How Leveraging Natural Capital Can Help Save Water Companies

The State of Natural Capital Report for England was published on 9 October 2024. Although this report addresses the risks involved in losing or degrading existing stocks of natural capital, it also demonstrates the benefits of investing in these stocks, and the virtuous cycle involved in early interventions having a greater impact at a lower cost, than delayed actions.

While this report supports the argument that investment into natural capital is cost effective and in the public interest, it falls short of the regulatory support that would really help water companies take their investments to the next level.

What is natural capital?

Natural capital refers to the world’s stock of natural resources, like water, soil and air, which provide essential services. These assets provide ecosystem services that are essential for human survival and economic activity, such as slowing and cleaning the flows of water, and converting nutrients and carbon into biomass.

How are environmental changes affecting water companies?

Water companies are facing a perfect storm, and environmental changes are putting increasing pressure on existing infrastructure, as seen in the 2024 Supreme Court ruling in Manchester Shipping Canal v United Utilities Water Ltd [UKSC/2022/0121].

This ruling confirmed that water undertakers can be sued by private landowners in respect of pollution caused by outfalls discharge effluent, even if that discharge resulted from extreme weather events overloading the undertaker’s infrastructure. There is a risk that this judgement will add to the calls on these companies to invest substantial sums in new infrastructure upgrades at a time when borrowing remains expensive, and there is no public appetite for rate rises. As a result, finding alternative solutions has become critical.

Utilising nature-based solutions

One cost-effective approach that’s gaining traction is the use of Nature-based Solutions (NBS) which leverage natural capital.  For water companies this might include restoring wetlands, or allowing rivers to meander, to slow the flow of water and allow man-made infrastructure more time to deal with unusually high levels of rainfall. Such methods not only protect the environment but are often more cost-effective than traditional infrastructure projects.

Unfortunately, current regulations don’t do enough to encourage NBS. Water companies are competing for private sector investment with many other companies, meaning that approaches to maximise profit and simultaneously work for the ‘public good’ can clash.

To support these initiatives and empower water companies to follow their data (notwithstanding the challenges posed by natural capital accounting), the new Labour government could consider reducing taxes on nature-based projects, introduce green financing, or provide access to more affordable capital to accelerate such programs.

Regulatory complexity

Despite natural capital being a stated government policy and supported by almost all water undertakers (including United Utilities), the fragmented regulatory landscape (with water companies having to consider inputs from the Environment Agency, DEFRA, and Natural England) limits coordinated action.

It is worth noting that the new Labour government has introduced ‘Mission Boards’ that are aiming to break down siloes in other areas such as ‘Clean Energy’ and ‘Growth’, and the scope of these boards may extend to nature-based solutions.

NBS in a changing climate

Nature-based solutions can be lower cost than alternatives, and often bring a host of other benefits, such as being net carbon sinks. As the UK continues to pursue its target of Net Zero emissions by 2050, this factor will become increasingly significant. Irrespective of the wider national targets, water companies are in the best position to take a holistic view of how to manage a particular catchment area and are well placed to collaborate with rural landowners and urban planners in order to facilitate development by (for example) investing in measures that reduce agricultural and surface water runoff in order to unlock much needed developments. This approach not only manages the water system more cost-effectively, but also creates a system that works harmoniously with nature.

What could the future look like?

Water companies are at a crossroads, facing increasing environmental pressures, legal risks, and financial constraints. By embracing natural capital and nature-based solutions, they could not only tackle immediate challenges, but also contribute to long-term environmental and economic sustainability.

Policymakers and industry leaders must take note and align the goals of ‘profit’ and ‘public good’, introducing initiatives and creating a regulatory framework to protect our water systems, enhance biodiversity and build a more sustainable future for all.