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  • Lorraine Wilson | Novata: Your On-ramp for the ESG Data Evolution
    POSTED 12.14.21 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Lorraine Wilson, Chief Impact Officer and Head of ESG Methodology at Novata.

    Novota’s mission is to empower general partners in the private market to collect, analyze, and report relevant ESG data.

    Lorraine says, “ESG is evolving. Novata offers a standard process for analysis… using metrics most applicable to the private market.”

    As ESG begins permeating the private sectors, it’s becoming top of mind for investors and in the boardroom. Listen as Lorraine walks us through:

    • How Novata assists general partners and private companies in collecting, analyzing and reporting relevant ESG data
    • The reporting on-ramp Novata has created – a technology platform which includes a library of metrics and guidance, where GPs can select the most relevant disclosures for their portfolio companies
    • What she believes will be the biggest focus of data analysis for 2022 (Hint: ESG isn’t going away)
    • And more

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability, and President of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Brokers Network. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today, I’m joined by Lorraine Wilson, Chief Impact Officer of Novata. Novata is an ESG platform built specifically for private markets. 

    Formed by unique consortium of leading nonprofit and for profit organizations, Novata empowers general partners and private companies to collect, analyze, benchmark and report relevant ESG data. And as an approach for investing ESG has gone from fringe to core top of mind, both among investors and in the boardroom. So I’m very excited to have Lorraine here to talk about Novata and ESG for an entire new segment of the marketplace, because ESG is permeating everything. Lorraine, welcome to the show. Thanks for joining me today.

    Lorraine Wilson: Thank you, Patrick. Really glad to be here, joining on the show.

    Patrick: Yeah, this is this is gonna be one of these topics. That’s just it transcends mergers and acquisitions to everything. So I’m excited about this. But before we get into Novata, and ESG, in general, let’s start with you. Why don’t you share with us, what brought you to this point your career?

    Lorraine: It’s a great question, one that I keep revisiting. What was my earliest influence that I think I brought me here? I’d say it started at home. So with my parents, early life lessons, responsibility, giving back to the community, but also this general awareness of what was taking place outside of our town. In my case, I went to school in Washington, DC for most of my schooling, you know, what was taking place outside of this politically charged arena, and what were others experiencing around the world. So paying attention to, particularly, you know, world events at the time, but also traveling outside of that bubble and doing community service, with Habitat for Humanity, for example. So early, early lessons for me both at home and in the classroom, in terms of thinking of others and responsibility.

    Patrick: Well, as we get into ESG investing, this is the environmental, social, and governmental view of companies, not just you know, how they look on spreadsheets, but also how they are as a corporate citizen and a player in the world. All this focus up until now, and I fell into this when we started our conversation together was that this isn’t applicable to publicly traded companies. And now is being brought down toward the private markets, because you got through private equity, mergers and acquisitions, and everything, all kinds of capital raising, and private investments for private companies. So talk about the bridge for ESG coming from the public to the private.

    Lorraine: Absolutely, you you nailed that. So it did start out as an issue that large public companies were more aware of. And I don’t mean issue. I mean, just the the the act of reporting, disclosure, investors looking for answers your your performance on these ESG factors. And so it absolutely started in that space. And you ask any asset manager today, and they are wrangling with how to tailor their disclosure, their reporting for just about every asset class under the sun. Your infrastructure, your municipal bond investments. So certainly, the work is underway as large investors asset managers think about what what ESG disclosure means to them and their portfolios. Our focus at Novata is the private markets. We know that the bulk of the economic activity globally takes place within the private markets. 

    And so you’re certainly public equities, just picking an example. They are light years ahead of us in terms of disclosure, there’s still a lot of fragmentation. So they are ahead but the question of standardization, particularly as it relates to disclosure on social issues, say human capital. There are some improvements that could be made. And so what we see ourselves doing is taking from what’s worked well in the public equities. We’re not trying to compete with these leading standards organizations. 

