ASSET ALLOCATOR SPOTLIGHT

 

FundFire sat down with experts from Northern Trust and ESG data technology platform Novata to learn more about how they are improving data standards in private markets by equipping investors with a holistic view of their data, empowering them to become more informed investors.

 

By Melanie Pickett | June 2023

As seen in FundFire, June 2023

In the complex world of private markets investing, having access to the right data at the right time plays a significant role in performance – it is also one of the biggest challenges facing asset owners today.

Assets owners are increasingly seeking to align private markets investments with environmental, social and governance (ESG) considerations, heightening both the importance and complexity of this data, and [highlighting] how a lack of structure and standardization creates a grey area for investors and managers alike.

To further complicate matters, asset managers may report on different metrics depending on the asset class they invest in and the availability of data from the underlying portfolio companies or assets. Furthermore, standardization is rare between asset types, making it difficult for asset owners to home in on the metrics that most closely align with their goals.

In addition, no two asset owners are exactly alike – many asset owners are at different stages of their own ESG journeys, as Melanie Pickett, head of asset owners – Americas at Northern Trust, explains.

“Many of our asset owner clients are still trying to figure out how to respond to the stakeholder requests they’re receiving, and how to focus on understanding the data,” says Pickett. “On the other end of the spectrum, we have sophisticated asset owners that have dedicated sustainable investing teams and have embedded ESG into their risk management and investment processes.”

This adds another layer of complexity to the ESG data issue: a requirement for flexibility according to the needs and sophistication of different investors.

Across the investment industry, technology innovators of all sizes are working to solve the data problem, but there is no one-size-fits-all approach.

In recent years, Northern Trust has been building a flexible data model and environment for its clients that can be customized to individual needs, allowing them to focus on the investment factors that are important to them – the metrics that matter, in other words.

With this in mind, Northern Trust has collaborated with data technology platform Novata, which was founded in 2021 with the backing of several leading philanthropic foundations and private equity firms to enable ESG data management for private equity, venture capital, and private credit investors and portfolio companies.

Scott Kennedy, president and co-founder at Novata, says his company has worked for some time to understand the data needs of institutional investors and focus on the mantra that has become Novata’s tagline: “metrics that matter.”

“What we heard very clearly was that the necessary data just did not exist,” he says. “The market needed a platform to collect the data, then manage it, store it and analyze it to provide context around it.”

A little over a year after Novata’s launch, Kennedy says it is already making “real progress” towards its intended impact of improving data quality and availability.

With more than 4,000 companies contracted to use Novata’s data management platform, attention is now turning to what users can do with the data. This includes benchmarking – and not just for investors.

“Benchmarks are critical in order to provide context,” Kennedy says. “We can say what a company’s carbon footprint is, or its diversity profile, but at the moment the company doesn’t really know if that is good or bad.”

Novata is creating value for asset owners through the development and distribution of the private markets’ broadest collection of ESG benchmarks, starting with 40 universal benchmarks and more than 200 sector benchmarks. The benchmark library will grow organically, as clients contribute more data to the platform. Northern Trust will be collaborating with Novata to deliver analytics and insights that create impact and value for the asset owner community.

It is not just asset owners benefiting from more access to quality data. This data is also helping general partners work with portfolio companies to make progress on ESG issues through contextualization, as they can benchmark data against anonymized industry peers to more accurately evaluate ESG performance.

A combination of regulatory pressure, industry collaboration, and investor demands has led to a steady momentum behind data improvements in public markets such as equities and fixed income over the course of many years.

“With private markets, while some of the same elements are at play, the industry is at mile one of a marathon,” as Kennedy explains.

“Convergence is maybe too strong of a word, but there is this gravitational pull towards consistency, comparability, and reliable data that hasn’t really existed previously,” he says.

For Pickett, providing asset owners with more consistent high-quality data is just the first step. As well as contributing to financial returns, she explains that data improvements should result in investors feeling more informed and empowered to influence their managers and portfolio companies to drive change in a positive and measurable way.

“At Northern Trust, we consider it our mission to support our clients’ missions,” said Pickett. “This includes working with industry innovators that are helping to solve our clients’ biggest data challenges, so they can focus on what matters most to them.”

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