In the runup to the 2024 Price Review which will set the scene for the AMP8 2025-30 investment programme, Charlotte Sugden, Principal Environmental Economist, Atkins and Jonathan Nichols, Associate for Natural Capital, Atkins explore why the water sector needs to consider taking a multi capitals approach to ensure a sustainable and secure future for the industry.

The clock is ticking. Climate change, ecological degradation, and the cost of living crisis are creating huge pressure on the water industry to mitigate, adapt, and transform. As the industry looks ahead to its next Asset Management Period, we have a golden opportunity to engage with the bigger picture, build on the early successes of embedding a natural capital approach, and think more widely about the potential of a multi-capitals approach. If we recognise the dependences, impacts and interrelationships in our systems, resources and assets, we can forge a new paradigm of far-sighted, sustainable value creation.

The utilities landscape is changing fast. Worsening heatwaves, increased stress on infrastructure through more extreme droughts and flooding, and the degrading of ecosystems we rely on: the next decade heralds enormous challenges, posing both physical and transition risks. Expectations are changing, from customers demanding improved environmental performance and greater transparency, to investors attempting to manage the long-term financial risks and opportunities of regulatory change. These drivers are forcing a rethink of traditional business models and decision-making processes to focus more on delivering sustainable, affordable, and reliable services.

In 2025, against this daunting backdrop, the water industry will enter Asset Management Period 8 (AMP8). It’s a singular moment to look ahead to the strategic challenges of water management in a new era, and seize the opportunity to improve the environment through investments that deliver multiple benefits, and tackle multiple objectives. As the water industry is particularly intertwined with natural capital assets, companies’ actions can exacerbate environmental risks to society, economy and wildlife, or take the lead in enhancing the quality and quantity of our natural capital.

We’re increasingly conscious of the complexity of our systems, their impact and their interdependencies. That holistic understanding, at the system level, is at the heart of a multi-capitals approach. By extending the traditional focus on financial capital to incorporate other forms, such as natural, social, human, intellectual and manufactured capital, we can unlock a much more balanced, insightful and sustainable understanding of value - the critical common denominator for best value decision-making, reporting, and investing. That’s why a multi-capitals approach is critical to understanding and finding solutions to our most urgent challenges.

Need for a step change

We can’t solve tomorrow’s problems with yesterday’s solutions. One of the key drivers of change is coming from investors acting on ESG principles, seeking stable long-term gains from responsible investments which positively impact on society, biodiversity and the environment. Therefore, to attract investment, we must build a detailed and transparent view of assets, impacts and risks in an evolving regulatory climate. If water companies don’t consider this now, the downstream consequences may be particularly disappointing for investors.

Moreover, customers’ expectations have evolved. They now prioritise environmental protection, improvement and resilience, and emphasis on social value - as well as a reliable supply of clean, cheap water. As the press furore around sewage discharges into rivers shows, more and more information is available in the public realm, and environmental impact therefore comes at increasing cost. Regulatory perspectives are shifting too. Following the introduction of mandatory climate-related financial disclosure mechanisms in the UK last year (for companies of a certain size), a global Taskforce on Nature-related Financial Disclosures (TNFD) piloted in October. Their aim is to guide nature-positive investment. The direction of travel is clear - regulators will increasingly expect companies to not just mitigate environmental damage, but deliver net gain.

In deep water

We are however still in a dynamic, experimental phase. Guidance has been developed in certain areas, but we’re still lacking a framework to draw together competing priorities. Natural and social systems are complex, and so are corporations. Often data is lacking to inform accurate assessments and baselines, whilst across several forms of capital, dozens of teams may be involved, making it difficult to unify vision, information and action. And it’s not enough to merely determine benefits; we need to integrate those benefits to recognise their value, and enable them to influence decision-making and action accordingly.

Ways of working will therefore need to adapt. A multi-capitals approach looks holistically at multiple priorities, promoting an unparalleled degree of transparency into our operations and their impacts. This highlights opportunities for co-benefits, many of which might otherwise be missed, but only if disparate teams come together and collaborate towards a shared vision. That may not be simple or comfortable in the short-term, but in the longer term, it will simplify and strengthen interaction with stakeholders, and enhance and inform decision making.

Measure to manage

Until we accurately measure other capitals, whether it be natural, social or intellectual capital, we won’t be able to recognise the true value and impact of our resources, and manage them in a forward-thinking, inclusive, and holistic way. At Atkins, our extensive experience in environmental economics, social value, and natural capital assessment and accounting means we understand multi-capitals concepts - making us natural partners in their application.

Fundamentally, a multi-capitals approach is the only way to go beyond short-term financial considerations towards longer term sustainability. Operationally resilient systems capable of withstanding a volatile climate require a multifaceted understanding of our assets and a collective willingness to be bold. If we re-align incentives to identify and minimise risk, and plan and deliver long term value creation, everyone stands to benefit - from customers to shareholders, our economy to the environment itself.

AMPed up

AMP8 will witness the delivery of key milestones, from net zero carbon emissions by 2030 to biodiversity net gain on new developments. However, this is still new territory. This period will see regulators expecting greater assurance of schemes, aspirational and resilient blue-green city plans and positive steps towards understanding impact and reducing uncertainty. At Atkins, we’re helping our clients address these changes. From supporting a water company to conduct a review of global multi-capitals approaches, alongside an analysis of their own approach and recommendations to strengthen it, to supporting other water companies maximise the delivery of multi-capital benefits in the delivery of its strategic infrastructure projects, we’re at the forefront of defining the risks and opportunities of this changing space.

With multi-capitals, companies across the industry are still at the starting blocks, and these approaches are still evolving. Change won’t be delivered overnight, but in small turns - rethinking, reprioritising and retrofitting. But if we want to bequeath healthy human and natural ecosystems to following generations, we must act now. The water industry is in a unique position to protect and enhance stocks of natural capital. Its best chance of doing so is by adopting a holistic, systems thinking approach - which is why a multi-capitals approach matters.

Follow the below links for more information on Atkins' work with natural capital and multi-capitals

Valuing Our Natural Capital: The Atkins Approach (snclavalin.com)

wif-natural-capital-principles-for-the-water-industry-4.pdf (yorkshirewater.com)

multi_capitals_briefing_pape.pdf (ymaws.com)