Success in achieving net-zero emissions requires broad buy-in from the entire private sector, not just publicly listed companies. Fortunately, the rapid rollout of COVID-19 vaccines shows what can be accomplished when traditional organizational and sectoral silos are ignored in the interest of a common cause.
NEW YORK – The word of the week, unfortunately, is Omicron. With yet another new COVID-19 variant dominating the headlines, the global spotlight on climate issues following last month’s COP26 conference is quickly fading. Humanity, after all, tends to focus on the most immediate threat.
Still, our response to the pandemic could offer a roadmap for confronting climate change. Both crises involve a classic tragedy of the commons, which occurs when individuals disregard the well-being of society in the interest of personal gain. Yet the global reaction to COVID-19 demonstrated that some unlikely parties could come together, at risk to their individual interests, to accelerate the development, testing, and distribution (at least in the rich world) of successful vaccines. The climate crisis demands a similar approach. Deploying capital to mitigate global warming will require an alignment of unusual bedfellows in finance, technology, social-justice activism, and beyond.
Capital, along with government and religion, has been one of the three great levers of change in history. It has the power to alter the trajectory of entire civilizations. For many decades, capital flows have followed a simple rule defined by the Nobel laureate economist Milton Friedman: all that matters is shareholder returns. But the continuing viability of this maxim has been called into question by unprecedented wildfires, more frequent and severe flooding, increasingly visible social inequities, and other worrying problems.
There is now growing support for the idea that capital should be used for more than just financial returns, as demonstrated by the explosion of interest in ESG (environmental, social, and governance) standards for corporations.
It is good news that investors are starting to demand greater transparency into how companies manage their ESG dynamics, and that executives and boards of directors are beginning to track relevant data to report to their investors. You can’t change what you don’t measure.
But the ESG movement has largely focused on publicly traded companies. That is understandable, because such companies are where individual shareholders can influence behavior, as the hedge fund Engine No. 1 recently demonstrated with its successful campaign to install decarbonization advocates on the board of ExxonMobil. The problem is that there are fewer than 50,000 publicly listed companies in the world today, compared to more than 200 million privately held companies. If the lever of capital is going to be used effectively, it must include private companies.
Not only do privately held companies represent the vast majority of employment and much of the world’s GDP, but they are also who public companies rely on for key inputs. Most of the recent net-zero commitments made by Fortune 500 corporations will have little meaning until there is greater clarity about what is happening in their supply chains.
As matters stand, there is very little information about privately held companies’ ESG metrics. And much of the data that do exist is of poor quality, calculated by third parties using algorithms that do little more than guess at conclusions. What has been missing is a consortium model in which unusual bedfellows come together to solve a problem that cannot be addressed by any one group.
Fortunately, there have been promising recent efforts to address this problem. For example, the ESG Data Convergence Project, a group of private-equity managers and limited partner investors, led by the Carlyle Group and the California Public Employees’ Retirement System, is working to standardize a set of ESG reporting metrics for private-equity managers. Similarly, the Institutional Limited Partners Association has put together an ESG Roadmap to identify best practices for private market investors who are interested in advancing ESG efforts at their organizations.
Finally, at Novata, we have organized a highly unusual consortium of players representing interests that have likely never before come together. Its members include the Ford Foundation, the Omidyar Network, S&P Global, Hamilton Lane, and a wide range of private-equity firms and pension-fund investors in the US and Europe. It represents some of the world’s leading foundations committed to social justice and inclusive capitalism, major players in financial data and analysis, the largest intermediary in the private markets, a diverse group of private-equity firms with longstanding commitments to ESG standards, and a set of leading pension funds that invest in the private-equity asset class. As a public-benefit corporation, Novata will provide an ESG “on-ramp” for privately held companies from around the world to track, store, and report on relevant data.
This emerging ecosystem of partnerships in the private markets represents a new approach to collecting accurate ESG data, which is essential to using capital to tackle some of our greatest challenges. And, importantly, these efforts aim to complement rather than compete with each other to accelerate change in the private markets.
In less than two years, we have seen biotech startups, pharmaceutical companies, academic institutions, governments, foundations, and think tanks come together to develop and roll out COVID-19 tests, vaccines, and other cutting-edge treatments. This stunning achievement came from cutting across traditional organizational and sectoral silos and reminds us that, when faced with an imminent threat, disparate interests can come together to chart a new course.
