shared the 2007 Nobel Peace Prize with Al Gore.

For more than a decade, Mills has raised questions about cannabis sustainability, starting with its prodigious energy use but extending to a broader range of environmental, social and governance impacts. He is author of several landmark studies of the industry going back to 2012, when he wrote a paper on the carbon footprint of indoor cannabis production. At the time, he calculated that the energy consumption of the U.S. cannabis industry, both legal and illegal, was equivalent to that of 3 million cars.

Mills’ most recent paper, in the Winter 2022 edition of the "Journal of Impact & ESG," calls out the "market frictions and failures, regulatory distortions, lack of transparency, greenwashing and inaccurate consumer information" that, he says, pervades the industry. A summary of that paper was published last week on Medium.

It’s all, admittedly, a bit of a buzzkill.

Inside out

As the cannabis industry grows globally, along with its impacts, it's high time to hold the industry to account. Legal cannabis already is a $150 billion to $200 billion global industry. In the United States, cannabis is the nation’s largest cash crop.

Mills’ upbraiding of cannabis focuses primarily on indoor cultivation. In 2020, he said, 42 percent of cultivators grew cannabis "exclusively inside sprawling windowless factory farms — often several times the size of a Walmart — and use as much energy as a data center," about 200 watts per square foot. That jibes with a recent United Nations finding that the carbon footprint of indoor cannabis cultivation is "16 to 100 times larger" than that of outdoor cultivation.

Windowless growing facilities represent a resource-intensive cultivation environment, Mills explained, with mechanically controlled temperature, humidity, air movement and artificial lighting "as bright as the sun" and maintained per a standardized "day" length, irrespective of outdoor conditions. The plants are typically rooted in a single-use inert growing medium such as mineral wool, which is made by mixing basalt lava with sand, limestone and soda ash in a melting furnace. Cannabis growing trays, Mills said, are "flooded with water-bearing concentrated artificial nutrients," while industrial carbon dioxide is commonly injected into the buildings to accelerate plant growth at up to five times natural atmospheric concentrations.

He added: "Such industrialized cannabis cultivation facilities — whether in Fairbanks or Phoenix — must simulate and maintain artificially cloudless tropical environments while suppressing humidity year-round."

In contrast, according to Mills, proper outdoor cultivation "has vastly lower environmental impacts." He makes sure to emphasize the word "proper."

There’s a certain irony here. Today’s blooming indoor ag industry owes a large debt to cannabis growers, who pioneered — usually surreptitiously — how to grow concentrated quantities of plants in a confined space, harnessing hydroponics, grow lights and other technologies now commonplace in cultivating such things as microgreens or tomatoes in warehouses and shipping containers. Those indoor operations also share some of the same negative impacts as cannabis, although, according to Mills, "cannabis is more severe."

All of which should be of interest to risk-conscious investors, and especially to impact investors, who seem drawn to cannabis companies despite the lack of transparency about their impacts. Mills noted that several major ESG ratings firms assess publicly traded cannabis companies poorly. For example, Morningstar rated 16 cannabis stocks as a "High" to "Severe" ESG risk in most cases; S&P Global scored four of these companies between 6 and 39 on a scale of 100, with higher being better. ISS rated 15 companies between D and C-plus. Only eight cannabis companies had issued ESG reports as of early 2022, and only four were among the top 27 companies by market cap.

Despite these rather sorry stats, there seems to be no shortage of exaggerated green claims. As an example, Mills told me about the Solar Cannabis Co., which operates a 67,000-square-foot facility in Somerset, Massachusetts. The company’s homepage states that it produces "Sustainable Cannabis Powered by Solar," but the story inside reveals that the company "burns natural gas and captures heat to circulate into the HVAC system." Mills calculates that Solar Cannabis is "probably getting 10 percent or less" of its electricity from onsite solar.

