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NOAA has issued an El Niño Watch, with an 82% probability of onset by May–July 2026. The WMO confirms that sea surface temperatures are rising rapidly. Sri Lanka’s Meteorology Department is already warning of hotter-than-normal conditions from July. The Disaster Management Centre has raised the prospect of seawater desalination. For Sri Lankan businesses, this is a material risk event — not a weather forecast.
By the ESGNexus Editorial Team · June 2026 · Estimated reading time: 9 minutes
KEY TAKEAWAYS
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The signals have been building for months. Sea surface temperatures in the equatorial Pacific are rising rapidly. Climate models are strongly aligned. NOAA has issued a formal El Niño Watch. The World Meteorological Organisation has confirmed a likely return of El Niño conditions as early as May–July 2026, with the event expected to persist through the Northern Hemisphere winter of 2026–27.
In Sri Lanka, the implications are already being felt institutionally. The Department of Meteorology has warned of significantly hotter-than-normal weather conditions from July and August 2026. The government’s Food Policy and Security Committee has convened emergency discussions on agricultural preparedness. The Disaster Management Centre has issued its most stark warning yet: if El Niño develops as forecast, Sri Lanka may need to consider desalinating seawater to meet drinking water requirements.
For Sri Lanka’s corporate sector, this is not background weather news. El Niño is a material business risk event — affecting energy costs, water availability, agricultural supply chains, worker health, and insurance exposure across multiple industries simultaneously. For companies with mandatory sustainability reporting obligations under SLFRS S2, it is also a compliance matter: climate scenario analysis and physical risk disclosure are required, and an El Niño event of the magnitude being forecast is precisely the kind of acute physical risk those disclosures are designed to capture.
This article explains what El Niño is, what the 2026–27 event is forecast to bring to Sri Lanka, which sectors face the greatest exposure, and what corporate boards and management teams should be doing right now.
“After a period of neutral conditions at the start of the year, climate models are now strongly aligned, and there is high confidence in the onset of El Niño, followed by further intensification in the months that follow.”
— Wilfran Moufouma Okia, Chief of Climate Prediction, WMO, April 2026
What El Niño Is — and Why 2026 Is Different
El Niño is the warm phase of the El Niño–Southern Oscillation (ENSO) — a recurring climate pattern driven by changes in sea surface temperatures in the central and eastern tropical Pacific Ocean. When the Pacific warms above normal thresholds, atmospheric circulation patterns shift globally, disrupting the monsoon systems, rainfall distribution, and temperature patterns that millions of people and businesses depend on.
El Niño events occur roughly every three to seven years, typically lasting nine to twelve months. Their intensity is classified as weak, moderate, strong, or very strong. The 2015–16 event was one of the three strongest on record. The 2023–24 event was moderate to strong. The 2026–27 event is currently projected to fall in the moderate-to-strong range — though the WMO notes there is still substantial uncertainty about peak strength, with no single strength category exceeding a 37% probability of occurrence.
What makes 2026 particularly significant for Sri Lanka is the timing of the ENSO transition. The country has just emerged from a La Niña period (the cool phase of the cycle) which followed the 2023–24 El Niño. The swing from La Niña to El Niño within a relatively compressed timeframe — combined with the baseline warming effect of climate change — means that the atmospheric and oceanic conditions Sri Lanka faces in the second half of 2026 are likely to be more extreme than historical El Niño patterns alone would suggest.
There is also the Indian Ocean Dipole (IOD) to consider. The IOD is a separate climate driver — a temperature differential between the western and eastern Indian Ocean — that interacts with ENSO and can amplify or modify its effects on Sri Lanka. Research published in April 2026 found that when El Niño coincides with a positive IOD, Sri Lanka’s food security impacts are significantly more severe, with rapid swings between drought and flash flooding within a single cultivation cycle.
