Water Resilience for Economic Resilience in the Context of Climate Change: Managing Economic and Financial Risks
Guest Blog summarizing the October 2024 Water Resilience for Economic Resilience (WR4ER) event at the Botín Foundation
The seminar on Water Resilience for Economic Resilience has taken place at the Botín Foundation headquarters on October 4, 2024. Co-organized by the University of Alcalá and the Botín Foundation's Water Observatory, it was organized in collaboration with the Bank of Spain. The seminar was inaugurated by Manuel de la Rocha, Secretary of State of the Office of Economic Affairs and G-20 of the Presidency of the Government of Spain, and its objective was to analyze the economic and financial risks associated with the impacts of climate change on water.
The Director General for Water pointed out that climate change means higher temperatures and greater water stress, with different impacts on the economy. The way we manage water stress can have consequences for the economy in the medium and long term. Adjusting our economy to the available resources without affecting the welfare of citizens and economic activity is one of the greatest challenges we face in Spain; challenges that will increase in the coming years.
The first panel included speakers from the BBVA Research Department, the Bank of Spain, the National Securities Market Commission and the Directorate General for Insurance and Pension Financing. They discussed the macroeconomic impacts of climate change, how to analyze and control the exposure of banks' portfolios, how to analyze the level of exposure of securities in the markets, and the evolution of indemnities paid by insurers due to climate risks with consequences on insurance premiums. Sara Baliñas, Director of the Office of Foresight and Strategy of the Government of Spain, commented on these interventions, highlighting the most relevant aspects for the Office of Foresight.
A second panel presented the analysis of the level of exposure and the responses being given by banks such as Caixabank, BBVA and Cajamar. Highlighting the opportunities and actions they are taking to promote the sustainability of their portfolios. The risk rating agency Axesor also made an assessment of how the risks of climate change and water are considered when establishing the credit rating of companies. Alberto Garrido, director of the Botín Foundation's Water Observatory and Professor at the Polytechnic University of Madrid, presented the possibility of mutualizing or insuring drought risks, concluding that, although there are many studies that support them technically, they do not fit easily into the agricultural insurance system and for climatic catastrophes in Spain. At least for irrigated farmers.
The conclusions of the seminar were given by Professor Carlos Mario Gómez of the University of Alcalá, and the director of the OECD Water Group, Sophie Tremolet, who highlighted how “appropriate” water policies can avoid or help to circumvent the impacts on the economy and the financial system, and how the OECD in its work on “Financial Materiality” is working on the development of a Guide to address financial risks.
Among the topics discussed were how insurance premiums and bank credit conditions can be affected by the impacts of climate change on water, but also how the financial system is encouraging more sustainable solutions in areas of high water stress. It has also been discussed how the impact on the credit rating of companies and, where appropriate, of sovereign debt is directly related to the way in which we address these risks.
It was discussed how the analysis of the past to define risk premiums, or the analysis of the balance sheets of companies in water stressed areas may not be sufficient to capture the risk we face. It is therefore necessary to measure the forward-looking risk associated with a series of reference climate scenarios, considering which variable or variables approximate that risk and the geographic granularity.