Summary:
A team of nonprofit leaders and venture capital investors have invested money in Novata, a new ESG data and rating agency. Alex Friendman, the founder, asserts that Novata is different from incumbents in the sense that it will be lower cost and more collaborative. Novata has referred to itself as a “public utility”. It is reported that Novata’s reporting framework and benchmarking tools will be offered at a substantial discount to prevailing prices.
Adding itself to the lengthy existing list of ESG ratings providers including ISS, MSCI, and Sustainalytics, Novata has emerged as a well-funded startup in the ESG space. Novata has a roster of investors including Omidyar Network, S&P Global, Hamilton Lane, Ford Foundation, Clearlake Capital, The Vistria Group, and Kohlberg & Co.
What stands out in this article as being particularly significant is the way that Novata is differing itself from previous ESG data providers.
First, Novata intends to collect its information through two channels: proprietary research and outside contributions. Unlike, other ESG rating providers, Novata wants to act as more of a collaborate data pool. This is something I discussed in my midterm as a way for more information to be disclosed and accessed. Open-sourcing and collaborating on ESG data capture would create more data and access, however, it would be necessary to ensure the data is accurate and reliable.
Second, Novata intends to provide ESG information in the form of a public utility. In this sense, Novata wants to empower all players in the ESG market with equal access to information. That way, all investors have access to the same information, and thus, ESG financial markets can run more efficiently.
So What?
Novata’s business model is a sign that there is innovation coming in the ESG rating space. It is well known that ESG data and ratings have faults. It is also well-known the ESG data is necessary for making good investment decisions. That is way this innovation is so salient and welcome.
It is interesting that Novata sees ESG data provision as a public utility. Already, financial disclosures are uniform and, in that sense, can be seen as a public utility. Interpretation is the source of competitive advantage. Moving toward that same playing field in ESG investing is the right move.
It could be argued that Novata is simply another for-profit ESG data provider capturing a market opportunity, but I think this argument can be defended against because Novata is a registered B-Corp and has a combination of nonprofit and for-profit investors.
What Novata evolves to become is yet to be seen, but I argue that it is a step toward innovation and improvement of ESG data provision, which is crucial for the success of ESG investing.
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