    You have SASB and VRF completing a merger. We are not competing with the likes of SASB or GRI or I could go on in terms of the leading groups. Rather, we’re borrowing from the metrics they’ve set out. We like the the example of a common core common application for college, where we believe that the set of metrics we’ve identified or highlighted are an on ramp. So you could go in, you could be a novice in terms of being a GP, looking to disclose on ESG topics, factors, and using our approach where we’ve distilled it down to a set of metrics, you could, you know, then start your reporting and your conversations with your portfolio companies.

    Patrick: As we get kind of a broader just conceptually with ESG. You know, it is this way where it’s how management teams and investors can work together to move companies and their behaviors and their practices in a way that’s in the best interest for all stakeholders. And so it’s the old saying of doing well, by doing right, okay, that doing these things, not only is good, ethically or PR wise, but there’s actually competitive advantage for, you know, having these standards, higher standards than just financial performance. So why don’t you share, you know, what are the benefits to companies and management teams and investors by pursuing good solid ESG formulations?

    Lorraine: Right, it’s it’s an important question, and one that we’ve been engaging with GPs on. You know, be, I’d say, in a lot of cases, this request for disclosure is coming from your LP, your investors. Here’s a questionnaire, we’ve heard these stories of GPs receiving forty questionnaires in one week, you know, various, you know, different flavors of the same questions, and you’re having to react in that sense, but really asking these questions about your emissions? Where might there be hotspots in your portfolios? What in your portfolio companies, what are some changes you could make, you might just be changing the geography of where a supplier is, we’re talking about energy costs. 

    So there may be some small changes you could make, as it relates to the E, the environment. When we’re talking about social, looking at things like worker turnover, injury rate, questions that your organizations and some federal organizations are asking for this information, we may find some of these details in a corporate social responsibility report, depending on the metric. But largely, a lot of this information on your workforce demographics, for example, is unstructured data that an ESG analyst will have to go find. So it’s released in different places. It’s voluntary disclosure. And it makes it challenging for investors to compare apples to apples the performance of a company on these different areas. 

    Again, just moving down the list, you know, some of the questions on governance could give a management team a better sense of potential risks and areas of opportunity, you know, what maybe they didn’t know about the composition of their board, or their senior leadership. If you’re outside of the US, one of the questions that a lot of investors will ask is, what’s the representation of underrepresented groups on your board? Maybe zero. And so it’s just for us that feedback loop, what you do with the data is is important. And we believe that you starting with the disclosure, the measurement, you can’t manage what you can’t measure. And and that’s certainly where we come in.

    Patrick: I think by following this, you can uncover some solutions that are hiding in plain sight. 

    Lorraine: Exactly.

    Patrick: Environmental and on one side, you have cost issues, efficiency issues. With the social with the biggest strain right now being labor, and how critical it is getting people and finding ways to get, retain and improve not only not only your your labor force, but your customer base and so forth. And that’s all people. And then you go from that to the governmental, where there are opportunities and things out there that both both sides can leverage for the benefit of all. And I think that’s just a great open minded approach that’s out there and it and it will literally pay for itself.

    Lorraine: Right. Right. Another thing I’d add, Patrick, and maybe it’s not the most exciting announcement, but we do see some some conversations coming out of Washington, DC. We know different agencies are looking for data, wanting to know about some of these different non financial metrics and how companies are performing. But then there’s the SEC that is thinking about mandating disclosure. In this case, you know, for private public companies, so on on the 10k. So we we expect to see some some changes some some events taking place as it relates to climate disclosure and human capital. And I think everyone in the industry is just waiting patiently to see what they come out with for public companies, and how that might impact those of us focused on the private market.

    Patrick: And if you want to see a leading indicator with the, you know, for the private markets out there, privately held companies, just look what’s happening in the public sector, because those practices and analysis and, and things they filter down. And so it’s a great way to get out there. They’re the testing agent out there. And I just think it’s just, you know, as with sports analytics has become very important. Here’s another source of data that, you know, business owners, not only investors and business owners and leaders can can learn from. And one of the things that happens with ESG, the criteria is is developing, it’s a moving target right now. 

