The Three Things that will Drive ESG Success in Private Markets

Coauthored by: Lorraine Spradley Wilson, Chief Impact Officer and Head of ESG Methodology, Novata, and Margot Brandenburg, Novata Advisory Committee member, Senior Program Officer, Mission Investments, Ford Foundation

2022 has started as a year marked by great uncertainty. Geopolitics is on edge in Europe and Asia, financial markets are exceptionally volatile, and the pandemic rages on with mutation after mutation. Yet, one thing is seemingly certain: ESG (Environmental, Social and Governance) issues are emerging as a top priority for senior management. The voices of CEOs, investors, employees, customers and regulators make clear that we have reached an important inflection point in the journey from shareholder primacy to one of stakeholder capitalism. That journey now depends in large part on what happens in private markets.

Once considered a buzzword, ESG has emerged as a fundamental piece of today’s capital markets. EY’s 2022 CEO Survey found “the majority of US CEO respondents (75%) have adopted ESG for strategic reasons—such as competitive advantage and lower cost of capital—rather than pressure from regulators.” And Larry Fink’s recent annual CEO letter was firm in the conviction that “companies perform better when they are deliberate about their role in society and act in the interests of their employees, customers, communities, and their shareholders.”

This collective focus on ESG brings with it an imperative for the private markets. Private companies, where ESG disclosure is still in its infancy, make up more than 90% of the world’s employment, much of the world’s GDP and are vital players in the supply chain of public companies. The numbers speak for themselves – there are about 50,000 public companies, and more than 200 million private ones.

The time is now to position the private markets for ESG success.  Fortunately, we can build on lessons learned from the public markets, where standards are emerging but which have been plagued by a fragmentation of standards, metrics, and methodologies. We can and must do it better in the private markets.

Coalescing Around ESG Requires Capital, Collaboration and Consensus 

Making progress in private markets ESG management starts with investment – in research, technology, and strategy – and then requires a unique collaboration among stakeholders to drive consensus on an approach that is not only useful, but is also trusted, credible and widely adopted.

Novata, a public benefit corporation built to be an open architecture on-ramp for ESG in the private markets, was founded on this concept. As a consortium of leading public companies and nonprofits, in partnership with a range of private equity firms and institutional investors, we are focused on collectively streamlining ESG reporting and benchmarking across the private markets. But we know our consortium cannot unite the sector alone. And while our goal is to make ESG reporting as simple as possible, we know the underlying issues are varied and complex. That’s why we have turned to a range of experts, with complementary and wide-ranging substantive expertise and backgrounds, to help us.

ESG Advisory Council

The Novata ESG Advisory Council (“Council”) will provide direction on tools, educational materials, methodology, and policy strategy, to help private markets navigate, operationalize, and realize value from ESG disclosure. Serving as advocates and liaisons to the private markets and beyond, the Council will review frameworks, provide technical expertise, and serve as an independent board. Its founding members include:

  • Margot Brandenburg, Senior Program Officer, Mission Investments, Ford Foundation; and Co-Chair of Novata ESG Advisory Council
  • Dame Elizabeth Corley, Chair of the Impact Investing Institute; former CEO of Allianz Global Investors, and Chair designate at Schroders plc
  • Pete Dunbar, Head of Private Equity, UNPRI*    
  • Robert G. Eccles, Visiting Professor of Management Practice, Saïd Business School, University of Oxford; Founding Chairman of the Sustainability Accounting Standards Board (SASB); Co-Founder of the International Integrated Reporting Council (IRRC); and Co-Chair of Novata ESG Advisory Council 
  • Linda Hill, Wallace Brett Donham Professor of Business Administration and Chair of the Leadership Initiative, Harvard Business School; Co-Founder of Paradox Strategies
  • John W. McArthur, Senior Fellow and Director, Center for Sustainable Development at the Brookings Institution
  • Ben Meng, Executive Sponsor of Sustainability, and Chairman of Asia Pacific, Franklin Templeton; Former CIO CalPERS, Deputy CIO at the State Administration of Foreign Exchange (SAFE)
  • Gonzalo Muñoz, President at TriCiclos; Partner at Manuia; CoFounder at SistemaB; United Nations High Level Climate Action Champion for COP25
  • Allison Spector, Head of ESG, One Rock Capital Partners*

Reaching our collective potential and accelerating the journey to a more inclusive form of capitalism requires assembling talented and diverse teams, and fostering cultures of inclusion that allows each of us to perform at our best. Putting infrastructure in place to unite the private markets on ESG – from frameworks and data repositories to benchmarking tools – requires input from stakeholders and experts across the globe if it is going to work. That is why the consortium behind Novata, including the Ford Foundation, Omidyar Network, Hamilton Lane and S&P Global, the ESG Advisory Council and our advisors at private equity firms (including Clearlake Capital, Bridgepoint, Thomas H. Lee Partners, KPS Capital Partners, Lindsay Goldberg, Summa, EQT, Vistria, Kohlberg and others), are critical to informing our strategy.

*Serving in an individual capacity.