Water – ESG Club feature


water companies could argue that they have a relatively fixed customer base, so outlooks rarely point to growth. Dividends are, therefore, needed to attract the investment needed to upgrade their aging infrastructure.


Water is one of those issues where the risks are extremely diverse, cutting right across areas such as climate change, nature,


health and human rights. Alexander Burr, Legal & General Investment Management


out why it could be financially material, and what impact it has for them over the long term. But one of the issues is that water risk cannot be tackled at the corporate level. “Companies around the world may be limited in the changes they can make due to many countries’ water sys- tems being nationalised or heavily regulated,” Burr says. “We have to tackle this at the policy level as well,” he adds. “While one water company changing its own practices is, of course, a positive step, you also need policy-level change to tackle the national and global problems that we are seeing.” LGIM has been working to address numerous issues in this area. It worked in a collaborative engagement led by First Sen- tier Investors to reduce microfiber and microplastic pollution in the water system. The engagement focused on asking washing machine makers to include filters in their products which can remove those microfibers and microplastics from our water system. “This has been quite a successful engagement,” Burr says. “It dem- onstrates that change on our water system is doable.” LGIM is focused on improving water quality and quantity. One aspect is utilising developing disclosure frameworks. “Greater transparency across the entire supply chain will highlight areas for corporates who could address their water-related dependen- cies, impacts, risks and potential opportunities,” Burr says.


Time for an upgrade


One criticism of water companies is that they been paying high dividends while pumping untreated waste into our rivers, lakes and seas. Indeed, they collectively returned £1.4bn to share- holders in the year to the end of March 2022. This may not look good to consumers whose health is being put at risk. But


Chief executives taking home huge bonuses while their com- panies are being criticised by consumers and the regulator is a different issue. Indeed, Thames Water came under criticism for offering its now ex-boss a bonus despite leakage from the company’s pipes being at a five-year high and the company struggling to manage its £14bn debt. Water companies need investment and lots of it to fix their creaking infrastructure. Ofwat, which regulates the water industry, has proposed that £1.6bn of work upgrading the water system should be brought forward from its intended 2025 to 2030 schedule. More than £1bn of this will be invested in reducing the average storm overflows by 10,000 a year. Nowhere near the more than 300,000 spills recorded last year.


Ofwat says that only 60% of the £2.2bn water companies could have invested in improving the infrastructure has been used for such a purpose.


Indeed, the largest 10 water companies spending in their wastewater infrastructure has fallen to an average of £2.7bn a year since 2020 from £3bn in the previous decade, Ofwat says. Water companies in England and Wales only upgrade 0.2% of their assets each year, which is behind the 0.6% average in Europe, says Water UK, a lobby group. Only Ireland and Hun- gary achieve less.


An example of the size of the problem can be found in Oxford- shire. The cost of improving a treatment plant in Witney to stop sewage being pumped into the Thames has almost dou- bled to £17m from £8.8m. Energy and labour have been cited as why costs are spiralling higher. But solving these problems is not just down to utilities. Steps have to be taken to reduce the agricultural waste that falls into our water system and removing the oil and plastics from our roads. “There is, without a doubt, a need for greater capital invest- ment and we are certainly seeing that coming this year,” Burr says. “Don’t get me wrong, that’s great, but the historic lack of investment has meant that more is needed to improve pollu- tion but also address the scarcity issues.


“This needs to be a long-term investment maintained over a number of years to improve the situation, which has been caused by an historic lack of investment,” he adds. It appears that whether we are discussing cleaning up our sources of freshwater, or removing plastic and oil from our oceans, there is no quick fix to these problems. It will take a great effort from investors to create the changes needed to sys- tems and corporate behaviour. The consequences of failure could be catastrophic.


Issue 125 | July-August 2023 | portfolio institutional | 33


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