    And that’s where you can, I think, have some suspicion out there where people have different criteria for, and different measurements, and so forth. So there’s no real set rule, even though, as you said, this is evolving, and there are beginning to be some standards out there. Let’s talk about Novata, because that’s one of the things that you’re bringing to the table is you have a set of, a process for analysis that bring some standardization and some consistency. So share with us that.

    Lorraine: Sure, our approach was to be an on ramp. And so we looked at the major standards organizations and frameworks and and looked at what they were doing and picked what we felt was more applicable or most applicable to the private markets. We’re starting with a set of metrics that’s focused on cross sector disclosures. So across all sectors, what are the set of questions we recommend? It boils down to 10 categories. So there are 10 categories across  E, S and G, where you could disclose. If we’re talking about E, it’s your GHG emissions, for example. Or do you have a net zero target waste and water management. 

    So you know, a lot of companies for them, this type of disclosure will be new, but for others, they’ve been gathering and releasing this data for a long time now. And so those 10 categories, we feel are approachable, they cover all industries. And then next quarter, we will be launching more industry specific metrics and guidance so that companies that want to focus more granularly on a specific industry on very industry specific topics and issues and can do so.

    Patrick: With this, I can imagine that, you know, a privately held company, I think you want to be proactive and have this reporting queued up because it’s, you’re going to get it well received. And if you’re used to doing it before you have to do it, I think I think that that’s in favor. And so you’re going to guide organizations that never consider this information. And you can literally hold their hand. And if they haven’t been measuring things, or they haven’t been tracking, you’ve been kind of guide them through the process.

    Lorraine: That’s our intention. And so we are in beta testing. Now we are gathering some great feedback. Turns out if you ask a private equity investor, the year our company was founded, that’s a conversation. And so we are incorporating all of this wonderful feedback. We have a coalition of GP investors that have signed up with us early that have offered their their advice, and we are certainly using that. And so testing the approach, the act of actually disclosing, reporting is really important to us. And so that’s an example right there of what the process looks like, in real time.

    Patrick: And then, I mean, would your client be the, I mean, the the target where the services are would be a portfolio company, but it would largely be your private equity firm that has a you know, several portfolio companies, not unlimited, but.

    Lorraine: They could have dozens, yeah. And so that type of support, you know, I was talking about feedback on the questions themselves, but actually going through the reporting, we’re staffing up our sales team and client service. And so we will have dedicated support, someone you can call to ask questions about whether it’s the tool itself, maybe something that doesn’t seem very intuitive, or the metrics. And so that type of support was important to us, because we do know that this type of reporting will be new to many, and we’re we’re staffing accordingly.

    Patrick: And I apologize if we haven’t focused on this, but there are some companies doing this but for the publicly traded companies and the the large, extended networks and so forth. And where Novata’s coming in is your unique offer is that you’re going to be doing this with the privately held companies and helping them more hand holding and entry level, right?

    Lorraine: That’s correct. And another distinction, or just a point I wanted to make about Novata’s approach is that we are not looking to rank or rate the companies. We also are offering a set of tools and benchmarking down the line as a, you know, an additional feature that the platform. And so that’s important to us. The key feature that GPs like is the ability to permission the data. And so they will be able to permission the data to users that they feel comfortable sharing the portfolio company information with. We can also Novata’s company can share anonymized data, which will help with benchmarking. You know, we’re looking to institute public company comparisons, for example. But also we’d like to share with academics anonymized data for their use. So we see that as a public good, that anonymized data.

    Patrick: I think that I didn’t realize this, but I guess, you know, if if you decide to go the route with ESG, and begin getting that, you, you know, you can’t turn that off. So I guess there’s a risk out there where oh, gosh, we’ve got to be all in. And some organizations are like, well, can we do this on a step by step basis? So that we’re not completely committed and out there? And I think also, you know, like you said, who wants to go out there, if you’re not ready and all of a sudden get ranked? That would be, that would be a PR disaster. So you give them that kind of like that, you know, safe harbor I would call it.

