Corporate Accountability and Environmental Law: The Water (Special Measures) Act 2025

The Water (Special Measures) Act 2025 represents a structural turning point in environmental law and utilities regulation in England. Introduced amidst growing public pressure over sewage pollution, systemic underinvestment, and the erosion of trust in the water sector, the Act imposes unprecedented compliance obligations and personal liability on senior executives in regulated water undertakers.

At its core, the Act responds to a longstanding regulatory challenge: how to align statutory environmental duties with enforceable corporate accountability.

Key Provisions of the Act

Bonus Prohibition Orders (Section 3)

The Act empowers the Water Services Regulation Authority (Ofwat) to impose bonus prohibition orders on the directors and senior executives of undertakers that breach environmental permit conditions, fail to comply with improvement notices, or are otherwise found to be materially and systematically non-compliant.

These orders are non-discretionary in effect: where trigger criteria are met, Ofwat is required to consider bonus prohibitions as part of its enforcement strategy. Importantly, the Act does not require a criminal conviction to invoke bonus restrictions—administrative findings under civil thresholds suffice.

Criminal Liability for Senior Managers (Section 5)

For the first time, the legislation introduces a statutory offence of “Environmental Mismanagement Causing Harm”. Where pollution incidents result in significant ecological damage, and senior managers are shown to have failed to exercise due diligence in the supervision or prevention of the breach, they may be subject to individual prosecution, with penalties including up to five years’ imprisonment and unlimited fines.

This offence incorporates elements of both the Health and Safety at Work etc. Act 1974 and the Corporate Manslaughter and Corporate Homicide Act 2007, in terms of its reliance on managerial responsibility and failure of systems of oversight.

Regulatory Implementation

The Act has already seen real-world application. In Q2 2025, Ofwat exercised its new statutory powers to issue bonus prohibition orders against six major water undertakers, including Thames Water, United Utilities, and Southern Water. The decisions followed a review of environmental performance data indicating persistent exceedances of discharge consents, low compliance scores in the Environment Agency’s annual metrics, and repeat statutory undertakings.

The speed and scale of these initial enforcement actions demonstrate both the strength of the statutory framework and the regulator’s willingness to act decisively. Unlike previous Ofwat interventions, which often relied on licence modification consultations or reputational levers, these new powers are coercive, direct, and enforceable.

 Broader Legal and Corporate Governance Implications

The Act reshapes the environmental compliance landscape in several key respects:

Integration of Environmental and Corporate Governance

By conditioning executive remuneration on environmental performance, the legislation forces boards to embed environmental compliance directly into risk management frameworks, remuneration committees, and annual reporting structures.

This is reinforced by the UK Corporate Governance Code (2024 update), which emphasises the need for alignment between non-financial performance metrics and director incentives.

Directors’ Duties and Fiduciary Risk

Under the Companies Act 2006, directors owe duties to promote the success of the company (s.172) and to exercise reasonable care, skill and diligence (s.174). The Water (Special Measures) Act 2025 raises the bar by establishing that environmental non-compliance may constitute a breach of those statutory duties—particularly where directors fail to act on regulatory warnings or internal audit reports.

Insurance and Indemnification Concerns

The Act introduces exclusions to indemnity and insurance clauses in directors’ liability policies for cases involving “wilful or reckless disregard” of environmental obligations. This may lead to increased premiums and limited coverage for directors in high-risk infrastructure sectors.

Strategic and Policy Context

The Water (Special Measures) Act 2025 must be understood within a wider policy ecosystem.

It follows the Environment Act 2021, which established long-term legally binding targets on water quality and biodiversity and as such it complements the Separation of Waste (England) Regulations 2025, which imposes operational duties on local authorities and commercial waste producers to improve recycling outcomes. It also coincides with the ongoing implementation of mandatory Biodiversity Net Gain (BNG) for major developments and infrastructure projects.

Cumulatively, these reforms signify a clear policy trajectory: environmental performance is no longer advisory—it is enforceable, and breaches carry reputational risk.

Moreover, the Act aligns the UK with emerging international norms, such as the EU Corporate Sustainability Due Diligence Directive (CSDDD) and the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, which both advocate for director-level environmental responsibility and access to remedies in cases of harm.

Looking Ahead: From Symbolism to Structural Change

While some have interpreted the Act as a symbolic intervention aimed at restoring public confidence, the legislation is much more than political optics. It embeds substantive liability mechanisms into the regulatory architecture and operationalises a model of deterrence that extends beyond corporate entities to individual officers.

Regulated undertakers and their legal teams will now need to undertake:

• Enhanced legal risk audits across their environmental compliance systems;
• Board-level training on regulatory obligations and enforcement triggers;
• Realignment of remuneration structures with statutory outcomes;
• Internal reporting upgrades to ensure timely escalation of non-compliance risks.

In parallel, regulators will face increased expectations to apply these powers proportionately, transparently, and consistently—particularly as civil society and environmental NGOs ramp up scrutiny through public law challenges and information rights requests.

Conclusions

The Water (Special Measures) Act 2025 is a defining moment in UK environmental law. It recalibrates the regulatory balance between public protection and private profit and sets a precedent for how accountability in environmental governance should function in a modern utilities regime.

As the climate and biodiversity crises intensify, this legislation is likely to become a template for further sector-specific interventions—extending the principle that those with operational control and financial benefit must also bear legal responsibility for environmental harm.