ESG: A sea of troubles

Lakes and rivers across Britain are turning brown. Raw sewage is being discharged into our freshwater supply at an alarming rate. Indeed, in 2022 there were more than 389,000 incidents of untreated waste being flushed into the UK’s waterways, say Surfers Against Sewage, a group campaigning for cleaner rivers, lakes and oceans.

The issue is that the UK’s water infrastructure, which was largely built during the Victorian era, is unable to cope with the impact of warmer temperatures.

Hot weather followed by excessive rainfall makes it difficult for the ground to absorb water and it ends up overwhelming the drainage system. To stop water backing up in people’s toilets and sinks, water companies discharge the excess into rivers, lakes and seas through overflow pipes.

Sounds a reasonable plan as no one wants their home or business to be flooded. Yet the issue is that along with the water coming out of those pipes is untreated waste.

This is not the only pollutant impacting the quality of our freshwater. Rainwater washes animal waste – which fuels the growth toxin-producing algae that draws oxygen away from animals and plants – and agricultural chemicals stemming from excessive use of fertiliser and pesticides from fields into rivers, while oil “runs off” roads into our freshwater supply.

This has left just 14% of rivers in England rated as being in a good ecological condition. The situation is so bad that there are fears Thames Water, which supplies a quarter of Britian’s population, is on the verge of collapse.

The sewage scandal has put water issues on the front pages, which not only raises awareness, but could force companies to act. “You can have a conversation with a person on the street and people understand it,” says Alexander Burr, ESG policy lead at Legal & General Investment Management (LGIM). “It is unfortunate that it has had to go this far. However, with the increased attention from stakeholders across society, we believe action must be taken.”

It is not just the inconvenience of swimming through raw sewage that is the issue. Water may cover 70% of our planet but only 3% of it is drinkable. Supply is finite and with the population growing, so will the demand for water to drink, bathe in and to grow more food. Pollution, therefore, means poorer water quality, shortages and less nutrition.

Ocean drive

Yet this does not mean the pollution in our oceans is not as big an issue because we don’t drink it. The situation here could be worse as it threatens our existence in other ways.

The oceans cover around 70% of our planet and we would struggle to survive without them. Not only do they generate half of the oxygen we breathe, but they also clean our air, feed us and provide millions of people with a livelihood.

The oceans influence our weather by storing solar radiation and distributing heat and moisture around the world. They are also a carbon sink, drawing the harmful gas out of our atmosphere, making it a natural ally in the fight against climate change. This shows that land management, water and climate change are interconnected, Burr says.

Indeed, burning fossil fuels does not only impact our atmosphere, but our oceans too. The seas absorb around a quarter of man-made carbon emissions, which makes it more acidic. This alters the chemicals in the water, which many plants and animals rely on.

For example, mussels, clams and coral need calcium carbonate for their growth, the level of which falls as water becomes more acidic. Rising acidity also makes it harder for some fish to sense danger or hunt prey and bleaches coral reefs. “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,” Burr says.

Plastic not so fantastic

Then there is plastic. It is not biodegradable and is, therefore, here to stay. Plastic entangles marine life and is eaten by sh and seabirds after entering the sea directly, through sewers or is washed o roads and into rivers and lakes during storms.

Indeed, 8 million pieces of plastic make their way into the ocean every day, killing 100,000 marine mammals and turtles and 1 million sea birds each year, according to British government figures from 2018. One in every three fish eaten by a human contains plastic, says Surfers Against Sewage. Indeed, plastics, albeit microparticles, have been found in people’s stomachs.

Another issue is that pollution in our rivers and seas is creating drug-resistant germs. Along with the food chain and drinking water, rivers and seas could be a breeding ground for anti-microbial resistance.

This could increase instance of people becoming seriously ill and even dying from a cut on the finger or a graze on the knee as drugs fail to kill any bacterial infection they cause. You also need antibiotics for operations and to help mothers give birth.

301 billion reasons to keep it clean

“Water quality and quantity is not currently as central in investment and corporate decision-making as it should be. This needs to change,” Burr says.

In 2021, CDP estimated that $301bn (£237.5bn) of value is at risk if corporates do not improve and innovative around their use of water.

Whilst water has implications for corporates, there are also macro-economic impacts to consider. For example, the World Bank has highlighted that in some regions, water insecurity could cut economic growth by as much as 6%.

“Lack of action may be due to water risks occurring further down supply chains, across markets, making it an indirect and harder to evaluate issue. The value and impact of water is often not reflected in its price, so the negative externalities created in the water system go unallocated and unaccounted for,” Burr says.

He adds that for water to be considered when pension schemes and insurers make investment decisions, it must be pointed 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 systems 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 Sentier 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 demonstrates 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 dependencies, 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 shareholders in the year to the end of March 2022. This may not look good to consumers whose health is being put at risk.

But 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.

Chief executives taking home huge bonuses while their companies 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 over flows 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 Hungary achieve less.

An example of the size of the problem can be found in Oxfordshire. The cost of improving a treatment plant in Witney to stop sewage being pumped into the Thames has almost doubled 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 investment 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 pollution 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 systems and corporate behaviour. The consequences of failure could be catastrophic.