    Lorraine: That’s right, Patrick, we’re also building in a feature for GPs to customize. Maybe there’s a question they’ve been asking for years of their portfolio companies. And they like to keep that consistency. It might not live within, you know, an industry leading standards organization or a framework, but it’s important to that particular GP in their process. And so we’ll have a feature where they can input customized questions and send those out to their companies. And then another feature that that we like, is the ability to actually check off the metrics that you would like your portfolio company to respond to. 

    And, you know, goes back to your comment about different companies, starting from different places in terms of their ability to report. Maybe staffing levels have something to do with it, maybe you’d like to them to see a question, but think about gathering the data to disclose next year. And so that feature of being able to check off which metrics you’d like for this particular, you know, whether it’s a quarter or calendar year, is an important one.

    Patrick: So I think that’s great, because there’s no harm no foul for prospective organizations that want to dip a toe into this, that they’re not passing a point of no return. So really favorable. Lorraine give me a quick profile, who would Novata’s ideal client be?

    Lorraine: Sure, I’d say I’ll change the wording slightly. You know, our day one user, we believe is a buyout, private equity investor, sending this to, you know, five or 30 portfolio companies that they’d like to report across different ESG metrics. So that’s our day one user. That’s who we’re set up for currently. We will be adding more metrics. So you know, keeping keeping an ear to the ground, adding more metrics. Maybe some that are mandated, in terms of, you know, mandatory disclosure, but others if we see a lot of investor consensus around certain topics or metrics, we’ll also keep that in mind as well. So to give you a sense of how we imagine this evolving, you know certainly accommodating other types of users, but also accommodating just changes in the ESG measurement space.

    Patrick: Okay, great. Now, as we’re going into this now, we’re just coming up on 2022. I mean, boy, this last year just flew. What do you see trend wise for ESG in the private sector, you know, in terms of embracing or any other, like, big metric or something that we didn’t think about that was going to come out?

    Lorraine: Sure. I think, you know, fall of 2020. So basically, a year ago, an interesting poll came out from Edelman that said, social issues you the social dimension went from third, you know, dead last as it relates to ESG for institutional investors, to first place and there were so many events that led to that change. I think it’s hard for anyone to ignore the environmental issues in the spotlight right now, especially with different government agencies, you’re talking about disclosure with cop26. And the commitments made there. And so I’d say we continue to see that focus on social. A lot of organizations have, have promised to measure, to manage, to disclose more on social. A lot of investors at particularly in the public equity space, whether it’s a proxy campaign or a request for disclosure, maybe a letter that they’ve sent over. 

    And personally, personally seen some of those those conversations take place with the Russell 3000 companies for disclosing on their workforce demographics. So I think we’ll continue to see movement there. And we certainly have commitments from some of the large asset managers that they will continue those conversations. But on the environment, I that’s an area where it’s particularly within the private markets, we’re starting to have a lot of conversations, Novata, and just generally private companies and private equity ownership and, and how they can disclose more and manage on the environment.

    Patrick: I think this is just something that’s not going to stop. I mean, there are a lot of challenges in the world that aren’t gonna get settled ever, as people are still here. And so I, between the E the S and the G, I think each one is going to take a priority surprisingly, over the other two sometimes, but they’re all there. And I think, with innovation, technology, and and real commitment out there, I think that you’re going to see everything moving toward the good. And organizations like Novata, that provide tools for companies to do this. 

    They intent, they have good intentions. Sometimes they just don’t know how to do it. I think you guys are there for that. So I think that this is something that’s going to be not going away anytime soon, we’re never going to run out of the need. So this is just essential, and is great, because you’re among the first ones in this space, so I wish you and Novata great success. Could you tell us how can our listeners find you and Novata?

    Lorraine: Sure. Our website is up. We are posting more and more content. novata.com. Engage with us on LinkedIn, we’re posting resources and we’ll be launching a webinar series to help educate. That’s important to us. So website, LinkedIn, reach out, send over any questions. Thank you, Patrick. It was really nice chatting with you and sharing about our work.

    Patrick: Lorraine Wilson, Chief Impact Officer, Novata. Thank you very much for joining us today. 

    Lorraine: Take care.