Pennon’s South West Water blasted for pollution failings for 10th year in a row

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Pennon Group PLC‘s (LON:PNN) South West Water arm has been cited by the UK Environmental Agency for again being one of the worst water performers in the sector for allowing raw sewage to spill into rivers and the sea.


South West Water performed “significantly below target” for pollution for the 10th year in a row, the agency said in its annual assessment of the industry.


Pennon easily has enough money that it could use to upgrade its network to avoid having to pump sewage overspill into natural watercourses, having recently confirmed it is sitting on a GBP3bn cash pile, but directors say they intend to spend much of this on acquisitions.


Also singled out for criticism was Southern Water, which earlier this week was fined a record GBP90mln for dumping billions of litres of raw sewage off the Kent and Hampshire coasts over more than five years.


“It’s disappointing to see repeat poor performance from some companies who are failing to take their responsibilities seriously enough,” said David Black, chairman of water industry regulator Ofwat.


“Addressing environmental challenges remains a top priority for water companies and the performance of some companies falls well short of what customers expect.”


A “step-change in culture and commitment” is needed by the sector, he said.


The operational arms of Pennon’s fellow FTSE 100-listed companies Severn Trent PLC (LON:SVT) and United Utilities PLC (LON:UU.) were among the five best performers.


Pollution by water companies “can cause environmental harm to surface waters or groundwater” the Environment Agency said.


“Water companies need to reduce the number of incidents so that they reduce their impact on the environment.”


Water companies have a tendency, when confronted about pollution, to “reach for excuses rather than taking action to reduce serious pollution incidents to zero”, the report said.


ESG investor conundrum


With Britain’s rivers in a sorry state due in large part to the water sector’s actions – and subject of public outcry in the past couple of years – it might present a conundrum for investors focused on environmental and social concerns or with an ESG remit as part of their wider investment policy.


Pennon’s largest three shareholders are Lazard, BlackRock and Impax Asset Management Group (LON:IPX).


A spokesman for Impax, which specialises in sustainability-focused investments, said its funds invest in water utilities because they provide clean and safe drinking water and treat wastewater before it is returned to the environment.


“We have engaged with Pennon on this issue and note their commitment to significant improvement. This includes a commitment to achieve a four star rating on the Environmental Performance Assessment (EPA) carried out by the Environment Agency in 2023-24 and 2024-25.”


Impax said pollution events are “one of the factors considered in the assessment of their environmental performance”, while arguing that “their performance in other areas is very good”.


“For example, they are among the few companies in the industry to have a strong policy framework for restoration and enhancement of biodiversity in and around their operational sites. They are proactively looking to protect and enhance healthy places, habitats and biodiversity in their operational areas by working in partnership with wildlife trusts and other stakeholders.”


At Lazard a spokeswoman said: “we believe that thinking and operating through a sustainability lens should be everyone’s job, and sustainability insights are incorporated into multiple aspects of our investment decision-making and client solutions.


“Our team of over 250 investment professionals, including a global network of more than 100 analysts and global sector specialists, are directly responsible for conducting research on sustainable investment relevant to their sectors, stocks, and portfolios. This research is not conducted by a separate team. We believe that our sector specialists are in the best position to fully understand the material ESG risks and opportunities within their sectors, and integrate them into investment decisions.”

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