Bringing the ESG Revolution to Private Markets

by | November 10, 2021

Three great levers have historically moved the world: religion, government, and capital.

Each, at different times, has been a driver of change for the betterment—or detriment—of society. With all eyes on COP26, perhaps the most critical climate summit of our time, the words of the ancient Greek mathematician Archimedes echo from the past: “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”

We have seen that religion and government are not the levers that will successfully address climate change. Instead, it is time we employ the missing lever of capital to move our world in the right direction.

Attention has increased on the role of environmental, social, and governance factors in business, with a focus on uncovering what public companies are doing to our Earth and society at large. The implicit logic is that companies can be a force for good or bad. Since they are organizing entities for huge concentrations of people and capital, they have a big role in addressing our challenges. As pressure on public companies has mounted, we’ve seen welcome changes in corporate behavior, including net-zero commitments, increased transparency on issues such as pay gaps, and broadened diversity of boards and management teams.

But the lever of capital that looks only to the public markets is not long enough.

There are fewer than 100,000 public companies in the world today. But there are more than 200 million private companies, representing the vast majority of employment, in addition to much of the world’s GDP.

And yet private companies have been largely left out of the ESG conversation.

The reason is simple. When a company is private, there is less pressure on its owners to bring transparency to their practices. There is also less clarity around which ESG metrics matter and limited ways for private companies to compare practices to peer groups because the data is not accurately collected or broadly shared. And if you can’t measure something, you can’t change it.

The three letters in ESG represent a tragedy-of-the-commons problem. That requires people and organizations that might not necessarily work together to team up.

In the spirit of Archimedes’ words, an unlikely consortium has come together to meet this challenge, comprised of some of the world’s leaders in social justice, financial data, private markets and inclusive capitalism, as well as a range of the world’s top private equity firms and investors. These firms represent trillions of dollars in capital in the private markets, control some of the world’s most important data, and own impactful private companies around the world.

Together, they have formed Novata, a public-benefit corporation designed to empower the long lever of capital in the private markets toward ESG effectiveness.

Novata has three parts: a simple way to determine which ESG metrics matter; a secure contributory database to store and track such data, where the contributor controls who has access to the information; and a set of tools to objectively compare the data to industry peers and report on progress to stakeholders. When it comes to measurement, one size does not fit all. This is why we built an “on-ramp” approach to ESG that is open-architecture, enabling any private company to easily customize its ESG reporting, if desired.

Today, Novata closed its first institutional round of investment, perhaps the largest ever for a public benefit corporation. The unique public-private consortium that formed Novata—the Ford Foundation, the Omidyar Network, S&P Global, Hamilton Lane , and a number of leaders in the private equity industry—is charting a path forward that has never before been attempted: building a self-sustaining company designed first and foremost to be a social good and supported by moral and economic engines from all walks of society.

If we get it right, we believe Novata can be a lever for good worthy of Archimedes’ ideal, and a model for a new and more inclusive form of capitalism.

Filed Under: Economics . Featured . Politics

About the Author

Alex is the co-founder of Jackson Hole Economics, LLC, a private research organization which provides analysis of key topics in economics, politics, the environment and finance, and develops actionable ideas for how sustainable growth can be achieved.

Alex has two decades of experience growing and transforming organizations in the financial and non-profit industry. He served as CEO and CIO for a number of publicly listed financial services companies and also as the Chief Financial Officer of the Bill & Melinda Gates Foundation, where he managed a range of day-to-day operating functions, was a member of the management committee and created the program-related investments group.

Alex served as a White House Fellow in the Clinton Administration and as an assistant to the Secretary of Defense. He is a member of the Board of Directors of Franklin Resources, Inc., a member of the Council on Foreign Relations, Chair of the Advisory Board of Project Syndicate and a board member of the American Alpine Club. Alex also writes regularly for various news outlets and is the author of The Big Thing: Brave Bea and Babu's Bindi, both children's books.  He is an avid mountaineer and rock climber and led the first major climb to raise money for charity through an ascent of Mt. McKinley.

Friedman holds a JD from Columbia Law School, where he was a Harlan Fiske Stone Scholar, an MBA from Columbia Business School, and a BA from Princeton University.

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