The company, which saw a rise in the number of serious pollution incidents to 12, was given two stars alongside Southern Water and South West Water.
Environment Agency Chair Emma Howard Boyd said water companies would face a tougher regulatory approach with increasing inspections.
In her forward to the agency’s annual report she pledged to look at financial penalties “given fines are currently only a fraction of turnover”.
Writing in the report’s foreword, she said: “Companies should be reflecting on their environmental performance and long-term resilience, if this is poor they should be asking themselves whether dividends are justifiable.”
Serious pollution incidents in England increased to 56 last year from 52 in 2017 and overall water company performance has deteriorated, reversing the trend of gradual improvement in the sector since 2011.
Just one of the nine major water and sewage companies in England – Northumbrian Water – is performing at the level expected, achieving the highest four star rating.
The report follows the agency’s announcement that Southern Water is facing prosecution after it was hit with a record £126m penalty package over “shocking” failures in its sewage treatment sites.Consumer Council for Water chairman Rob Light said: “People have a growing concern for the environment and will feel badly let down that the majority of water and sewerage companies in England have failed to be good stewards of our waterways and the life that depends on them.
“Customers will back any move that hits companies much harder in the pocket when they flout their responsibilities to the environment – it’s clear the existing deterrents are not strong enough.”
Yorkshire Water said they had acted to turn performance round and had seen a 36 per cent fall in pollution incidents this year compared to the same period last year.
They were spending an extra £50.4m on pollution improvement.
A statement added: "This level of performance is absolutely not reflective of the company’s ambition to protect the environment and falls far short of the standards required to meet our aim to be recognised as an industry leader.”