Source: WMO, El Niño/La Niña Update, April 2026 — wmo.int; NOAA, ENSO Diagnostic Discussion, May 2026 — cpc.ncep.noaa.gov; The Morning, ‘Food security: El Niño-IOD convergence signals drier monsoon’, April 2026
What Sri Lanka Can Expect: The Two-Phase Pattern
Sri Lanka’s experience of El Niño is not uniform across the island or over time. The historical record and current forecasts point to a distinctive two-phase pattern that corporate planners need to understand and plan for separately.
Phase 1 — May to September 2026: Drought and Heat in the West and South. The southwest monsoon, which normally brings significant rainfall to the western, southern, and central regions of Sri Lanka from May to September, is expected to be weakened by El Niño. The WMO forecasts nearly global dominance of above-normal land surface temperatures in the coming months. Sri Lanka’s Department of Meteorology has specifically warned of significantly hotter-than-normal conditions from July and August 2026 — the peak heat months under El Niño influence.
The consequences for the West and South are concrete. Tea estates in the central highlands face heat stress and moisture deficit during the critical growing months. Reservoir levels — which feed both irrigation and hydropower — will be lower than normal. Agricultural production during the Yala cultivation season, which runs from April to August, is affected by below-average rainfall. The government’s Food Policy and Security Committee has already identified adequate water storage for the Yala season as a priority concern.
The Disaster Management Centre’s warning about potential seawater desalination, issued in the past 24 hours, should be read in this context. It is an indication of how seriously authorities are treating the potential severity of the drought phase, particularly for drinking water supply in areas that depend on small reservoirs and rainfall catchments.
Phase 2 — October 2026 to February 2027: Flood Risk in the East and North. El Niño does not simply mean drought everywhere. Historical analysis of past El Niño events in Sri Lanka consistently shows a second phase: above-normal rainfall in the eastern and northern provinces during the northeast monsoon season (October to February), potentially accompanied by heavier inter-monsoon rainfall in October and November. This is the climate whiplash phenomenon — and it is often more damaging than either drought or flood in isolation, because communities and businesses depleted by the first phase are then struck by the second.
The 2016–17 El Niño illustrated this clearly: more than two million Sri Lankans were affected — first by flooding and landslides, then by a severe drought that devastated two harvest seasons and created water scarcity across 19 of 25 districts. The 2023–24 event followed a similar pattern: initially dry conditions, then heavy inter-monsoon rains that devastated vegetable cultivation in the central highlands and caused sharp increases in food prices.
The preparedness lesson from both events is the same: plan for two distinct crises, not one. A company that protects only against drought risk in mid-2026, without scenario planning for flood risk from late 2026 onwards, has prepared for half the problem.
Source: Sri Lanka Brief, ‘What a Strong El Niño Could Mean for Sri Lanka (2026–2027)’, May 2026 — srilankabrief.org; UNDP Adaptation, ‘Integrated water resources development: The way forward for Sri Lanka’, October 2023 — adaptation-undp.org; The Morning, ‘El Niño impact mitigation underway’, June 2026
The key lesson from Sri Lanka’s El Niño history is not that it brings uniform disaster, but that it brings opposite extremes to different parts of the country at different times. Preparation must be region-specific and season-specific — and must plan for both phases.
— Sri Lanka Brief, May 2026
Sector-by-Sector Risk Assessment
The business impact of El Niño 2026–27 will vary significantly by sector. The table below maps the primary risk and business implications for the sectors most exposed in the Sri Lankan corporate landscape.
