Rising Heat On ESG Risk, Reputation And Regulation

It has taken awhile for accountability to catch up with Southern Water, the UK’s privatised water company owned by a consortium of private equity, pension and infrastructure funds. Earlier this month it was fined a record £90m for intentionally dumping billions of litres of untreated sewage into the sea, adding to a history of multiple fines and penalty payments over the last decade. Now the UK Environment Agency’s annual report on the sector calls its performance “consistently unacceptable” in delivering on environmental targets, and makes for depressing reading on the sector as a whole at a time when the need for action on environmental protection looms large. The pressure is on to join the dots between individual and collective responsibility on ESG issues through further legislation and regulation, with a need for culture change.

As a customer-facing business Southern Water has displayed an extraordinary disregard for public health made ever more chilling by the ravages of the pandemic. This, at a time when ESG issues are rising rapidly on the risk landscape among many listed businesses keen to stay a step ahead of fast-moving regulation on climate, environment and social issues, and to maximise opportunity. On individual director responsibility for management decisions around ESG in listed businesses too, the heat is rising from activist investors and stakeholders determined to use their power to bring about change.

In levying the £90m fine on Southern Water, the UK’s Crown Court judgement delivered by Mr Justice Jeremy Johnson it had shown “a shocking and wholesale disregard for the environment, for the precious and delicate ecosystems along the North Kent and Solent coastlines, for human health, and for the fisheries and other legitimate businesses that depend on the vitality of the coastal waters”. He also said the offences could not be viewed in isolation as the company had a record of “very serious widespread criminality” with offences “aggravated by its previous persistent pollution of the environment over very many years.”

Southern Water’s prosecution has taken time, and has revealed not only environmental crime, but an under-reporting of profits to cover it up at the highest levels, “long-term corporate knowledge” of the actions according to the prosecution, and reportedly an “obstructive” company stance to investigation.

Meanwhile the latest EA annual report on England’s nine water and sewerage companies as a whole is stark. Whilst there were improvements in 2020, no single company achieved all the expectations for the period 2015 to 2020, it says. These included the reduction of total pollution incidents by at least one-third compared with 2012 and for the self-reporting of such incidents to be at least 75%.

If these were publicly listed companies, there would have been a much greater media furore. Yet, as water companies, they carry enormous responsibility for the public health of all they serve.

While the current CEO of Southern Water, Ian McAulay, speaks of “historic incidents”, its revamped boardroom looks like a public relations guide to fixing corporate image on ESG judging by the published backgrounds on those appointed since 2015. The longest standing board member appears to be Paul Sheffield, who has been on the board since June 2014, and its senior independent non-executive director since July 2015.

Looking at the consortium that owns Southern Water, JP Morgan Asset Management, UBS Asset Management and Hermes Investment Management are represented among infrastructure funds, as well as among pension funds, along with other players. The UK’s Financial Conduct Authority (FCA) last month launched consultations proposing to introduce disclosure requirements that are aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) for asset managers, life insurers and FCA-regulated pension providers, “with a focus on the information needs of clients and consumers.”

“The climate change challenge affects the whole of society. It is vital that the financial services sector plays a leading role in addressing this challenge. Managing the risks of climate change and transitioning to a cleaner and less carbon-intensive economy will require high quality information on how climate-related risks and opportunities are being managed throughout the investment chain” said Sheldon Mills, FCA Executive Director of Consumer and Competition.

Climate and our treatment of the environment go hand in hand as the part of the same ecosystem. Thinking about climate, the environment, public and private sectors and the role of finance capital mindful of our ‘natural capital’ should be starting to come together in a rush, even as the UK sees private equity firms strike more deals in the first half of the year than in the same period in any year on record. The media spotlight here is firmly switched on.

Looking back to February, 2021, before we entered the pandemic time warp, Sir James Bevan, CEO of the Environment Agency, called for a modern approach to regulation in order to protect air, land and water from future threats, including the climate emergency. “After leaving the EU, the UK has the opportunity to set its own rules and modernise regulation. But we must avoid false choices. Better regulation isn’t code for deregulation. The test for any changes in legislation must be that they will deliver better environmental outcomes as well as being good for the economy” he said.

“Good regulation isn’t complicated, bureaucratic, and costly : it is simple, impactful, and money-saving. The best regulation will stop environmental damage at the source, rather than the costly impact to the public purse and the environment of responding to damage after the event” he added.

If banks can move climate risk swiftly up the priority rankings on risk in a one-year time frame to sit behind credit risk and credit security and now see it as the top problem they will have to address over the next five years - according to a recent survey of 88 financial institutions over 33 countries by EY and the Institute of International Finance - then these issues around water, marketed as ‘water for life’ shouldn’t be far behind on the radar of our financial institutions.

ESG issues have a way of coming full circle, which means there is no way of escaping the reality of them, unless it is through holes in the legislative and regulatory net for those hell bent on profit over purpose.

Main image credit: Sutirta Budiman on Unsplash