The UK water sector is currently under intense scrutiny due to recent troubles at Thames Water and ongoing pollution problems faced by water companies.
This has ignited a debate about aging infrastructure, the management of waterways, and the affordability of essential services during a cost-of-living crisis. As responsible investors, we face complex challenges in navigating these issues, recognising that these are not as black and white as headlines may suggest.
Water companies play a critical role in providing clean water and managing wastewater, which is often taken for granted in the developed world. Beyond these essential services, they also contribute to environmental restoration, such as rejuvenating peatland and ecosystems in Sites of Special Scientific Interest (SSSI). Water companies undertake initiatives to reduce surface flooding, educate farmers on reducing pesticide use, promote biodiversity, and employ river rangers to monitor and manage waterways.
However, despite these efforts, significant environmental challenges persist within the sector. Pollution events continue to contaminate waterways with raw sewage, and inadequate leakage detection and maintenance plague the distribution network. Performance in these areas falls short of expectations, both from the public and from investors who demand better outcomes.
As bondholders in the sector, our engagement with water companies becomes crucial. It allows us to go beyond surface-level headlines and immediate financial impacts to gain deeper insights into the problems at hand and the companies’ efforts to address them. It also provides an opportunity to advocate for meaningful change. Royal London Asset Management has been actively engaging with UK water utility companies, probing them on water management practices, affordability schemes, and their plans to adapt to a warming climate. Our recent engagements have highlighted five key issues that the industry must address.
- Supply management: Effective management of the water supply is vital in the face of climate change risks. This requires strategic investments in new assets and the upgrading of existing infrastructure. Companies that prioritise asset health and utilise innovative technologies to reduce leaks are more likely to succeed.
- Climate resilience: Climate change presents challenges, including water scarcity and extreme weather events. Rising temperatures, unpredictable rainfall patterns, and increased frequency of dry weather necessitate investments in infrastructure and proactive measures to ensure resilience to droughts and floods.
- Pollution and biodiversity: Climate change amplifies pollution events in the water sector. Droughts can lead to surface flooding as dry ground struggles to absorb rainwater, overwhelming existing infrastructure. Ongoing customer education is needed to prevent blockages and protect waterways from pollution.
- Meeting net zero goals: The UK water sector has taken a pioneering step by committing to achieve a net zero water supply by 2030, two decades ahead of the government's target. According to Water UK, this ambitious goal is estimated to save 10 million tonnes of greenhouse gas emissions, and demonstrates the sector's commitment to combating climate change.
- Keeping water affordable: As we strive for a greener future, a Just Transition that leaves no one behind is crucial. While fixing water infrastructure requires investments and innovative solutions, companies must ensure that customers, particularly vulnerable groups, are not burdened with excessive costs. Striking a balance between sustainability objectives and affordability considerations is essential for both the environment and society.
In conclusion, the UK water sector faces significant environmental challenges that demand our attention. As responsible investors, we have a duty to challenge and support water companies in enhancing resilience, biodiversity, and implementing just transition plans. While the commitment to achieving a net zero water supply by 2030 is commendable, it is equally important to address pollution events and protect waterways. By prioritising environmental protection, we can contribute to a sustainable and resilient water sector that ensures the long-term availability and health of this vital public service.
A version of this first appeared in ESG Clarity.
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.