| Sector | Primary El Niño Risk | Business Implication |
|---|---|---|
| Tea & Plantations | Drought stress on tea bushes; reduced yields in western/central highlands (May–Sep 2026) | Export revenue decline; cost per kg increases; quality fluctuations affect premium market positioning |
| Agriculture & Food | Weakened Yala season; below-average rainfall in south and west; food price volatility | Input cost increases; supply chain disruption; food security risk in company canteens and community CSR programmes |
| Hydropower & Energy | Reduced reservoir inflows; 30–40% of electricity from hydro; generation shortfalls expected | Higher electricity costs from thermal substitution; potential load-shedding risk; increased Scope 2 emissions |
| Tourism & Hospitality | Extreme heat (July–August peak); beach and outdoor product disruption; potential water scarcity at resorts | Operational costs increase; guest experience risk; water supply planning becomes urgent |
| Manufacturing & Apparel | Water scarcity for industrial processes; heat stress on workers; potential power interruptions | Production efficiency loss; occupational health risk; ESG labour reporting implications |
| Banking & Finance | Portfolio exposure to climate-affected sectors; green lending stress tests required | CBSL Roadmap 2.0 ESG risk management obligations apply directly; lending to agriculture and energy sectors under pressure |
| Coastal Industries & Fisheries | Sea surface temperature increases; coral bleaching; fish stock disruption in western coast | Revenue volatility for fishing-dependent communities; biodiversity disclosure implications |
Source: ESGNexus sector analysis based on WMO forecasts, NOAA ENSO Diagnostic Discussion (May 2026), Sri Lanka Brief El Niño analysis (May 2026), IPS TalkingEconomics ‘Powering Through Droughts and Crises’ (April 2026), and historical El Niño impact data from UNDP Sri Lanka
The Hydropower Crisis — Sri Lanka’s Most Immediate Vulnerability
Of all the business impacts, the electricity supply risk deserves particular attention because it affects every company in every sector simultaneously.
Hydropower provides approximately 30 to 40 per cent of Sri Lanka’s electricity generation. That generation depends entirely on rainfall — specifically on the reservoir levels in the central highlands fed by the southwest monsoon. When El Niño weakens the monsoon, hydropower generation falls; the Ceylon Electricity Board (CEB) substitutes with expensive thermal generation; electricity prices rise; and the risk of load shedding increases.
The 2016–17 El Niño produced exactly this sequence: reservoir levels dropped, thermal substitution increased, power costs rose sharply, and several industrial zones experienced load shedding at a period when export orders were active. The Institute of Policy Studies has noted that Sri Lanka’s energy system has three structural vulnerabilities that El Niño exploits simultaneously: dependence on a rainfall-linked bimodal hydro system, near-total reliance on imported fossil fuels to fill gaps, and an ageing grid ill-equipped for the distributed energy future.
For corporate sustainability officers, the hydropower risk has a direct SLFRS S2 implication: it is a physical climate risk with a clear financial materiality pathway. Higher electricity costs increase Scope 2 emissions (because thermal electricity has a higher emission factor than hydro), reduce profitability, and may disrupt production schedules. These are exactly the kinds of scenarios that SLFRS S2 climate scenario analysis is designed to capture and disclose.
Source: IPS TalkingEconomics, ‘Powering Through Droughts and Crises: Redesigning Sri Lanka’s Energy Resilience’, April 2026 — ips.lk
The Tea Industry — A Bellwether for Climate Physical Risk
Sri Lanka’s tea industry is one of the country’s most climate-sensitive export sectors and a clear indicator of what El Niño’s physical risk looks like in practice.
Tea production in Sri Lanka depends critically on moisture availability during the growing season. The best quality teas — the high-grown varieties from the central highlands that command premium prices in international markets — are grown at elevations that depend almost entirely on the southwest monsoon and highland rainfall patterns. When El Niño weakens, that rainfall yields fall, quality fluctuates, and the cost per kilogram of production increases.
The 2023–24 El Niño produced a complex pattern for tea: initial dry conditions reduced yields in some regions, then heavy inter-monsoon rains disrupted harvesting in others. The net effect was revenue volatility that hit mid-sized estate companies harder than the large conglomerates with diversified operations. This pattern is likely to repeat in 2026–27.
For tea companies with sustainability reporting obligations — and several of Sri Lanka’s largest plantation conglomerates are already GRI reporters — the El Niño event creates a direct disclosure obligation. Physical climate risks to agricultural production, water availability for tea processing, and the business strategy for managing yield volatility under changing climate conditions are all material topics under SLFRS S1. Companies that have not yet conducted a materiality assessment treating climate physical risk as a candidate for financial materiality are, in the context of an imminent El Niño, operating with an incomplete picture of their own risk exposure.
