Water risk modeling: a framework and guidance for the financial sector

Published: Thursday, 07 April 2022 08:16

A recent academic paper provides guidance for financial sector risk managers on the increasing threat created by water risks events. Written by Thomas Walker, Ph.D., Concordia University, Dieter Gramlich, Ph.D., DHBW Heidenheim, and Adele Dumont-Bergeron, Concordia University, the paper explains the emergence of water risks and looks at how they are expected to develop. It looks at current methods of modelling water risks and why it is important that risk managers consider the best way to model water risks to their organization.

Executive summary (verbatim)

In recent years, water risk has become a major threat to society and business viability. Exacerbated by climate change, water risk events have increased in frequency and magnitude, thus endangering water security for households, industries, and ecosystems. The consequences of water risk are multifold, affecting society and the economy alike. Yet, because water risk is an emerging risk, it remains poorly understood and lacks visibility and inclusion in risk management processes.

Well-developed tools that allow risk managers and investors to understand, assess, and mitigate water-related challenges are crucially important to address this emerging risk. Many organizations have created water risk assessment tools in recent years, but are the available models exhaustive and/or holistic enough to guide the financial sector towards enlightened decision-making? Because water risk presents various investment, management, and modeling opportunities, it is important from both a risk management and investment opportunity perspective for the Global Risk Institute (GRI) and its constituents to understand the current state of research and model development in this area. It is in this context that we present this report to the GRI and offer detailed insights into the current state-of-the-art of water risk modeling.

Read the paper.