ESG Trendsetters: Xylem
Nasdaq's ESG Trendsetters series highlights the top ESG professionals and teams around the world who go the extra mile in their evolving ESG roles. Discover how leading ESG companies are incorporating ESG factors into their corporate strategy, achieving meaningful impact and communicating with their stakeholders.
For this edition, we are joined by Xylem. Xylem aims to create a world in which water issues are no longer a constraint to health, prosperity and sustainable development. With water at the core of Xylem's business, the company has a natural and deep commitment to sustainability. Hear from key Xylem team members on what it takes to be an ESG Trendsetter.
How do you associate ESG with Xylem's corporate strategy and purpose?
At Xylem, sustainability is at the center of what we do and, therefore, who we are. As the leading global water technology company, we help address one of the world's most critical environmental and social challenges, and that is the responsible stewardship of our shared water resources. It is important to note that when we talk about sustainability, we define sustainability broadly—beyond making a positive environmental impact. For us, it is about responsible practices that strengthen our company and that strengthen the environment, global economy and our societies. We, therefore, believe that in doing our work, we have the opportunity and actually the responsibility to create a safer and more equitable world. This alignment between sustainability and strategy enables us to create both economic and social value simultaneously. It also, frankly, nurtures a strongly purpose-driven culture. From a governance perspective, our board and its committees have been and continue to be incredibly valuable partners in our sustainability evolution. They regularly review and discuss our sustainability strategy and progress with us, and they provide unique inputs from each director's diverse vantage point. The other key, in terms of our engagement with the board, is that it helps drive accountability and that accountability is in service of our key stakeholders, including our investors.
With the understanding that sustainability is core to Xylem, what are the benefits you've seen that others might be able to achieve if they tie ESG to purpose?
We see value creation for all of our stakeholders when we drive ESG and our sustainability programs through our entire strategy, and for us, it starts with the customer. Inherently, in the water industry, our customers are concerned about providing safe, affordable drinking water and protecting the environment. By partnering with them and helping them achieve their sustainability goals, we also are achieving our business strategy. Internally, our employees, we have 16,000 employees around the world, that are passionate about water issues, and so, we're able to engage them not only in our sustainability initiatives but interfacing with customers, being advocates for the industry as a whole and also participating in our community impact programming and giving back. The final stakeholder group I'll highlight is the communities that we operate in and partner with, and we do that primarily through a program we call Watermark, which is our CSR program. Being able to have that mission brings all of our stakeholders together to create shared economic value, as well as social and environmental value.
Have you seen a valuation impact on account of your ESG program?
By nature of what we do, we have always been a part of portfolios that have been geared towards sustainability and impact funds. These holders take a very thoughtful and long-term approach to their investments, and so, as part of the research we did a few years ago, we recognized that there would potentially be a significant opportunity for us to increase our ESG Shareholder base over the coming years. One of the reasons for this is the generational wealth transfer of more than $30 trillion that will take place over the next several years, particularly from baby boomers to their children and grandchildren. Within that new generation of investors, more than 75% have indicated that sustainability will be critical to their investment process. That compares to about ⅓ of the baby boomer generation when asked that same question, and so, for us at Xylem and in investor relations, this meant a modest shift in our focus, messaging, and shareholder targeting efforts. The proof point is that we now have the highest ESG capital, including active and passive investors as a percent of our market cap, of all companies over $9 billion in market cap. We have the fifth-largest percentage of ESG capital as a percent of market capital of all companies regardless of size. We estimate about 30% of our shareholder base is now ESG holders, and that's roughly doubled in the last four years. It's been a meaningful change, and it's also one of the biggest reasons why it's been so critical for us, is that we're a company with the portfolio that's evolving and changing with technology, much like the market we serve, the water sector, is evolving and changing in a new digital age. Growth and disruption with technology do not happen in a straight line. We found this out firsthand after some challenges a couple of years ago and having to reset guidance and targets at that time, but importantly, these shareholders understood this. They supported us through these challenges, and they believe in the long-term strategy and vision of what we were building as a company for a sustainable water future.
Xylem’s 2020 Sustainability Report, Solving Water for a Resilient World, tracks their progress in tackling critical global challenges of water access, affordability and resilience. Working with partners worldwide, Xylem has advanced sustainability across their customer solutions, their business operations and their humanitarian work, with the aim of creating a more resilient and equitable world for all.
Why did you decide to accelerate your ESG efforts, and how did you go about it?
We view stakeholder engagement as a critical component of our overall ESG Strategy, and over the course of a year, we engage with a wide range of our constituents, including institutional investors, our retail shareholders, proxy advisory firms, ESG rating firms and industry thought leaders, like Nasdaq. At this point, we have a very well-established annual shareholder engagement program, and it typically involves our independent board chair, as well as our senior leadership team and a range of individuals from different functions in the organization, including investor relations, legal, executive compensation and sustainability. This past year, we invited more than 30 of our largest shareholders to participate in engagement meetings and for perspective, which represents more than 60% of our outstanding shares. These engagement meetings are an opportunity to discuss key aspects of our governance profile, for example, our board composition and diversity, compensation philosophy and, importantly, our performance around sustainability and social value creation. These meetings are also a great forum for management to get feedback directly from our investors regarding the practices and policies that are most important to them. Over the past few years, we've seen a very clear trend where ESG and sustainability topics in these meetings continue to be very central and to expand and evolve. It's absolutely critical that our team is current and well-versed in preparation for these discussions. Fortunately, we've been able to leverage the deep expertise that Nasdaq has, along with some of our other partners, to make sure that we understand key areas of investor interests, as well as some of the broader voting trends.
What results did you get from your work with Nasdaq?
We've always had a close relationship with Nasdaq, but our relationship has been even further enhanced over the last year by leveraging their expertise in ESG. The ESG space is one that is changing rapidly with requirements, frameworks, rating systems, requests from stakeholders and investors. Nasdaq has helped keep us informed and educated on these changes. What's relevant to us as an issuer, how to think creatively about targeting new long-term investors, how to prepare for meaningful engagement with investors and other stakeholders and providing thoughtful feedback and suggestions to key decisions and messaging around our ESG and sustainability strategy. They've been a crucial part and an extension of our team here at Xylem. We're fortunate to have that partnership.