What This Means for SLFRS S2 Compliance
For companies subject to mandatory sustainability reporting under SLFRS S1 and S2, the approaching El Niño event is not just an operational challenge — it is a compliance catalyst.
SLFRS S2 requires companies to disclose climate-related risks and opportunities across four pillars: governance, strategy, risk management, and metrics and targets. The strategy pillar specifically requires climate scenario analysis — testing business strategy against different climate futures. El Niño 2026–27 is not a hypothetical climate scenario. It is a forecast climate event, with high-confidence probability estimates, known historical impact patterns in Sri Lanka, and specific sector-level implications.
A company that has begun its SLFRS S2 compliance process and has not yet considered El Niño as an acute physical risk scenario has not completed its climate risk identification. A company that has not begun its SLFRS S2 compliance process and is simultaneously facing the operational impact of El Niño is dealing with a risk it was already required to have assessed.
The practical intersection of El Niño and SLFRS compliance provides a useful starting point for companies that have been struggling with the abstraction inherent in climate scenario analysis. Instead of modelling hypothetical 1.5°C and 3°C warming scenarios, which require sophisticated data and methodologies, companies can begin with a concrete near-term scenario: what does our business look like if El Niño develops as NOAA and the WMO are currently projecting, for the twelve-month period from July 2026 to June 2027? That exercise — answering that question rigorously, sector by sector, asset by asset, supply chain link by supply chain link — is a credible starting point for the physical risk component of SLFRS S2 scenario analysis.
El Niño 2026–27 is not a hypothetical climate scenario — it is a forecast event with high-confidence probability estimates and known historical impact patterns. For SLFRS S2 compliance, this is exactly the kind of acute physical risk event that climate scenario analysis is designed to capture.
What Corporate Leaders Should Do Now
The window for preparation is narrow but still open. El Niño conditions are expected to emerge in the May–July 2026 window — meaning the drought phase is either imminent or already beginning. Here is a prioritised action list for corporate leadership teams.
- Conduct an immediate El Niño operational risk assessment. Map your operations, supply chains, and assets against the two-phase risk pattern described in this article. Which of your operations are in western or southern Sri Lanka and exposed to drought risk from May to September? Which are in eastern or northern Sri Lanka and are exposed to flood risk from October onwards? Which depend on hydropower-supplied electricity? Which rely on water-intensive processes? This mapping exercise should be completed in days, not months.
- Audit water storage and supply resilience. The Disaster Management Centre’s warning about potential seawater desalination is the most extreme marker of the water supply risk. For industrial facilities, hotels, plantation estates, and food processing plants, water security is both an operational and an ESG disclosure issue. Assess your current water storage capacity, identify backup supply sources, and consider emergency procurement of water storage infrastructure.
- Stress test your energy cost assumptions. If hydropower generation falls as projected, CEB thermal substitution will drive electricity tariffs higher. For energy-intensive manufacturers, exporters, and hospitality operators, run a scenario in which electricity costs increase by 20 to 40 per cent over a six-month period from July to December 2026. Does that scenario materially affect your profitability? If yes, it is a financially material climate risk that belongs in your SLFRS S2 disclosure.
- Review your agricultural supply chain exposure. For food and beverage companies, exporters of agricultural inputs, and hospitality groups, the risk of Yala season disruption is real. Review your supplier diversification, your input inventory levels, and your pricing agreements. Companies that have long-term fixed-price contracts with agricultural suppliers should assess whether those contracts carry climate force majeure provisions.
- Integrate the El Niño scenario into your SLFRS S2 climate risk work. If you are in the process of building your SLFRS S2 compliance programme, use the El Niño 2026–27 event as a concrete near-term physical risk scenario. The NOAA and WMO forecasts provide the scenario inputs. Sri Lanka Brief’s sector analysis provides the regional impact mapping. The result — a documented, evidence-based assessment of how your business performs under this specific climate scenario — is a credible and defensible component of your SLFRS S2 strategy disclosure.
