Despite environmental missteps by Welsh and English water and sewage companies, executives continue receiving generous bonuses and shareholders, rising dividends. Public patience is stretched thin. But legal and regulatory pressure is acting as a catalyst for change, creating opportunities for innovation. Rukaiyat Adebusola Yusuf writes that, by embracing the moment, England and Wales’ water companies have the potential to set a global standard for environmental excellence and corporate responsibility.

England and Wales’ water and sewage companies are facing a critical juncture in their environmental stewardship and corporate governance. Intensified legal and regulatory scrutiny has focused on practises in sewage and wastewater management, dividend payouts and executive remuneration. As consumer rights are increasingly central to corporate accountability debates, public patience with environmental negligence is thinning.

The stakes have never been higher. Every water company in England and Wales is subject to comprehensive investigations by Ofwat, the industry regulator. The investigations cover a wide range of issues from sewage treatment compliance to the accuracy of self-reported data. The goals are to ensure adherence to environmental obligations, hold companies and executives accountable for significant breaches and ensure financial resilience. This shift signifies a move from reactive oversight to proactive enforcement.

These regulatory and legal developments are acting as a catalyst for change, with a unified call from regulators, consumers and environmentalists for an end to complacency and a strong demand for accountability and environmental stewardship. This is set to reshape not only the operational practises of water companies but also their role in society. As custodians of essential resources, these companies are challenged to balance economic efficiency with ecological integrity.

Environmental impact

One specific practice raising concern among environmentalists is the companies’ overreliance on combined rain and sewage overflows, designed to prevent backups during heavy rainfall. The core problem lies in the ageing infrastructure and insufficient investment in modern sewage treatment facilities. This has turned what should be a last resort into a common practice, with significant environmental consequences. Frequent sewage spills into rivers and seas degrade aquatic life, pose public health risks, hinder conservation efforts and raise alarms about the long-term health of the UK waterways.

Corporate governance

Despite the missteps, executives continue to receive generous bonuses and shareholders, huge dividends. For instance, Thames Water’s chief executive got a £195,000 bonus for the first three months in 2024 even after proposing a 59 per cent increase in customers’ bills. Additionally, dividends in water companies rose from 540 million in 2021 to £1.4 billion in 2022 amid public outcries.

Figure 1 indicates a persistent trend among water companies to distribute dividends irrespective of their net income. This phenomenon is financed through accruing debt, leading to a situation in which many of these companies have amassed substantial financial liabilities. This put them in a financial position that mirrors the circumstances observed during the decades subsequent to privatisation.

The government facilitated their transition into private ownership by absolving £4.95 billion debt and infusing £1.5 billion cash into the industry in 1989. Fast forward to 2024, Thames water alone is struggling with an £18 billion debt such that Ofwat had to put it into “special turnaround oversight regime”.

Figure 1. Dividend payout ratio in the 3 largest water companies in England and Wales, plus the industry average

Source: Author

Public and regulatory pressure

The public outcry has been strong, with calls for immediate action to address the pollution, protect the environment and ban executive bonuses. Water companies are now under pressure to upgrade their infrastructure, improve transparency regarding spill incidents and reduce their environmental footprint. Ofwat’s current announced measures of banning bonuses in light of serious criminal breaches, imposing criminal charges and stopping dividend payments that risk the financial health of these companies is a clear message that mere compliance will no longer suffice.

The outcomes of the investigations could lead to significant fines, mandatory infrastructure improvements and a redefinition of industry standards. As the probes continue, the water companies face immense pressure to demonstrate their commitment to environmental stewardship. This heightened scrutiny and public demand for accountability have not only led to regulatory pressures but have also mirrored in the legal arena.

The legal landscape for England and Wales water companies has changed dramatically following a landmark Supreme Court’s ruling in The Manchester Ship Canal Company Ltd vs. United Utilities Water Ltd. This decision broadened the potential for litigation against water companies, finding that the water industry act of 1991 does not preclude claims for trespass when waterways are polluted by sewage waste even without deliberate negligence or misconduct. This ruling represents a significant departure from a previous High Court ruling and underscores the Judiciary’s willingness to empower affected parties to seek justice.

The ruling’s implication is profound, significantly broadening the scope for businesses, private entities, and the general public to initiate legal action against water companies for sewage pollution. This could lead to a surge in litigation and claims for damages. Paul Greatholder suggests that even owners of adjacent waterways or ordinary members of the public could bring claims against utility companies. This development is especially significant, given the financial pressure and scrutiny water companies faced due to unauthorised waste discharges.

The Supreme Court’s judgement also set a precedent that issues of sewage pollution could be mitigated if water companies invested in improved infrastructure and treatment. This ruling serves as a clarion call for the industry to prioritise environmental protection over profit margin and dividend payouts. It not only provides a legal avenue for redress but also signals the end of unchecked environmental impact. For environmental organisations, swimmer, fisherman and other affected parties, the ruling emerges as a symbol of renewed hope – a means to hold polluters accountable and to champion the health of the UK waterways.

The repercussions of the England and Wales water companies environmental and operational practises extend well beyond the riverbank, affecting millions of households. Consumers are increasingly feeling the impacts of industry shortcomings, including the allegations of underreporting pollution incidents and overcharging. These issues have eroded trust between the water providers and their customers. Recent legal action suggest that six English water companies could be facing substantial compensation claims due to accusations of insufficient transparency regarding pollution levels, potentially misleading both regulators and the public. Additionally, allegations of overcharging have further compounded consumer dissatisfaction, raising questions about the value and integrity of the service provided.

Legal liability

The potential success of these legal claims extends beyond financial implications for the water companies: it serves as a barometer of consumer sentiment. A successful claim could result in over £800 million in compensation and set a precedent for corporate transparency. For customers, it is not just about financial recompense but also holding companies accountable for their promises and environmental impact.

Increased scrutiny over billing practises reflects this concern, as customers demand greater transparency and justification for the cost, expecting their bills to account for both water provision and investments in infrastructure that ensure environmental compliance and sustainability. As the case against the water companies unfolds, the consumer’s voice is growing louder, calling for change and a new era of corporate responsibility. The outcome of these legal challenges will set the tone for the future relationship between utilities and consumers.

While the parts ahead presents challenges, it also offers opportunities for innovation and progress. By embracing this transformative moment, England and Wales water companies have the potential to set a global standard for environmental excellence and corporate responsibility. However, it remains to be seen if these changes will lead to the desired benefits. Further research and careful monitoring will be necessary to assess the long-term impact and effectiveness of these initiatives.

• This blog post represents the views of the author(s), not the position of LSE Business Review or the London School of Economics and Political Science.
• Featured image (Stop Sewage in our Rivers demonstration) provided by Shutterstock
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