SDG 6: Clean Water and Sanitation | SDG 13: Climate Action
Institutions: Ministry of Finance | Ministry of Jal Shakti | Ministry of Environment, Forest and Climate Change
The OECD publication “Embedding Water-Related Risks in Financial Stability Frameworks” underscores the growing significance of water-related risks for the global economy and financial systems. The report warns that intensifying pressures-such as water scarcity, flooding, pollution, and ecosystem degradation-are disrupting supply chains, industrial production, and financial markets, with cascading effects on economic resilience and financial stability. It calls for integrating water risk assessment into the macroeconomic and prudential frameworks of central banks and financial regulators, noting that water risks are distinct from climate risks and require targeted data, metrics, and stress-testing tools.
The guidance highlights that these risks emerge through multiple channels-credit, market, and operational-and emphasizes cross-sector collaboration between the financial community and the water community to improve systemic risk management. It serves as a resource for policymakers, supervisors, and financial institutions to anticipate and manage water-driven shocks and strengthen resilience in an era of accelerating environmental change.
For water-stressed economies like India, integrating water risk into financial stability assessments can complement the country’s National Adaptation Framework, Sustainable Finance Roadmap, and RBI’s climate-risk guidelines. This alignment can help financial institutions price water exposure in high-risk sectors such as agriculture, power, and real estate, and ensure capital adequacy planning that accounts for ecosystem-related disruptions.
What are Water-Related Risks? → Economic and financial risks stemming from too little water (droughts), too much water (floods), or degraded water quality-all of which can disrupt production, reduce asset values, and amplify credit and insurance risks across sectors.
Why Are They Distinct from Climate Risks? → While climate risks focus on temperature and emission pathways, water risks are local, hydrological, and geographically specific, making them harder to quantify and necessitating sector-specific data and collaboration between regulators and water resource agencies.
What is Financial Stability Framework? → The set of policies, tools, and oversight mechanisms through which central banks and regulators maintain systemic financial health. Embedding water risk within these frameworks helps prevent liquidity, solvency, and credit crises triggered by environmental shocks.
Follow the full report here: Embedding Water-related Risks In Financial Stability Frameworks