- Communicate transparently with your board. El Niño is a board-level risk issue, not just a management operational issue. The SEC’s mandatory ESG Sustainability Policy requirement, which came into force in October 2024, requires companies to maintain board-level oversight of sustainability matters. A developing El Niño event that could materially affect company performance should be on the board’s agenda — not because compliance requires it, but because governance demands it.
ESGNexus Will Be Tracking This
ESGNexus will be monitoring the development of El Niño conditions and their impact on Sri Lanka’s corporate sector throughout 2026 and into 2027. We will cover the meteorological developments as they unfold, track sector-specific impacts as companies report them, and assess how Sri Lanka’s listed companies handle the physical risk disclosure obligations arising from this event.
The quality of El Niño-related disclosures in FY2026 annual reports — when they are published in 2027 — will be one of the first real tests of whether Sri Lanka’s mandatory SLFRS S2 framework is generating meaningful physical risk transparency, or whether it is producing boilerplate statements that bear no relationship to the actual climate risks companies faced during the year. ESGNexus’s annual compliance quality assessment, planned for the first quarter of 2027, will include this as a specific assessment dimension.
Subscribe to the ESGNexus Weekly for ongoing coverage of El Niño developments and their corporate implications throughout 2026.
El Niño 2026–27 will be one of the first significant tests of whether Sri Lanka’s mandatory sustainability reporting framework produces meaningful physical risk disclosure — or whether companies report climate scenarios that bear no relationship to the actual climate events they experienced during the year. ESGNexus will be watching.
Sources & Further Reading
WMO — El Niño/La Niña Update, April 2026: wmo.int/media/news/wmo-likelihood-increases-of-el-nino
WMO — El Niño/La Niña Update, February 2026: wmo.int/resources/publication-series/el-ninola-nina-updates
NOAA — ENSO Diagnostic Discussion, May 2026: cpc.ncep.noaa.gov/products/analysis_monitoring/enso_advisory/ensodisc.shtml
NOAA — El Niño Alert System Status: El Niño Watch, 82% probability May–July 2026: cpc.ncep.noaa.gov
Sri Lanka Brief — ‘What a Strong El Niño Could Mean for Sri Lanka (2026–2027)’, May 2026: srilankabrief.org
The Morning — ‘Food security: El Niño-IOD convergence signals drier monsoon’, April 2026: themorning.lk
The Morning — ‘El Niño impact mitigation underway’, June 2026: themorning.lk
Ada Derana — ‘DMC warns of possible need to desalinate seawater if El Niño impact as predicted’, June 2026: adaderana.lk
IPS TalkingEconomics — ‘Powering Through Droughts and Crises: Redesigning Sri Lanka’s Energy Resilience’, April 2026: ips.lk
UNDP Adaptation — ‘Integrated water resources development: The way forward for Sri Lanka’, October 2023: adaptation-undp.org
ABC News — ‘El Niño expected to develop soon, but strength remains uncertain’, May 2026: abcnews.com
ESGNexus — ‘Is Sri Lanka Ready for Mandatory Sustainability Reporting? An Honest Assessment’: esgnexus.lk
ESGNexus — ‘SLFRS S1 vs SLFRS S2: A Plain-English Guide for Sri Lankan Finance Teams’: esgnexus.lk
| ABOUT ESGNEXUSESGNexus is Sri Lanka’s independent platform for ESG, CSR, and sustainability intelligence. We track ESG performance, regulatory developments, and sustainability data across Sri Lanka’s listed companies, large unlisted corporates, and state-owned enterprises. All editorial content is independently produced. Sponsored content is clearly labelled.
Data disclaimer: Information in this article is sourced from publicly available documents. ESGNexus does not independently verify company disclosures. Errors and omissions excepted. |