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Environment Watchdog Has Financial Interest In Companies It Regulates

Water pipes (Alamy)

3 min read

The chief government regulator tasked with policing the water industry has invested millions of pounds into businesses connected to the sector, financial records have shown.

The Environment Agency’s pension fund has invested £5.05m in shares of private water companies or their parent firms, making it a part owner of some of the very companies it regulates.

The findings have sparked warnings of a potential conflict of interest, as it means that the regulator’s own pension pot’s finances were reliant on the profitability and ongoing high dividends of the companies it regulates.

Environmental charity Greenpeace and the head of the Commons Environmental Audit Committee both suggested to PoliticsHome that the regulator should divest from these companies that it directly regulates. 

The biggest investment was over £2.1m in shares of JP Morgan and the Macquarie Group, the two investment banks that are the primary shareholders and owners of Southern Water.

In 2021, the Environment Agency fined Southern water a record £90m for its repeated, deliberate dumping of raw sewage into the region’s rivers and seas.

But cases like that are increasingly the exception. A leaked report in late 2022 found the regulator’s management was refusing to prosecute in 93 per cent of the cases where its frontline staff had gathered evidence of serious pollution and pushed for the offenders to face sanctions.

The regulator has also failed to regularly audit water companies to check they are telling the truth about pollution and illegal sewage dumping.

The regulator also had major investments in United Utilities and Severn Trust, as well as CK Hutchison and its subsidiaries (the owner of Northumbrian Water) and Blackrock (which has major stakes in Severn Trent, United Utilities and South West Water).

In 2022 there were over 384,000 discharges of raw sewage were reported by water companies across England and Wales.

Tory MP and chair of the Commons Environmental Audit Committee Phillip Dunne said that findings were concerning. 

“The Environment Agency’s regulatory performance is in the spotlight. Its staff may well be concerned to learn that the performance of their pension fund is in part dependent on the financial performance of water companies operating in the sector the Agency regulates,” he said.

“Pension fund trustees have fiduciary duties related to the fund’s performance: but it is highly surprising, to say the least, to find that the investment policies of any regulator’s pension fund are not drawn so as to exclude investment in companies which are under regulation.”

Liberal Democracy Environment spokesperson Tim Farron said the connection “sounds very dodgy”.

“The public will not accept any whiff of a conflict of interest between the government and the scandal ridden water industry. The Environment Agency should reconsider this," he said. 

Greenpeace UK policy director Dr Doug Parr said the regulator "urgently needs to divest from the companies they are responsible for regulating”. 

“This conflict of interest is so glaring that it makes public trust impossible” he added. 

Government has pledged to ban bonuses for the chief executives of water companies that fail to prevent illegal sewage spills that pollute rivers after senior staff netted more than £26m in bonuses, benefits and incentives over the last four years, despite record levels of illegal sewage dumping in English waterways, according to the Guardian.

An Environment Agency spokesperson said: “The Environment Agency Pension Fund is legally separated from the operational and regulatory functions carried out by the Environment Agency and is subject to different legal rules, governance and decision making.

“The Fund is also one of the first institutional investors to commit to analysing the impact of its shareholdings on nature with a view to lessening its impact. It’s already identified utilities, including water, as a key sector for consideration with our asset managers."

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