Nature-related physical risks, including those associated with climate change, pose significant threats to biodiversity, ecosystems, human health, food security, livelihoods, and infrastructure. Nature-related physical risks refer to the potential adverse impacts on people, the planet, and economic systems arising from the degradation of natural systems, including biodiversity loss, water scarcity, pollution, and ecosystem decline. Climate-related physical risks are a subset, encompassing the direct consequences of climate change, such as increased frequency and severity of extreme weather events, rising temperatures, and shifting precipitation patterns. Both types of risks can have significant consequences for human well-being, economic productivity, and financial stability (TNFD, 2023[1]; TCFD, 2017[2]).
Water is central to these risks, as its availability and quality underpin both natural systems and human well-being. A growing body of research on physical risks, including by the Intergovernmental Panel on Climate Change (IPCC), identifies that water-related events such as droughts, floods, and pollution, have widespread and pervasive impacts, disrupting essential ecosystem services and undermining the resilience of communities and economies (IPCC, 2023[3]).
The hydrological cycle is one of the most important channels through which climate impacts manifest, such as through droughts and increases in heavy precipitation, or extreme weather events, including flooding and storms. Climate change is an increasing pressure on water systems. Notably, 90% of all natural disasters are water related (UNEP, 2023[4]). By 2050, the number of people exposed to floods is expected to grow from the current 1.2 billion to 1.6 billion (UN, 2020[5]) and over three-quarters of the world’s population could be affected by drought (UNCCD, 2022[6]).
At the same time, nature, which encompasses all physical aspects of the natural world, including both biotic and abiotic elements, plays a significant role in stabilising greenhouse gas (GHG) emissions and increasing resilience. The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) defines nature as “the living parts of the biosphere, including their diversity and abundance and functional interactions with one another and with the abiotic parts of the earth system” (IPBES-IPCC, 2021[7]). Water and particularly soil moisture, are essential to this process, notably through wetlands, which naturally absorb and store carbon, buffer coastlines from extreme weather and reduce the impacts of droughts (Ramsar, 2019[8]). Freshwater is a prerequisite for economic and ecological resilience at ecosystem, biome, and planetary scales (Global Commission on the Economics of Water, 2024[9]).
The importance of natural capital to our economies is increasingly recognised as the impacts of nature’s degradation can be felt in the real economy and in the financial sector. Natural capital, referring to the planet’s stocks of natural assets including geology, soil, air, water and all living things is fundamental to human life (Convention on Biological Diversity, 2014[10]). Our economies rely on the ecosystem services that natural capital provides, through the provision of food, water, fuel, as well as flood protection or climate regulation benefits (Convention on Biological Diversity, 2014[10]). Emerging literature points to the fact that nature is critical not only at a micro level to financial institutions but also at a macro level for financial systems (NGFS, 2023[11]; Ranger et al., 2023[12]; NGFS, 2024[13]).
Nature degradation, often caused by poor management of natural capital and other pressures such as pollution, land-use change, and climate change, has implications not only for the environment but also for societies and economies. It can lead to catastrophic consequences for humans, when ecosystem productivity and resilience decline, and when countries become more prone to extreme events such as floods and droughts (OECD, 2021[14]).
Early analysis of the impacts of nature-related economic and financial risks shows significant results, and as discussed in Chapter 3, these estimates consistently underscore the critical role of water. The approaches used in these estimates are still in fairly early stages and likely to be conservative given the difficulty of modelling complex interaction between ecosystem services, as well as their linkages with the economy (Gardes-Landolfini et al., 2024[15]). Nevertheless, the value of water-related economic risks is estimated to be equivalent to 7 to 9% of Global Gross Domestic Product (GDP), the highest amongst all ecosystem services (Ranger et al., 2023[12]).
