During the spring 2021 semester, six students from University of Southern California’s Impact Investing Group (IIG) collaborated with Imagine H2O on a consulting project. Their scope of work focused on evaluating how Imagine H2O communicates the impact of the organization, the ecosystem and of the portfolio. They focused on our 2020 Impact Report, our portfolio […]
Xylem: First of its kind Green Bond
This summer, Xylem closed its $1 billion inaugural Green Bond. With the offering, Xylem has positioned itself as a leader in water-related sustainable financing. Scott Bryan and Kelly Trott of Imagine H2O sat down with Claudia Toussaint, Xylem’s SVP, General Council, Corporate Secretary and Chief Sustainability Officer to discuss Xylem’s evolution into green finance.
Where does the Xylem green bond story begin?
This kind of financing doesn’t happen overnight. Xylem has always put sustainability at the core of what we do. Between myself, a number of other stakeholders and the treasury, we had ongoing conversations around sustainable financing as early as 2016. Also, given the high percentage of ESG focused equity investors in Xylem, we knew we would have significant support for sustainable financing.
We started with a sustainability-linked revolving credit facility in 2019, which we thought was easier to start with than going straight to the public markets with a green bond offering. The revolver enabled our team to have the right systems in place to track and report impact data. Our commitment to sustainability and track record of providing reliable data was the foundation of our green bond offering.
When did you decide to move forward with the Green Bond and how was it received?
After the success of the revolver, we were ready to move forward with the green bond but were waiting for a number of conditions — board conversations, debt maturities, a favorable rates environment, etc. It was essentially a year between the credit revolver and the green bond, but the conversation was continuous between the two.
The green bond offering was oversubscribed by several times. I believe it was so well received by the market because of increased education and awareness around the importance of green bond financing, and, more broadly, social financing. Additionally, as we have said publicly in the past, if you incorporate after-tax benefits, the total cost of funding actually turned out to be less than one percent. Not only does the oversubscription of the bond indicate the enthusiasm in the marketplace, but the pricing benefit also demonstrates it.
It is important to note that the success of the offering goes beyond just the oversubscription. We have received an outpouring of encouragement from a number of other stakeholders — including our customers, our employees, and our board.
Where are we in this evolution of green bond offerings?
Our perspective is that, traditionally, sustainability financing has largely focused on energy projects. The 2016 impact bond by DC Water, which is considered a thought leader among water utilities, put green financing on the map for water companies. With both water utilities and water-related technology companies like Xylem doing sustainable financing, I think you’re going to continue to see an uptake here!
What was different about the Xylem green bond?
The norm is that most green bond offerings are based on a project approach. While we are not the first, ours is different in that it is based on a portfolio approach where you structure your green finance to look at your entire portfolio, or as much of our portfolio as is applicable. That differentiation between project financing versus portfolio financing is a big deal — the difference between funding a narrowly defined project, and a broader portfolio of activities. It provides considerably more flexibility, and potentially higher impact. Not a brand new design innovation, but not one that’s been done very often in the market.
We were able to take the portfolio approach because the structure of our green finance framework is aligned with our long-term sustainability strategy, in which our 2025 sustainability goals are directly tied to our business strategy. My hope as the Chief Sustainability Officer is that our peers will take note of Xylem’s approach and start thinking about how they can shift their business model and strategy to integrate with sustainability instead of being project-specific.
Within the portfolio what are some examples of how you could use the proceeds?
The first area is products and solutions that focus on the circular economy and eco-efficiency. Think about a more efficient pump, a more efficient treatment system. And then you think about how the systems are connected and as a result deliver additional incremental value. The connectivity between products, in a digital solutions overlay, is really where we see a significant opportunity to create operational benefits for our customers, but also significant sustainability value.
The second area is products and solutions that advance the reuse of water, or address our goals to prevent water pollution — like storm-water overflows getting into waterways where they are not supposed to be. That latter application leverages our ability to model systems with the use of digital twins, then optimize the existing infrastructure, reducing the need for new civil works. That has big sustainability benefits. It’s part of where we see the industry needing to go and it’s part of what we can finance — whether from R&D or acquisition — with the Green Bond proceeds.
Since we are a water Accelerator we have to ask….what is the role of engaging with early stage innovation within this portfolio?
From a business strategy perspective, we are very focused on opening up our collaboration process in regards to both technological and business model innovation. I’m explicitly mentioning business model innovation because, as an engineering driven organization, we are often thought to focus primarily on the technology.
How does the ESG impact reporting work?
The best corollary I can really give you is financial reporting. When a private company becomes public, they’re not automatically good at financial reporting the way the SEC rules and investors expect. The same is true with respect to sustainability data. However, there is an added layer of difficulty because the data comes from multiple sources, making the reporting even more complicated. Sustainability is a lot about driving continuous improvement, and we have incrementally gotten better overtime.
Another piece of the journey is that it takes time to engage a broad enough set of stakeholders who really understand how important it is to make data-driven decisions, both about strategy and also about monitoring and reporting. With the credit revolver in 2019, we aligned it to the Sustainalytics rating system and leveraged their team to give us perspectives and advice.
As we all know, reporting doesn’t always tell us everything. How do you plan on communicating the impact of the green bond more broadly?
You are right — often our interventions have multiple layers of ESG impact that aren’t reflected in just the numbers. For example, we recently did a project in South Bend, Indiana.
- The first layer of impact was environmental. The project prevented huge volumes of sewer overflow from entering the St Joseph river, and, as a result, decreased the presence of E. coli in the river.
- The second layer of impact was governance. The project enabled the city to respond to a consent decree from the EPA.
- The third layer of impact was cost savings for the community. The project saved the city (and ratepayers) something in the neighborhood of half a billion dollars.
In order to communicate the success of projects and the broader green bond we are equipping our senior leadership and our customer-facing colleagues to tell these stories externally. And we’re also talking about our experience on all our digital channels — social media and web, of course, but also conversations like this one.
What is next for Xylem?
We’re motivated by applying our technologies to solve the world’s toughest water challenges — especially water scarcity, water affordability, and the resilience of water systems. We’re particularly focused on the combination of traditional infrastructure solutions with digital technologies to create breakthroughs for water utilities and the communities we all serve. In the end, that’s what puts sustainability at the center of our business.
Offering details: $1 billion senior unsecured notes. $500 million 1.95% senior notes due in January 2028 and $500 million of 2.25% senior notes due in January 2031.
More information on Xylem’s Sustainability efforts: Please visit their website here where you can download their 2019 Sustainability Report and read about their 2025 Goals.