Our views

Customer trust is key for water companies


Ashley Hamilton Claxton, Head of Responsible Investment

12 July 2018

Ofwat, the regulator for water utilities in the UK, has sent a clear message to water companies that they need to keep customers at the heart of their business. It has set out new rules requiring water companies to explain how they are delivering good customer outcomes and to better link this to how they pay their executives and distribute profits to shareholders through dividends. We think this is a positive move by the regulator, and complements work we’ve been doing to engage with water companies over the last six months on environmental, social and governance (ESG) risks in the water sector.
Conclusions from a recent report we published highlighted that customer service and protecting the ‘social license’ to operate under increasing public and political scrutiny should be of high importance to water utilities. Growing dissatisfaction, higher rates of complaints from customers, and rumblings in the press about nationalisation are red flags that water companies need to re-focus on the customer. 
Our report also found that of all the ESG risks facing the sector, companies’ approach to leakage and managing water scarcity was the most important issue from a credit perspective. While water often seems abundant in the UK, the recent hot, dry weather should remind us that water is a vital and precious resource that requires conservation and proper management. We wanted to assess which companies are taking the lead on water conservation through metering. 
We own water utilities in our corporate bond funds and also have some exposure through our UK equity holdings. Whilst the sector is highly regulated, opportunities to differentiate between firms and across capital structures do exist. Our research found that sound ESG management – or ‘operationalised sustainability’ – leads to less volatile and marginally higher profitability, stronger climate resilience and greater social performance. When looking from a credit perspective, these factors are most financially relevant for subordinated, or junior, company debt, which is most sensitive to changes in company operating performance. 
This work shows how we can use ESG information to highlight risks to companies’ long-term sustainability, something at the very core of our investment decisions. Our analysis of the water sector has provided some insights into opportunities to switch some of our fixed income investment from lower-rated ESG companies into higher-rated ESG companies with no loss of return for our clients. It has also informed our engagement and voting at companies in our equity funds. 
You can read more about our water utilities research and engagement project here [insert hyperlink to report].

Ofwat, the regulator for water utilities in the UK, has sent a clear message to water companies that they need to keep customers at the heart of their business. It has set out new rules requiring water companies to explain how they are delivering good customer outcomes and to better link this to how they pay their executives and distribute profits to shareholders through dividends. We think this is a positive move by the regulator, and complements work we’ve been doing to engage with water companies over the last six months on environmental, social and governance (ESG) risks in the water sector.

Conclusions from a recent report we published highlighted that customer service and protecting the ‘social license’ to operate under increasing public and political scrutiny should be of high importance to water utilities. Growing dissatisfaction, higher rates of complaints from customers, and rumblings in the press about nationalisation are red flags that water companies need to re-focus on the customer. 

Our report also found that of all the ESG risks facing the sector, companies’ approach to leakage and managing water scarcity was the most important issue from a credit perspective. While water often seems abundant in the UK, the recent hot, dry weather should remind us that water is a vital and precious resource that requires conservation and proper management. We wanted to assess which companies are taking the lead on water conservation through metering. 

We own water utilities in our corporate bond funds and also have some exposure through our UK equity holdings. Whilst the sector is highly regulated, opportunities to differentiate between firms and across capital structures do exist. Our research found that sound ESG management – or ‘operationalised sustainability’ – leads to less volatile and marginally higher profitability, stronger climate resilience and greater social performance. When looking from a credit perspective, these factors are most financially relevant for subordinated, or junior, company debt, which is most sensitive to changes in company operating performance. 

This work shows how we can use ESG information to highlight risks to companies’ long-term sustainability, something at the very core of our investment decisions. Our analysis of the water sector has provided some insights into opportunities to switch some of our fixed income investment from lower-rated ESG companies into higher-rated ESG companies with no loss of return for our clients. It has also informed our engagement and voting at companies in our equity funds. 

You can read more about our water utilities research and engagement project here.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.