Drought and water scarcity are emerging as some of the most significant and far-reaching consequences of the intertwined climate and nature crises. As ecosystems degrade and rainfall patterns become increasingly unpredictable, water shortages are disrupting agriculture, energy production, industry and livelihoods, with cascading impacts on economic performance, social stability and human well-being. These pressures are increasingly translating into material nature-related financial risks, affecting supply chains, asset values, productivity, investment returns and financial stability.  

Recent research is demonstrating the scale of these risks. The European Central Bank, in collaboration with researchers from the University of Oxford's Environmental Change Institute and Resilient Planet Finance Lab, and the London School of Economics, has examined how ecosystem degradation and water scarcity could affect the euro area economy, highlighting the extent to which economic activity remains dependent on healthy ecosystems and resilient water systems. At the same time, the United Kingdom's recent work identifying nature degradation as a threat to national security has reinforced the growing recognition that nature loss and water stress are not only environmental challenges, but also strategic risks with implications for economic resilience, financial stability, food and water security, and broader societal resilience.    

Healthy ecosystems such as wetlands, forests, peatlands and watersheds play a critical role in regulating water cycles, reducing drought impacts and strengthening resilience. Investing in ecosystem protection, restoration and sustainable water management therefore represents not only an environmental imperative but also an important strategy for mitigating financial risk and safeguarding long-term prosperity.

The session explored how drought and water scarcity amplified nature-related financial risks and what this meant for governments, financial institutions, businesses, and communities. It examined emerging evidence linking ecosystem degradation, water stress, and financial risk, including research on potential impacts on the euro area economy and the recognition of nature degradation as a national security threat in the United Kingdom. The session also showcased practical solutions to strengthen resilience through nature-positive investments, ecosystem restoration, sustainable water management, and improved risk assessment and management.