The path is lit. Now we must follow it to address other problems of the commons before they become even more tragic.
NEW YORK – The word of the week, unfortunately, is Omicron. With yet another new COVID-19 variant dominating the headlines, the global spotlight on climate issues following last month’s COP26 conference is quickly fading. Humanity, after all, tends to focus on the most immediate threat.
Still, our response to the pandemic could offer a roadmap for confronting climate change. Both crises involve a classic tragedy of the commons, which occurs when individuals disregard the well-being of society in the interest of personal gain. Yet the global reaction to COVID-19 demonstrated that some unlikely parties could come together, at risk to their individual interests, to accelerate the development, testing, and distribution (at least in the rich world) of successful vaccines. The climate crisis demands a similar approach. Deploying capital to mitigate global warming will require an alignment of unusual bedfellows in finance, technology, social-justice activism, and beyond.
Capital, along with government and religion, has been one of the three great levers of change in history. It has the power to alter the trajectory of entire civilizations. For many decades, capital flows have followed a simple rule defined by the Nobel laureate economist Milton Friedman: all that matters is shareholder returns. But the continuing viability of this maxim has been called into question by unprecedented wildfires, more frequent and severe flooding, increasingly visible social inequities, and other worrying problems.
There is now growing support for the idea that capital should be used for more than just financial returns, as demonstrated by the explosion of interest in ESG (environmental, social, and governance) standards for corporations.
It is good news that investors are starting to demand greater transparency into how companies manage their ESG dynamics, and that executives and boards of directors are beginning to track relevant data to report to their investors. You can’t change what you don’t measure.
But the ESG movement has largely focused on publicly traded companies. That is understandable, because such companies are where individual shareholders can influence behavior, as the hedge fund Engine No. 1 recently demonstrated with its successful campaign to install decarbonization advocates on the board of ExxonMobil. The problem is that there are fewer than 50,000 publicly listed companies in the world today, compared to more than 200 million privately held companies. If the lever of capital is going to be used effectively, it must include private companies.
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Not only do privately held companies represent the vast majority of employment and much of the world’s GDP, but they are also who public companies rely on for key inputs. Most of the recent net-zero commitments made by Fortune 500 corporations will have little meaning until there is greater clarity about what is happening in their supply chains.
As matters stand, there is very little information about privately held companies’ ESG metrics. And much of the data that do exist is of poor quality, calculated by third parties using algorithms that do little more than guess at conclusions. What has been missing is a consortium model in which unusual bedfellows come together to solve a problem that cannot be addressed by any one group.
Fortunately, there have been promising recent efforts to address this problem. For example, the ESG Data Convergence Project, a group of private-equity managers and limited partner investors, led by the Carlyle Group and the California Public Employees’ Retirement System, is working to standardize a set of ESG reporting metrics for private-equity managers. Similarly, the Institutional Limited Partners Association has put together an ESG Roadmap to identify best practices for private market investors who are interested in advancing ESG efforts at their organizations.
Finally, at Novata, we have organized a highly unusual consortium of players representing interests that have likely never before come together. Its members include the Ford Foundation, the Omidyar Network, S&P Global, Hamilton Lane, and a wide range of private-equity firms and pension-fund investors in the US and Europe. It represents some of the world’s leading foundations committed to social justice and inclusive capitalism, major players in financial data and analysis, the largest intermediary in the private markets, a diverse group of private-equity firms with longstanding commitments to ESG standards, and a set of leading pension funds that invest in the private-equity asset class. As a public-benefit corporation, Novata will provide an ESG “on-ramp” for privately held companies from around the world to track, store, and report on relevant data.
This emerging ecosystem of partnerships in the private markets represents a new approach to collecting accurate ESG data, which is essential to using capital to tackle some of our greatest challenges. And, importantly, these efforts aim to complement rather than compete with each other to accelerate change in the private markets.
In less than two years, we have seen biotech startups, pharmaceutical companies, academic institutions, governments, foundations, and think tanks come together to develop and roll out COVID-19 tests, vaccines, and other cutting-edge treatments. This stunning achievement came from cutting across traditional organizational and sectoral silos and reminds us that, when faced with an imminent threat, disparate interests can come together to chart a new course.
The path is lit. Now we must follow it to address other problems of the commons before they become even more tragic.