Thames Water - a cautionary tale for “responsible investors” and privatized utilities

The reputation of some of Canada’s largest public pension funds as responsible investors with a record of due diligence, strong corporate governance and environmental oversight is being challenged this summer by the collapse of Thames Water, the United Kingdom’s largest water utility that services 15 million people. Thames Water has become a poster child for a British water industry under fire for its poor environmental record and financial mismanagement.

Thames Water’s biggest shareholder is OMERS, the $124-billion public pension fund for Ontario’s municipal workers, which owns a 32% stake in the company. An OMERS Managing Director sits on Thames Water’s board. British Columbia’s $233-billion public pension manager, BCI, owns 9% of the private water utility. Media reports reveal the company is saddled with debt, unable to pay for its operations and infrastructure upgrades, and under fire for environmental lapses. It hasn’t paid its shareholders a dividend in six years and may now be worth far less than investors paid for it. 

Thames Water was under threat of nationalization by the UK government before its shareholders, including OMERS and BCI, responded to the private water utility’s financial mismanagement yesterday with an injection of £750 million. Another £2.5 billion is expected to be required from shareholders between 2025 and 2030 to upgrade the utility’s infrastructure and services. Thames Waters’ shareholders, including OMERS and BCI, have not collected a dividend since 2017, with the company saddled by significant debt.

Source: .Neil Unmack. 5 July 2023. (UK’s leaky water model faces a growing storm.” Reuters. https://www.reuters.com/breakingviews/uks-leaky-water-model-faces-growing-storm-2023-07-05/.

If Thames Water’s finances look bad, its environmental record is even worse. The private water utility was fined £3.3 million this month for releasing raw sewage into the ocean and rivers. Reports show the company leaks more water than any other water company in the UK, losing the equivalent of up to 250 Olympic size swimming pools every day from its pipes. A jump in the amount of sewage released across the UK in recent years has undermined confidence in a privatized model that has prioritized shareholder value and executive bonuses at the expense of clean rivers and beaches, along with affordable and reliable water rates for British citizens.

Source: Lara Williams. 7 July 2023. Water Companies Need to Rebuild Trust Before Hiking Bills.” Bloomberg. https://www.bloomberg.com/opinion/articles/2023-07-07/the-true-cost-of-water-includes-the-value-of-trust.

The Thames Water debacle raises some troubling questions about the investment strategy that’s popular with Canada’s Maple Eight pension plans: investing in privatized public infrastructure. When a public pension plan owns private utilities that provide essential services like water to citizens in another country, it raises the question of whose best interests are being served. Is it wise to invest in companies with the potential to pit the future value of a public pension for a municipal employee in Kitchener or a teacher in Kelowna against the best interests of UK citizens who rely on this critical public infrastructure?

Canadians want to believe their pensions are responsibly invested, but it may be hard to do so when they see a privately-held company managed so poorly that it faces nationalization– especially when the company is so reckless with its approach to the environment that it continues to dump untreated sewage into the ocean and rivers. 

When it comes to managing serious climate-related financial and environmental risks, Canada’s pensions often talk about their commitment to stewarding and engaging with companies they own to achieve results. With the example of OMERS’ and BCI’s private ownership of Thames Water, beneficiaries are rightly concerned about how meaningful these commitments to stewardship and engagement can be in the face of problems which threaten both pension financials and the environment.