Environmental Law News Update

In this latest Environmental Law News Update, Christopher Badger, Charles Morgan and Natasha Hausdorff consider the fine imposed on Yorkshire Water for a sewage leak, new environmental and social reporting requirements in corporate strategic statements, and a report by Consumer Council for Water on the state of sewerage and drainage systems in the UK.

Yorkshire Water fined for raw sewage leak

On 27 November 2017, Yorkshire Water Services Limited pleaded guilty at Sheffield Crown Court to charges relating to a pollution incident in April 2014 where raw sewage was discharged into a watercourse and ultimately into 2 local ponds. They were fined £45,000 and ordered to pay costs of £24,762.56.

The fine is notable due to its low size. The discharge of sewage resulted in a raised level of ammonia in the water of the ponds and a reduced level of dissolved oxygen for a considerable period of time. The pollution from the illegal discharge was traced for over 3.5km downstream from the pumping station and a large number of fish died due to the toxic effects of ammonia.

Yorkshire Water’s annual report for 2017 shows that revenue for the year ending 31 March 2017 totalled just over £1 billion, with a gross operating profit figure of £317 million. This is a gross profit margin of 31%. However, due largely to an exceptional item linked to the fair value of index-linked swaps taken out by the Company in 2007/2008 as a hedge against movements in the Retail Price Index, the company made a loss before taxation of £362 million and received a tax credit of £101 million. It isn’t known to what extent this loss influenced the Court’s decision.

The Environment Agency’s press release can be found here

Environmental and Social Governance – Section 414CB Companies Act 2006 Reporting Requirements

Back on 1 January 2017, a new section 414CB of the Companies Act 2006 amended the mandatory content of a company’s strategic report, introducing a requirement that companies provide in their non-financial information statements, inter alia, an understanding of their impact on environmental and social matters. This marked a significant change in the substance of non-financial reporting.

During the year, the Corporate Governance Reform Agenda, part of a policy drive advanced by BIS, focused attention on s.172 Companies Act 2006, the duty imposed on a Director to promote the success of the company, having regard amongst other things to the impact of the company on the community and the environment.

In light of these developments, the Financial Reporting Council recently closed a consultation on proposed amendments to its ‘Guidance on the Strategic Report’ and intends to bring about reforms to non-financial reporting by June 2018.

ESG continues to gain prominence. Last month, prompted by the interim recommendations of the ‘High Level Expert Group on Sustainable Finance’ (whose final report is due this month), the European Commission announced it was considering whether to clarify that institutional investors’ duties  include taking into account sustainability risks. A proposed impact assessment will assess whether and how such a clarification could contribute to a more efficient allocation of capital and sustainable growth. It is expected that the Commission will clarify that the fiduciary duties of institutional investors and asset managers to explicitly integrate material ESG factors and long term sustainability.

S.414CB requires that the Strategic Report must include a description of the company’s policies and due diligence processes with respect to Environmental and Social Governance (ESG), as well as the principle risks, their adverse impacts and a description of risk management ((S414CB(1)-(2)). In so far as a company does not pursue policies in this vein, it is required to provide a clear and reasoned explanation for this absence (S414CB(4)). There exists a carve out for impending developments or matters in negotiation, where the disclosure of this information would, in the opinion of the directors, be seriously prejudicial to the commercial interests of the company (S414CB(9)).

Where a company makes use of a reporting framework it may specify this as an alternative to including the information in its statement. The top reporting frameworks providing a means of calculating ESG include the Dow Jones Sustainability Index, the Global Reporting Initiative and the Carbon Disclosure Project.  The frameworks have driven management attention to these areas, engendering greater awareness and assisting in the development of corporate programs.

A director who knowingly or recklessly approves a strategic report which is not in compliance with the requirements of the Act, and fails to take reasonable steps to secure compliance or to prevent the report from being approved, is liable to a fine upon conviction.

As more and more companies reach their financial year end, it will be interesting to note the extent, if any, of improvements to ESG reporting.

Sewerage undertakers still in trouble over sewer flooding

The Consumer Council for Water exists to champion the interests of water industry consumers (so pretty much everyone). In its recently-published report ‘Clear Way Forward: Delivering a resilient sewerage and drainage system’ it reports an annual increase of nearly one-third in instances of internal flooding of properties, particularly in the service area of United Utilities (90% increase) and Thames Water (39%).

The problems which the water industry faces are manifold and not entirely of its own making. Increased demand imposed upon an old system by population growth (with the statutory duty to accept new connections), abuse of the system by its use as a ‘liquid dustbin’ (resulting in chronic blockages, the greatest single offender being wet wipes of all types) and climate change (causing intense rainfall events) are amongst the challenges.

The statistics can’t have been helped by the compulsory vesting in the undertakers in 2011 of a vast length of formerly private sewers and lateral drains pursuant to The Water Industry (Schemes for Adoption of Private Sewers) Regulations 2011. This greatly increased the size of the public network and included many lengths of pipe of unknown location and performance with which the undertakers are still becoming acquainted.

The suggested solutions include a more proactive approach to sewer management, better customer communication and education and reduction of the amount of surface water entering the system (via SUDS and improved long-term drainage and wastewater management plans). The report recognises that the ‘obvious’ solution – build bigger sewers – is neither practical, economically feasible nor sustainable in the long run. Nor of course does the failure to do so result in liability in private law – Marcic v Thames Water Utilities Ltd. [2004] 2 AC 42.

As noted above, we are all water industry consumers. When it comes to the problems caused by sewage, we are all responsible …

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