For environmentally-conscious investors, choosing which private companies to put their money into can be tricky. There is often a transparency gap between private companies and their publicly-listed peers, making it difficult to ascertain how ‘green' a private equity firm’s investment portfolio is.
In a bid to make it easier to gather data on and report and benchmark Environment, Social and Governance (ESG) performance, several philanthropic foundations and private equity firms have joined forces to launch Novata. The platform is backed by the Ford Foundation, S&P Global and Omidyar Network.
Chris Jurgens, director of impact investing at Omidyar Network, told Barron’s: “We know private markets are a huge part of the economy, and much of the energy and dialogue and focus on ESG data has been in public markets … But if we want to address the challenges we face of climate change, of impacts on workers and workers’ conditions, on good governance, we need to look at private markets.”
Alex Friedman, who is CEO and co-founder of Novata, pointed out that the failure by a private vendor to disclose its ESG performance complicates ESG reporting for a company with net-zero ambitions, because it cannot fully declare its Scope 3 emissions. Scope 3 emissions are those which occur beyond a company's direct control, such as in its supply chain.
“We know private markets are a huge part of the economy, and much of the energy and dialogue and focus on ESG data has been in public markets … But if we want to address the challenges we face of climate change, of impacts on workers and workers’ conditions, on good governance, we need to look at private markets” - Chris Jurgens
Data on the Novata platform will be anonymized. It will allow users to benchmark companies on parameters like pay and diversity against each other.
ESG is on the mind of private equity players. A consortium led by Carlyle Group [CG] is working on reporting standards. The consortium currently manages $4trn in assets. The combine plans to meet annually to assess the data and build on the ESG metrics. For now, it will gather and report data from portfolio companies to create an anonymous benchmark.
“As an industry, we haven’t had a common language to measure ESG performance. The field has been marching in different directions even though we all have the same objectives,” Megan Starr, global head of impact at Carlyle Group, told Wall Street Journal.
Why are PE firms embracing ESG?
The success of any ESG platform relies on private companies being willing to disclose the information– even if it is anonymised. It appears ESG reporting is gaining traction, largely because CEOs are beginning to focus on doing good rather than just looking good.
Founder of Bridgewater Associates, Ray Dalio, said: “Fortunately, I think it’s becoming bad or uncool or nasty to be doing harm to the environment, and it’s becoming cool and appropriate or polite to do things like ESG investing,” in an interview on CNBC Make It.
Bridgewater has begun advising clients on ESG investing, while earlier this year it announced the Lyxor/Bridgewater All Weather Sustainability Fund. The fund will be managed by Lyxor but use Bridgewater’s All Weather investment strategy to allow investors to trade assets that align with the United Nations Sustainable Development Goals.
In a January 2020 letter to CEOs, BlackRock [BLK] CEO Larry Fink stated that “climate risk is investment risk.” In this year's letter to clients, he added that the firm is “asking companies to disclose a plan for how their business model will be compatible with a net-zero economy.”
Two former senior executives at Rosenberg Equities have recently launched an independent asset management firm: RadiantESG. It’s partnering with STP Investment Services to execute its investment strategies.
“Quantitative tools help us expand the breadth and depth of our research and create scalability and efficiency but as ESG is evolving so fast you can’t backtest your confidence … You can try to quantify as much as you can but fast-moving information can be the Achilles heel of a quantitative process” - Heidi Ridley, RadiantESG co-founder and CEO
Heidi Ridley, RadiantESG co-founder and CEO, told Markets Media in August: “Quantitative tools help us expand the breadth and depth of our research and create scalability and efficiency but as ESG is evolving so fast you can’t backtest your confidence … You can try to quantify as much as you can but fast-moving information can be the Achilles heel of a quantitative process.”
The private sector has a long way to go on ESG reporting – the World Economic Forum has even called for global reporting standards. However, by using a platform such as Novata, to streamline the reporting process, private equity firms will likely find it easier to “figure out whether their investments are good for the world,” according to Freidman.
“It all starts with collecting data,” Friedman told Barron’s. And collecting data is “the big lever for getting capital to move most effectively against the ESG agenda within private markets.”