Freshwater Systems And The Water Crisis In A Nutshell

Freshwater has an estimated annual value of approximately US$58 trillion, equivalent to roughly 60% of global GDP (p.2). Although 70% of the planet is covered in water, only about 2.5% of that is freshwater (p.4). The water crisis manifests across multiple dimensions: too much water, too little water, too dirty water, and failing green and grey infrastructure and governance. Twenty-five countries, representing one-quarter of the world’s population, already experience “extremely high” water stress annually (p.9). Average freshwater species population sizes have declined by 85% since 1970 (p.14), and the planet has exceeded safe operating boundaries for both blue and green water.

Why Water Security And Water Systems Resilience Are Critical For Central Banks, Financial Supervisors And Regulators

Water-related risks transmit to economies and financial systems through microeconomic and macroeconomic channels. Up to 46% of global GDP could come from areas facing high water risk by 2050 (p.22). An “extreme but plausible” drought scenario could put 15% of euro area output at risk, with knock-on effects for agriculture, manufacturing, hydropower and shipping (p.31). One-third of assessed sovereign states already face material credit risks linked to unsustainable water management (p.32).

Water risks are not solely external shocks — financial flows themselves fund activities that degrade water systems, creating endogenous risk. Finance negatively impacting nature reached US$7.3 trillion in 2023, whilst nature-positive finance amounted to US$220 billion — an imbalance of approximately 30 to 1 (p.46). Addressing the water crisis also presents opportunities: evidence suggests that one dollar spent on ecosystem restoration provides economic benefits 7 to 30 times greater (p.44).

Emerging Responses By The Real Economy And Financial Sector

Corporate responses remain fragmented and uneven. CDP estimates that the aggregated financial impact of disclosed physical risks from 10,397 companies totals US$1.47 trillion; yet just 9% of assessed companies reported physical adaptation investments in the past year (p.54). Only 39% of 348 responding financial institutions carry out water-related risk or opportunity assessments for their portfolios (p.55). The SUSREG 2025 assessment reveals that no supervisory authority achieved a full score in addressing water-related risks. CBFRs should require financial institutions to assess geographic concentration at the basin level, disclose water-related risks, and adopt double materiality assessments.

Available Tools, Metrics And Forward-Looking Approaches To Assess Water-Related Risks

A broad range of tools is available, from ENCORE for sectoral dependency screening, to the WWF Water Risk Filter and WRI Aqueduct for portfolio-level risk analysis, and WaterLOUPE for scenario-based modelling. Water metrics span physical flows (withdrawals and discharges), activity-based metrics (sector dependencies) and project-based metrics (green and blue bonds). Current climate scenarios do not fully capture compound risks, overexploitation, pollution or water-specific transition risks. CBFRs can address these gaps by layering in catchment-level data, applying narrative-led scenario approaches, and deploying reverse stress testing under conditions of data scarcity.

Recommendations For Central Banks, Financial Supervisors And Regulators

Urgent actions include formally acknowledging water-related risks as material to financial stability, allocating resources to build analytical capacity, and initiating system-wide exposure assessments including endogenous risk. In the short term, water risks should be integrated into supervisory expectations, disclosure frameworks, and macroprudential stress tests, with attention to neglected issues such as pollution and freshwater ecosystem degradation. Over the medium term, CBFRs should incorporate water risks into capital requirements, establish mandatory due diligence and target-setting for financial institutions, develop water-specific risk monitoring dashboards, and issue or support preferential refinancing lines linked to water security. International coordination is essential to manage cross-border spillovers and promote consistent supervisory approaches.