Sustained Effort

There is still a lot of work to be done before sustainability becomes a “business as usual” issue for water companies, says Entec’s Maurice Hoban

Is sustainability ‘business as usual’ in the water industry? There certainly is a lot of discussion on the topic as regulator Ofwat starts consulting on what sustainable development could mean for the Water Service Regulation Authority, which supersedes it in April 2006.

Water companies take pride in being leaders in sustainability, and deservedly so. Nineteen out of the 26 water companies in England and Wales publish a sustainability or corporate responsibility report and five of them are listed in the top 40 companies in Business in the Community’s Corporate Responsibility Index.

Entec talked to water companies and stakeholders in the sector to understand how they were responding to new challenges of sustainability. Specifically, these challenges were the changing requirements from the Water Act and, at the time the research started, the introduction of an Operating and Financial Review.

The aim was to identify barriers that may restrict sustainable development and make recommendations on how the sector could move the agenda forward. Discussions took place with six water companies, three investment groups, the Consumer Council for Water, OFWAT, the Department of Environment, Food and Rural Affairs, the Environment Agency, Water UK and two
non-governmental organisations.

Water company stakeholders were asked what they expected from companies in terms of sustainable development. All said they want sustainability to become business as usual, with companies demonstrating better focus on the key sustainability issues.

There were a number of key stakeholder messages.

All stakeholders recognised that water companies had done a great deal of work on sustainable development. This includes developing sector indicators and being leaders in reporting. But all thought that existing company information and reports could be more open and transparent, “I want to see water companies be more up front in their reports”, said one. Many wanted to be able to “compare across the whole sector”.

There was scepticism that some companies are either ignoring the real issues or putting them on the “too hard” list. Most felt the key issues for the sector were not getting the profile or debate they deserved. There was also frustration at the lack of numerical targets. “There are a lot of measures, but no real targets”, said one. “Companies are losing sight of the big picture objectives”.

There was a desire for sustainability to be a core business driver, with companies deciding on what was important. Stakeholders wanted “to see companies be more proactive… allowing regulators to shift from compliance to performance.”

Entec asked all respondents to identify their top five sustainability issues. There was overwhelming agreement that the impact of climate change was the key issue for the sector. Affordability, water demand management, water efficiency and catchment management make up the “top five” issues.

The research revealed more discussion than action on sustainability. So what is holding the sector back? Discussions with companies revealed that they believed the key issues were not top of the regulator’s agenda, and they were frustrated with the lack of funding for these issues. All the companies said that sustainability should be included in the existing regulatory framework if it is going to be taken seriously. “The regulatory environment is a reality of the water sector. People are used to it and respond to it.”

Other barriers identified in discussions with companies and stakeholders were:

• Lack of executive buy-in within companies
  For many firms sustainability sits with one department or person. These people are looking towards regulation to help them create ownership of sustainability within their own companies;
• A short-term regulatory framework
  Water companies have big, long-term assets and resources to manage. All companies felt that the regulatory planning and 5-year funding structure, with its short payback expectations, restricted long-term sustainable solutions;
• Regulators are not working together
  There is a feeling that regulators are out of step with each other, which can undermine their sustainability goals (for example outcomes of the Habitats Directive are out of step with the Asset Management Plan (AMP) process). The result is forced solutions based on subjective judgements rather than good science or management;
• Better integration is required
  Water quality is better then ever, but energy use is higher then ever and domestic consumption is creeping up. Instead of providing solutions to reduce consumption, reduce energy and look for innovation in preventative solutions, companies felt they were trapped into end-of-pipe solutions;
• There are no incentives
  Companies felt that it was easier to get money for new assets than alternative, perhaps more sustainable solutions, such as water efficiency measures, catchment management or education campaigns. Ultimately, it is harder to measure social and environmental costs and benefits so they are often ignored.

One point companies and stakeholders all agree on is that sustainability should not be a bolt-on to existing strategy. Another is that a fundamental shift is required if sustainability is to be achieved. It also seems that in this heavily regulated sector some form of regulation is required to move the agenda forward.

But regulation should mean prescriptive requirements, if the ultimate aim is to create ownership of sustainability within companies and ultimately achieve sustainability as ‘business as usual’. Regulation should provide incentives for companies to make up their own minds on what is important. All parties recognise that some issues, such as climate change, require a sector wide response. But it is water companies that are most aware of local and regional issues, and it is these companies that are in the best position to identify solutions.

So what might incentive-based regulation look like? Sustainable solutions require long term planning and funding. Companies are already required to produce 25-year water resource plans. Could this approach be extended to encourage companies to produce an integrated 25-year company strategy (for example building in wastewater and sludge into an existing water resource plan)? If such strategies were subject to a sustainability test, such as a sustainability appraisal and strategic environmental assessment (SEA), then these strategies would have been through a transparent process for building sustainability directly into long-term business planning. Objectives and targets within the SEA process would help define the key issues and indicators that companies could report within annual reports, and also define measurements for Ofwat to use within the June returns and AMP process.

Ofwat is currently considering how sustainability could be integrated into its existing functions. Research from Entec and others, including the Green Alliance & RSPB report on regulating for a sustainable water sector, indicate that there should be a workable way for sustainability to become business as usual.

What should be done:

Maurice Hoban is an associate director at Entec. Tel: 01926 439082. Email: hobam@entecuk.co.uk Internet: www.entecuk.com

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