Watered down? Investigating the financial materiality of water-related risks in the
financial system
Water-related risks are intrinsically linked to both climate and nature challenges
and can be closely tied to socio-economic challenges, such as poverty, food security,
and domestic and international conflicts. There is increasing evidence that water-related
risks are financially material across actors in the financial system, and further
still, that there may be important implications for financial stability. However,
a review of current practices indicates that these risks are not fully captured by
current approaches to assessing risk.
This working paper explores how the financial sector understands the concept of financial
materiality as a lever for decision making on water-related climate and nature risks.
The paper also looks at how regulatory and supervisory guidance considers water in
the context of climate and nature risks, and finally how sustainable finance tools
and initiatives can support market participants in gaining an improved understanding
of water-related risks.
Water is critical for meeting commitments of the Paris Agreement and achieving the Sustainable Development Goals. Our economies rely on water, with recent estimates putting the economic value of water and freshwater ecosystems at USD 58 trillion - equivalent to 60% of global GDP. At the same time, water related risks are increasing in frequency and scale in the context of climate change.
How are investments shaping our economies and societies exposure to water risk? What role can the financial system play in supporting water security? And how can increased understanding of how finance both impacts and depends on water resources spur action towards greater water security?
On Tuesday 14 May 2024, OECD Policy Analyst Lylah Davies discussed the evolving landscape for assessing water risks to the financial system, and presented key findings and recommendations from recent OECD work on assessing the financial materiality of water-related risks, including the recently published paper “Watered down? Investigating the financial materiality of water-related risks”. She was joined by experts to discuss relevant initiatives underway.