Other cannabis companies, he said, make sustainability claims that are, well, half-baked, such as installing "a few token solar panels on a rooftop to make a false impression, emphasizing recyclable packaging while vastly greater amounts of nonrecyclable waste from the cultivation process are landfilled, or utilizing illegitimate carbon offsets."

If a large multinational company misrepresented itself in these ways, it would likely be hounded by activists, sued by regulators and shunned by consumers.

Policy matters

Can the industry constructively confront these sobering realities? Several organizations are trying. For example, there’s the Sustainable Cannabis Coalition, formed last year by a group of industry players. It is working with ASTM, the international standards organization, to establish consensus standards for the industry, as Shawn Cooney, the cannabis coalition’s co-founder, explained. ASTM has nine cannabis-related "task groups" covering such things as indoor and outdoor agriculture, quality management systems, and security and transportation. The output of all this would be voluntary standards, not necessarily mandatory regulations, although the ASTM work could inform policymakers.

As Mills noted, one big problem area for the cannabis industry is the lack of accurate data on both a company and industry scale. Toward that end, Cooney’s coalition is working with Dartmouth College’s Thayer School of Engineering on a research project about energy use in the cannabis sector, doing an in-depth analysis of one operator’s cultivation facility in New Bedford, Massachusetts. "We've done year one of that and we're working on year two," Cooney said. The group will be publishing results of the first year’s work later this summer.

"Whether it's indoor, greenhouse or outdoor, the industry needs to be able to record what it's doing, report on what it's doing and look at making improvements towards more sustainable goals, whether it's water use, waste or energy use, or greenhouse gas production," Cooney said.

Industry practices and measurements aren’t the only obstacles. Another is policy, at least in the United States. Cannabis, Evan Mills noted, is "one of the vanishingly few segments of the economy that has been largely overlooked in energy and environmental policy."

Industry practices and measurements aren’t the only obstacles. Another is policy.

Even when policies exist, they often perversely incentivize indoor growing over outdoor. For example, U.S. law prohibits interstate commerce of cannabis and derivative products, meaning that whatever is sold in a given state must be grown and produced there. And not every state has the same energy mix. A comparison of electricity use per unit yield in seven states found a twenty-sixfold differential in greenhouse gas emissions, “and this did not include the full range of climate severity or power plant emissions factors seen across the whole country," Mills said.

Transportation is another factor. In California, for example, cannabis is typically transported at least four times between the point of cultivation and the point of consumption. Regulations require farmers to transport their product to processors, who then transport to distributors, who then transport to dispensaries. Retail consumers then transport the final product from the dispensary.

And some localities ban outdoor growing, presumably as a security measure. Oddly, that can mean farmers must site indoor grow houses atop fertile farmland.

Moving outside can solve many of cannabis’ sustainability problems. According to Mills, some firms already have shifted towards outdoor cultivation. Between 2016 and 2020, he said, the number of growers cultivating primarily indoors fell from 80 percent to 60 percent.

"Contrary to conventional wisdom, sustainable bio-intensive outdoor cultivation can actually use significantly less water and less land than state-of-the-art indoor practices, removing key arguments for indoor operations," said Mills. The same holds for solid waste generation, eliminating the single-use growing media and plastics common in indoor operations.

Shawn Cooney has high hopes that things will continue to change. "I think the states are going to loosen up a little bit on the indoor growing thing," he told me. "I think it's going to vary more region by region and demographic area by demographic." He envisions a day when cannabis growing will be determined in large part by its end use. "So, high-value products are grown indoors, the medium stuff is in a greenhouse, and outdoors is where they do their extraction products."

Evan Mills has a simpler vision. "I think the golden ring is that we return to what we've been doing for 5,000 years, which is growing outside."

Thanks for reading. You can find my past articles here. Also, I invite you to follow me on Twitter and LinkedIn, subscribe to my Monday morning newsletter, GreenBuzz, from which this was reprinted, and listen to GreenBiz 350, my weekly podcast, co-hosted with Heather Clancy.