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UK regulator ties water companies’ dividends to environmental performance

A sewage overflow outlet discharges into an English river. The government says companies should not be allowed to pollute without facing the consequences (Photo: Dan Kitwood/Getty Images)
A sewage overflow outlet discharges into an English river. The government says companies should not be allowed to pollute without facing the consequences (Photo: Dan Kitwood/Getty Images)

Ofwat is using new powers to prevent water companies from paying shareholders without first accounting for the interests of customers and the environment.

UK water regulator Ofwat has requested company boards consider environmental performance and the level of service provided to customers when deciding whether to pay shareholders, and pledged enforcement action against businesses that fail to do so. Ofwat will also stop dividend payments if these compromise companies’ financial health.

Water companies will have to maintain robust levels of financial health, since failing to do so would limit their ability to invest in the environment and negatively effect customers’ interests, the regulator said.

Ofwat is changing licences to require that companies “take account of service delivery for customers and the environment, as well as investment needs and financial resilience, when deciding whether to pay dividends”. In a statement accompanying the news, Ofwat chief executive David Black said: “Too often, this has not been the case.” Most licence changes will take place by May 17.

The regulator is using new powers that were granted through the 2021 Environment Act; previously it had no control over water companies’ dividends. 

The government has increased its scrutiny of water companies, having issued record fines of over £142mn since 2015, and environmental quality minister Rebecca Pow backed Ofwat’s new powers, saying: “It is wrong for water companies to be responsible for environmental damage and poor performance but not face the penalties. It has been happening too often and it needs to stop.”

Implications for investors

The announcement could have future implications for the investor base of UK water businesses, much of which is overseas. According to a Guardian report in November 2022, more than 70 per cent of English water companies are foreign owned.

Three UK water companies are listed on the London Stock Exchange: United Utilities, Severn Trent, and Pennon Group. Their shares all rose marginally following the announcement. All three declined to comment on Ofwat’s announcement.

Pennon Group paid £1.59bn in dividends in its financial year to March 31 2022, which included a special dividend of £1.5bn in July 2021. United Utilities paid £296mn in dividends over the same period, while Severn Trent paid £255mn.

The companies have had a mixed recent track record on pollution. On March 14, a Pennon trading statement disclosed that the company had registered a reduction in pollution incidents of around 30 per cent last year. It said it had increased its spending on the environment by 40 per cent.

Severn Trent, meanwhile, recorded an increase in the number of pollution incidents linked to its waste water activities last year, registering 204 incidents over 2021-22, up from 190 in the previous period.

In 2021, Severn Trent was fined £1.5mn over illegal sewage discharges after being prosecuted by the Environment Agency, and Extinction Rebellion activists protested outside the company’s headquarters this March.

Also in March, the i newspaper reported that the Environment Agency did not prosecute United Utilities despite the company having polluted the River Mersey. 

An Environment Agency spokesperson said: “In this instance, United Utilities did cause the pollution on the River Mersey. Our teams thoroughly investigated the incident and have worked with the water company to ensure their systems are updated to avoid a repeat of this offence.” 

According to a United Utilities spokesperson: “This occurred when a technical fault arose at our treatment works. As soon as we found this, we resolved the problem quickly. Using the lessons learned we now have more robust internal procedures to reduce the risk of this happening again.” 

A service from the Financial Times