UK’s water stress evolving into national security risk

Key points

• England is facing severe water stress, which has promoted Moody’s to maintain a “negative” outlook for the UK water sector until strategic clarity emerges.

• Climate change is intensifying both droughts and floods, costing the UK economy an estimated £3.3bn annually in flood damage and £3.8bn in water scarcity losses.

• While flood insurance remains broadly accessible, rising claims and a growing protection gap highlight fiscal risks, with an estimated £1.6bn to £2.2bn per year needed to keep flood risk levels steady, plus £0.9bn to £2.6bn annually for drought resilience measures.

• Experts are calling for a formal national adaptation accounting framework to track spending and link it to future damage costs while debates continue over funding models and the role of blended finance.

With more than two-thirds of England in a drought, customer bills at an all-time high, sewage dumping running rife and the largest water company in the country facing potential insolvency, the importance of adequate water management is becoming a top priority for the UK government.

In its latest assessment of the industry at the end of last year, credit rating firm Moody’s said its outlook for the UK water sector “remains negative”. It stressed that public sentiment is unlikely to improve until there is clarity “on the strategic direction for the sector, government priorities and trade-offs, as well as the timeline and costs of service improvements”.

Hannah L. Cloke, a professor of meteorology and climate science at the University of Reading, says that risks linked to water have not been acknowledged adequately.

“Climate change means we’re having to prepare for both ends of the hydrological cycle,” she told Green Central Banking. “Longer, hotter droughts threaten water availability, while heavier downpours increase flooding, overwhelm sewer systems and damage infrastructure. The same changing climate can produce both extremes, creating growing risks for society and increasing pressure on public finances.”

The UK’s Climate Change Committee (CCC) estimates that annual flood damage is already costing the UK economy £3.3bn per year, while water scarcity currently causes direct economic losses of roughly £3.8bn annually.

Last month, the Bank of England sent out a stark warning indicating the UK economy could face physical damages from threats such as flooding. And last year, the UK Prudential Regulation Authority  tightened climate risk management rules for UK banks and insurers, requiring them to embed climate considerations into core risk frameworks and board-level decision making.

Meanwhile, the Financial Conduct Authority has released guidance on how firms should consider physical risks from climate change. It identified several risks from climate change to consumers and markets, including reduced insurance access, higher homeowner costs, and market pricing difficulties.

Adapting to increased flooding

To keep household flood insurance available, in 2014 the UK government set up Flood Re – a single-peril reinsurance scheme whereby insurers can pass on the costs of paying out flood damages to a public-private fund. According to Moody’s, this has helped keep the country-wide flood insurance protection gap low, at approximately 10% of total economic losses.

Still, as flood risk rises, the reinsurance scheme is facing problems.

“Fiscal risks are limited at present but could become material in extreme events,” says Moody’s. Meanwhile, the CCC has highlighted that insurers have paid out more in claims than premiums for five years running and that 20% more home insurance policies were placed in the scheme between 2024 and 2025, compared to the previous year.

To improve flood management, the CCC estimates an annual investment of around £1.6bn to £2.2bn is required to keep flood risk at roughly today’s levels as the climate changes. This funding would cover flood defences, drainage systems, early warning capabilities, and community resilience.

To mitigate drought risk, including water storage, efficiency, and demand-side measures, the CCC estimates between £0.9bn and £2.6bn per year is needed.

According to Cloke from the University of Reading, investing in water resilience should be seen not simply as an environmental cost, but as an investment in economic resilience and national security.

“Every major water supply failure has consequences far beyond inconvenience,” she said. “Hospitals, schools, businesses, food production and emergency services all depend on reliable water. As climate change increases pressure on water resources and infrastructure, reliable access to clean water becomes an increasingly strategic asset.”

Should water resources therefore be considered on equal footing as energy dependencies? According to Bertie Wnek, director at policy consultancy Public First, the difference is that energy disruption is more likely to affect the whole country at once, whereas water risks are usually regional – even though that does not make them marginal.

“Water availability is increasingly a national security issue, even if it does not yet carry the same day-to-day political weight as energy. Energy affordability will remain more immediately salient politically because energy costs are a much higher proportion of household expenditure,” he added.

Funding barriers

While there is consensus among the general public, economists, and policy makers that the status quo is not sustainable as extreme weather events increase in intensity and regularity, how to reform the country’s water sector remains a contentious issue.

The UK’s newly appointed prime minister, Andy Burnham, has argued for greater public control of the water industry, which was privatised in England and Wales in the late 1980s.

At present, water management (access, sewage, and scarcity) is the responsibility of licensed, private companies. An economic consultant for the UK water sector who wished to remain anonymous due to a conflict of interest said drought adaptation measures would not affect the government’s fiscal budget for public water supplies, as such investments (for example new reservoirs) are funded privately with companies recovering the money through water bills. Wnek from Public First agreed, adding that developers, local planning authorities, and national highways authorities all have a role in ensuring the system is adapted to extreme weather.

In Scotland and Northern-Ireland, the water sector is in public hands, so the costs would fall on their devolved governments.

When it comes to flood management, Wnek noted adaptation measures are primarily funded by government, so investment in defences carries a direct fiscal impact, as well as damage to public assets, he said.

If the new government were to go ahead with a renationalisation of water companies, it would affect the fiscal budget, with the impact conditional on the public ownership model used, the water consultant said. Regardless of this, “any changes would not happen overnight,” they added.

Accounting framework needed

To have a clear overview of the costs the UK would face adapting to higher water risks, government bodies and experts say an accounting framework for national adaptation is needed.

“There is currently no reliable data on current or planned levels of UK government spending on adaptation. Nor is there any reliable analytical framework for relating adaptation spending to future damage costs,” a spokesperson for the Office for Budget Responsibility (OBR) told Green Central Banking.

Meanwhile, the CCC has made the case that government should consider risks from climate change in its fiscal forecasting and monitoring of fiscal risks. It also urges the OBR to account for climate risks in its five-year assessment, rather than assessing them separately over a longer-term horizon.

“To ensure adaptation is reflected in annual budgets, government needs a framework that treats climate adaptation as a core part of economic planning,” a spokesperson for the CCC said.

An OBR spokesperson added the organisation expects to assess the potential fiscal costs and benefits of adaptation in the coming years, “with the hope that the government will have addressed some of the current gaps in reporting and strategy on adaptation in the meantime.”

Once a baseline exists of how adaptation costs are reported and tracked against, it is up to ministers to decide how to pay for it, Wnek from Public First said. At present, “a large share of water management sits in the regulated asset base and is funded through consumer bills rather than from the Treasury, which we expect it would remain,” he said.

In its global sector analysis published in June 2026, Moody’s notes that adaptation measures are crucial for mitigating against credit risk as “water stress becomes most relevant to government or corporate credit quality when it affects key industries with limited flexibility to cope with strained supply.”

The credit rating firm adds that as water supplies become scarce, the credit impact will depend on whether blended finance can be mobilised to fund adaptation measures before water stress becomes too disruptive.

“Credit outcomes will depend less on how water-stressed a region appears on average, and more on whether its systems can maintain reliable supply when conditions deteriorate”.

Updated on 21 August to clarify that a quote was from Bertie Wnek. 

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