Previous perspectives

By Jorge Sánchez and Roberto Jiménez

October’s harsh weather left Costa Rica with a massive bill. Damages are estimated at $58 million in road repairs and $30 million in agricultural losses. Millions more were lost to low productivity. These costs will likely rise.

Over the past four decades, Central America has suffered nearly $14 billion in direct losses from weather-related events. The Economic Commission for Latin America recently forecasted that the region stands to lose 10 percent of its gross domestic product between now and 2050 due to climate-related events. The recent floods and this dire outlook motivated Central American presidents to do something they had never done before: publicly demand that developed countries “take the responsibility for their undeniable responsibility for climate change.”

Costa Rica is the most climatically exposed country in the Americas, according to a U.N. study. In addition, the Global Adaptation Institute ranked the country second in the Americas in terms of vulnerability of its water resources. Other climate-risk rankings confirm Costa Rica’s precarious condition: It’s a country with poor urban planning and a crumbling infrastructure, and it is located in a region that will be highly impacted by the changing climate.

Around the world, companies are beginning to better understand climate risks in order to make more prudent investment decisions. Hurricane Katrina, the Japanese tsunami and recent floods in Thailand have highlighted the real potential for losses via supply chains. Some companies are beginning to employ climate vulnerability factors in their investment analyses. Climate-risk factors could raise the hurdle rate for projects in Costa Rica. How much foreign direct investment could the country lose because of its high climate-related risk?

Governments and society should also begin factoring climate risk explicitly to ensure development is climate-resilient. More granular information is needed to enhance financial models and properly account for the risk of projects. Economic losses in the country due to poor financial analysis could be massive.

The good news is that information to identify areas of high risk is already available, especially if we assume that a high percentage of climatic vulnerability is determined by two key variables: a region’s ability to manage changes in precipitation and its socio-economic development level. A county-level ranking tool, prepared with the help of finance and insurance community experts, would enhance investment decision making and increase national competitiveness.

Costa Rica’s changing climate should not be synonymous with unprofitable or risky investments. Climatic changes could also bring along significant opportunities. Some countries today thrive despite challenging climatic conditions. Israel has developed high technologies and infrastructure to overcome a shortage of water, while The Netherlands has done it for an overabundance of water. Costa Rica potentially already has an early example of climate-smart infrastructure: the irrigation canals in the Arenal-Cañas region. What other opportunities lie ahead?

In addition to demanding financial relief for the damages incurred this past October, Central American leaders are well served to understand how to adapt and take advantage of a changing climate in the decades ahead. Being “eco-competitive” is more than just generating revenue from Costa Rica’s natural richness. It’s also about knowing how to control the (hidden) costs incurred by it.  

Like the climate, business models are changing globally. If Costa Rica can adapt to these changes, it will be successful. Nature has always been its best investment.

Jorge Sánchez is a manager at an advertising and communications company, and  Roberto Jiménez is an analyst at a global energy company. Both men hold a master’s degree in business administration and are associated with co2.cr, a climate change think tank.