Utilities would welcome greater engagement, claims UK asset manager, as they seek to improve water quality in English and Welsh rivers.
Investors should respond to UK water utilities’ mixed record in addressing river pollution by renewing engagement in order to drive future performance and regulatory change, according to EdenTree Investment Management.
In its recent ‘The Condition of Our Rivers’ report, EdenTree suggested investors need to play a greater role in helping utilities to tackle river and water pollution. “Investors have by and large failed to engage with the industry on river health,” it noted, based on discussions with eight waste and water utilities.
“We heard that historically investors have been more exercised by financial performance, and whilst there was a sense this was changing, the primary focus for many investors seems to be climate change”, EdenTree said. Utilities signalled they would react positively to a broader approach to engagement by investors, which could both to galvanise poor performance and influence government and regulators.
Neville White, EdenTree’s Head of Responsible Investment Policy & Research, told ESG Investor: “Given the pressing need for regulatory change in supporting more investment in river health, the water utilities expressed their keenness for investors to have a voice and to be engaged. Several companies told us they had no routine conversations with investors on river health and welcomed our interest – perhaps a sign that we targeted eight companies and had meetings with all of them.”
Just 14% of English and Welsh waters meet ‘Good Ecological Status’ under the Water Framework Directive according to the Environment Agency’s periodic review. Earlier this year, the House of Commons Environmental Audit Committee’s report on Water Quality in Rivers branded them “a ‘chemical cocktail’ of sewage, agricultural waste, and plastic”. There were 7,600 water pollution incidents in 2019, a sharp from 6,500 in 2015, and last year a £90 million fine was handed to Southern Water for “deliberately dumpling billions of litres of sewage into the sea”, following the record penalty of £126 million the company received in 2019.
Large fines, widely-publicised incidents, and a lack of transparency have led to widespread criticism of the industry. A Yorkshire Water pumping station becoming overwhelmed led to designated approved bathing spots along with River Wharfe encountering dangerous levels of bacteria levels.
Analysis by Windrush against Sewage Pollution revealed that 95% of breaches at 13 Thames Water sewage treatment works were not reported by the Environment Agency. Southern Water’s 2021 prosecution laid out a misleading picture of compliance to the Environment Agency, with its 51 breaches being branded as a “shocking and wholesale disregard for the environment” by the presiding judge.
The fines and the associated reputational damage are a threat both to the utilities and their investors, said White. “Whilst some of these have been historically low, some have also been punitive [such as] Southern Water’s landmark fine for persistent pollution incidents. This could ultimately affect credit ratings or the Asset Manager Plan (AMP) settlement with the regulator, and in turn investor returns,” he added.
The AMP is a five-year time period used in the English and Welsh water industries by the Water Services Regulation Authority to set price increases for water companies and the assessment of key performance indicators, including water quality and customer service.
Although the EdenTree report makes it clear the utility firms need to improve their performance, it also highlights the many challenges faced by the industry, due to a mix of wider forces.
Increased agricultural pollution and urban run-off have been key contributors in the pollution of water and rivers. According to the UK’s Department for Environment, Food and Rural Affairs (DEFRA), agricultural pollution accounts for 40% of all pollution affecting English and Welsh water bodies. Urban run-off from towns, cities and transport accounts for 18% of watercourse pollution, DEFRA said.
In response, utility operators are seeking to increase investment to boost deployment of technological solutions in tackling water pollution. Companies spend up to £100 million every year treating 300,000 sewer blockages and utility companies are currently at various stages of adopting technological solutions including cameras, sensors, real-time data and optics. Further innovative solutions have been discussed, such as Welsh Water and Severn Trent also using data science, or developing AI algorithms as a predictive tool. Yorkshire Water are due to lay out 17km of fibre-optic cables in 2023, also featuring microphones to provide acoustic data on blockage build up.
According to EdenTree, the current cost of nature-based solutions is limiting the pace and scale at which utility companies can implement projects. These solutions include climate-smart forestry and agriculture, coastal flood protection green cities and river, wetland and peatland restoration. Utility companies are keen to use nature-based approaches and avoid ‘concrete solutions’, but in practice the cost-benefit is often not yet fully established, with several requiring further analysis and investment.
Need for regulatory change
The report suggests that the industry’s capital structure can be a contributing factor to under-investment and lack of engagement. The majority of UK water utility companies issue debt rather than equity, with only three out of ten integrated companies listed. Traditionally, debt investors tend to be less actively engaged than equity investors and less likely to seek to influence company policy.
EdenTree’s White said engagement is vital to push water utility companies and their regulators government to tackle pollution more effectively, including investment to carry out infrastructure projects and trial new technological and nature-based solutions.
“Given the pressing need for regulatory change in supporting more investment in river health, the water utilities by and large expressed their keenness for investors to have a voice and to be engaged,” he said.
With the next AMP period due to start in 2025, the EdenTree report argues that the time is ripe for the industry’s investors to push for change, reorientating the sector’s regulatory framework to incentivise investment to improve river health.
“Continuing a regulatory model that does not focus enough on environmental investment will lead over time to the continual erosion of a viable river-based ecology – one that is harmful to wildlife and of little attraction to the public,” it said.
EdenTree’s White said the water companies’ overall track record across a wide range of warranted greater support from investors. “They manage enormous amounts of land and infrastructure, and are responsible for keeping bills low, achieving 99.9% drinking water health, returning waste water in a clean and treated condition to the environment, managing leakage, dealing with agricultural and urban run-off and in many cases maintaining pristine beaches and coastline,” he said.
“However, they have been mired in under investment in maintaining infrastructure [such as] pumps, valves, pipes and in protecting the environment more generally. We don’t see this as a barrier to investment but it is an incentive to engage strenuously with them to perform better.”