Climate Resilience: Investments for a Sustainable Future

In a context marked by global warming, the frequency of extreme weather events has surged, creating a landscape of complex and often interconnected threats.

Latin America and the Caribbean has become a high risk climate zone, due to its inherent vulnerability—often deficient infrastructure, residents in disaster-prone areas, and limited fiscal room for maneuver—and constant threats regarding the likelihood of extreme weather events.

Indeed, as per EM-DAT data, at least 2,225 such disasters have been recorded in the region during the last 43 years, i.e. an average of 52 events per year. Floods and storms are the most frequent events (49.5% and 30.6%, respectively), followed by landslides (7.0%) and droughts (6.9%). Also, the number of extreme events in the region surged by 90% between 2000 and 2021 from the previous two decades.

Climate-related disasters have not only huge economic impacts, but they have also affected a large portion of the population. On average, damages and losses in the region each year are estimated at 0.2% of GDP. Similary, around 1% of people in the region on average is impacted by climate disasters each year, and the combined figure of fatalities and missing persons is estimated at around 100,000 people.

The disasters associated with the last three major El Niño events in 1982–1983, 1997–1998, and 2014–2016, for example, wreaked havoc in Chile, Colombia, Peru, and Ecuador, estimated at USD 6.47 billion, and over 3,300 deaths. The current drought in the south of the continent could cost between 2% and 5% of GDP in Argentina, Brazil, Paraguay, and Uruguay.

Prompted by these figures, a recent study by CAF—development bank of Latin America and the Caribbean— assessed the macroeconomic effects of investing in resilient (or adaptive) infrastructure, and the creation of contingency funds, based on a quantitative general equilibrium model considering climate disruptions. The results for four of the economies with the highest climate risk in the region (Honduras, Dominican Republic, Barbados, and Paraguay) suggest that such investment minimizes the impact of climate events on GDP, and improves public debt trends in the medium and long term.

The effect on debt dynamics is boosted if, in addition to investment in resilient infrastructure, a contingency fund is established to address disaster-related emergencies. Nonetheless, investment in resilient infrastructure and establishing an emergency fund impinge on the debt dynamics in the short term.

If these investments are not made, the study finds, the occurrence of a disaster could trigger a vicious circle marked by an upward debt trend that would raise the cost of borrowing. This, in turn, would limit the options for investment in resilient infrastructure, thus compounding the negative impacts on GDP and gradually reducing responsiveness.

The study also stresses the pivotal role played by concessional financing. This type of financing would not only streamline the investments needed in resilient infrastructure, but would also mitigate issues in access to credit—especially for highly indebted economies with little fiscal room for maneuver—or issues regarding political economy. These investments are estimated to require between USD 9 billion and USD 31 billion annually across the region, i.e. between 0.15 and 0.5% of GDP each year.

Thus, the results suggest the need for greater preparedness and responsiveness to climate disasters, as well as continuous adaptation to reduce vulnerability, by anticipating a higher frequency of these phenomena in the future. Other intervention alternatives such as territorial planning and nature-based solutions should also be considered in an attempt to reduce countries' vulnerability to climate risks. 

Multilateral banks, in their role as mediators and enablers, can play a pivotal role in this context. First, they can mobilize capital, offer concessional financing and technical advice, in order for nations to carry out the investments needed in resilient infrastructure for climate risk adaptation and management. Second, multilateral banking can also foster regional collaboration to share experiences and best practices.

Climate change adaptation is not only a necessity, but also a strategic investment in the sustainable development of Latin America and the Caribbean.