Future returns: a new way to track ESG in private markets
Reporting on ESG metrics has become commonplace for publicly traded companies, but private companies have not come under the same pressure from customers and other stakeholders for details of how they stack up.
This lack of transparency makes it difficult for private equity firms, which “own most of the high-volume private companies,” to show investors how well their portfolio companies are performing against ESG standards, says Alex Friedman, CEO of New York-based Novata.
Novata is a public benefit company – a for-profit company that aims to be socially responsible. It was formed this month by a consortium that includes data companies S&P Global and
The non-profit Ford Foundation, and the Omidyar Network, a charitable investment firm.
“We know that the private markets are a huge part of the economy, and that a lot of the energy, dialogue and focus on ESG data is in the public markets,” says Chris Jurgens, director of impact investing at Omidyar. “But if we want to address the challenges we face from climate change, the impacts on workers and worker conditions, on good governance, we need to look at private markets.”
Jurgens adds that the major US private equity firms are “some of the biggest employers in the country, if you take their portfolio companies in total.” “They are important to the change we think we need to see.”
Over the years, members of the consortium, including Friedman—who created the Social Impact Fund at the Bill & Melinda Gates Foundation when he was chief financial officer—have watched over the years the emergence of several ESG reporting frameworks to hold public market firms to account. The data produced by these frameworks “was ubiquitous and wasn’t really effective,” says Friedman.
He says the reports often fail to take into account the private companies that supply the big companies with the raw materials they need to operate. That could mean that a public company’s declaration of net zero carbon emissions within a decade is meaningless if the emissions of private companies’ suppliers are not accounted for, says Friedman.
Novata is designed as a for-profit public benefit company, rather than a nonprofit, that can be self-sufficient given the costs of building the technology to support the system, he says.
girl He recently spoke with Friedman and Lauren Spradley Wilson, Novata’s chief impact officer and president of ESG, about what Novata expects to achieve.
Simplify ESG reporting
“Novata is basically a data warehouse,” says Friedman. But this data is powerful, in that it gives insights to investors and other external stakeholders about the performance of private companies and allows the companies themselves to derive insights into how they can improve.
Currently, private equity owners “can’t tell if their investments are good for the world,” says Friedman. “It all starts with data collection,” he adds, “the big leverage to get capital to move more effectively against the ESG agenda within the private markets.”
To start, Novata will make sending data so easy and free, that any private company will have a fast track to reporting on the ESG metrics that are most relevant to them.
Rather than adding another framework to the world of reporting, Novata uses those that already exist. The goal, says Friedman, is “to produce something that is manageable, so if a small business filled those metrics it would meet about 80% of any shareholder’s demand.”
When developing its approach, Novata turned to an advisory group of general private equity partners – the owners of these companies – and limited partners, who are the investors.
These and other experts, like those at the Ford Foundation, “look across leading standards, frameworks and principles, and bring these together” into the Novata system, says Spradley Wilson.
The private equity firms consulted include many of the big names in the industry, such as Bridgepoint, Clearlake Capital Group, Kohlberg & Co. And some of those general partner advisors, including Clearlake, Kohlberg and Vistria Group, have also invested in Novata, with the proceeds from their investment being donated to nonprofits, according to a press release.
The Novata framework also provides a set of clear definitions of metrics, so companies know what to report and how to report it. Novata also made sure that users could easily engage with the technology while adding data to the system, says Spradley.
It’s an open architecture system, Friedman says, meaning it can work with any external framework, or the Novata model can be customized by any user.
A private equity firm can enter its data analysis software into the Novata system. “It’s kind of a public good,” he says. “You can’t change something if you can’t measure it.”
Once the data is submitted to Novata, it is entered into a secure database. The information can then be used for analysis and reporting to stakeholders, such as the limited partners of a private equity firm or to regulators.
It also allows private equity firms to look at stored data to see how the individual companies they own stack up against their peers. While the data from private companies is anonymous, a health care company owner who is curious about industry pay scales, for example, can see what other health care companies of a similar size are paying their workers.
By allowing such benchmarking, versus creating a proprietary version of the generic rating systems that have proliferated in the public markets, Novata intends to provide a tool that companies and their owners can use to gain insight and improve operations.
Rankings, by contrast, “tend to be subjective,” says Friedman, requiring an outside company to make subjective decisions about what and how to weigh the characteristics of particular data.
The Novata database is also comprehensive, allowing insight into ESG issues for all companies. On the other hand, ESG ratings may weigh one of these pillars more than the other.
Says Friedman, referring to the common application of filling out a prospective college student form. “Instead of 100 different ESG surveys, the general partner can allow access to a report that comes automatically from the data they have collected.”
Novata is currently beta testing the framework, which it intends to roll out widely early next year.