On 28 July 2010, the United Nations General Assembly explicitly recognised the human right to water and sanitation. It will also come as no surprise that in the UK we have enjoyed clean water for generations. Investing and supporting companies that deliver clean water certainly falls into ESG investing.
However, ownership of the assets that deliver water and sanitation has become political in the UK. As investors in bonds issued by water companies, we are keen to ensure that we maintain the value of our investments. There are three strands to our analysis. First is the effective management of these companies. Second, is the ability to reinvest in assets to deliver future cash flow and returns. Finally, exploring the social, regulatory and political environment in which companies operate.
It is this very last point that has recently become more material in our assessment of the UK water companies. At the start of February the Social Market Foundation issued a report claiming that the nationalisation of the water industry would cost in excess of £90bn. Water and its ownership have become a political issue; the election campaign in 2017 saw the Daily Mirror run this headline: “The Labour Party claims the water industry has been used for tax avoidance and says it’s time to bring it back into public ownership”. The use of offshore tax structures have become a political issue for an industry that has spent, and needs to spend, billions investing and delivering water in the UK.
Our fixed income team, together with our ESG-research team, has penned a letter to a number of major bond issuers in the UK water sector. We wrote that the nature of delivering clean water infrastructure requires further investment but that past and future investment should be conducted in a tax framework that, in itself, gives confidence to the public as consumers. There was no accusation of tax evasion but that certain efficient tax structures are not publically acceptable in times of strained public finances. We wrote that “Perceptions of what is acceptable have undoubtedly changed in recent years” and encouraged issuers to review tax structures that offer the perception of “cute” financing arrangements.
As investors our responsibility remains to the value of our investments. As such, and as our letter stated, “It is our responsibility to balance any reputational issues that adverse publicity may create within our overall risk assessment”. The rights and merits of public or private ownership are not ours to judge, but where we can influence to reduce uncertainty and volatility in the value of our assets, that is in our gift and interest.
Transparency builds trust and goodwill with all stakeholders (including investors). We hope that in some small part we can encourage transparency in how the companies we invest in manage their arrangements and in doing so, ensure effective delivery of water to all in the UK.