Towards a climate-smart tourism sector: Building resilience through financial instruments

Sri Lanka’s tourism sector holds great economic and social importance, but it is vulnerable to the impacts of climate change

The tourism sector is an important pillar of Sri Lanka’s economy, providing income and employment for more than 400,000 people directly and indirectly across areas such as hospitality, transportation, and retail. However, like many other sectors, it is facing serious challenges and risks connected to climate change, necessitating a transformation towards sustainability and resilience.

Innovative financial instruments and risk transfer solutions could play an important part in enhancing the sector’s capacity to withstand climate-related shocks, recover from losses and damages, and adapt to long-term climatic changes. If Sri Lanka can pioneer new business models and creative risk management tools, it could help communities, entrepreneurs, tourism companies, and other stakeholders to turn the country into a more vibrant, resilient, and prosperous destination.

Climate risk and the tourism sector

The tourism sector is exposed to climate risks in a multitude of ways, including short- and long-term as well as direct and indirect risks. For example, changing weather patterns can lead to monsoon rains extending into peak tourism seasons or causing spreads of diseases such as dengue, affecting both guests and the local workforce. Floods, storms, landslides, and other extreme events pose a growing danger to the sector’s infrastructure, while sea level rise threatens costal properties with erosion, tidal waves, and storm surges.

Climate change also contributes to the degradation and loss of natural ecosystems and biodiversity—which can be the focus of eco-tourism or nature-based tourism—and reduces the country’s overall attractiveness as a destination. Other examples of climate-related risks include heat stress due to rising temperatures or water and energy insecurity connected to droughts or water scarcity.

Furthermore, beyond these climate-specific risks, climate change compounds underlying risk factors that contribute to the sector’s vulnerability, such as poverty, low diversification of supply chains, rising cost of living, or lack of financial safety nets. Apart from climate change, Sri Lanka’s tourism industry also faces other challenges including a competitive global environment, a lack of digitalisation, education and capacity gaps, and the need to mobilise investment and new sources of finance.

Innovative financial instruments

To manage this complex environment of risks, the tourism sector must conduct comprehensive risk assessments and engage in risk-informed planning, climate-smart business models, business continuity plans, and long-term strategies for resilience-building. However, there is only a limited awareness of these challenges and how to address them, as well as a lack of specific financial instruments, tools, and mechanisms.

Sri Lanka has a window of opportunity to not only transition the tourism sector towards greater sustainability and green growth, but to also invest in innovation and tailored financial solutions. Given a conducive regulatory environment, the sector could facilitate fintech and insurtech start-ups, provide a sandbox for piloting climate insurance for tourism enterprises, encourage the adoption of emerging technologies, and scale up the availability of tourism-sector risk transfer and finance mechanisms.

What could such solutions look like? Given the variety of Sri Lanka’s landscapes and tourism models as well as the multitude of diverse actors—from hotel chains to tour guides and from jeep drivers to restaurant owners—, there is a wide range of possible approaches. For example, parametric or index-based insurance schemes could protect the tourism sector from arrival fluctuations due to adverse weather, allowing it to absorb the resulting loss of income. Climate-specific insurance products could also provide coverage for damage caused by extreme weather events, helping tourism operators recover more quickly. Similarly, catastrophe bonds (“cat bonds”) or related instruments could provide a financial safety net in the event of large-scale climate-related disasters, helping to fund recovery and reconstruction efforts.

Beyond insurance and bonds, financial instruments could also focus on smaller investment and seed funding models to provide grants (or highly concessional loans) for technology, digitalisation, risk analytics, and direct risk management measures. For example, coastal tourism businesses could access grants to invest in shoreline protection measures, such as planting mangroves or constructing seawalls. Similarly, tourism operators in drought-prone areas could secure funding to implement water conservation technologies, such as rainwater harvesting or wastewater recycling. Such schemes could reduce the financial burden on tourism operators and encourage them to adopt climate-smart practices that create co-benefit for the wider tourism ecosystem.

There is a range of options and approaches to implement them, including through public-private partnerships or multi-actor partnerships that include government, industry, civil society, and research stakeholders. Beyond the above-mentioned examples, this could also include expanding access to climate insurance products for small and medium-sized tourism enterprises (SMEs), establishing climate resilience funds for large-scale projects, or enhancing awareness and literacy of climate-related risks and the financial instruments available to manage them.

Envisioning a climate-smart and resilient future for tourism

Sri Lanka’s tourism sector holds great economic and social importance for the country, but it is vulnerable to the impacts of climate change. Innovative financial instruments—such as index insurance, cat bonds, or climate-smart grant schemes—could help sectoral stakeholders at all levels to better manage these risks and become more shock-resistant. Furthermore, a holistic vision for the future of tourism should incorporate these considerations at its core and create an environment that allows innovation and entrepreneurship to thrive, promoting sustainable, climate-smart, and risk-informed growth and planning.

(The writer works as Director: Research and Knowledge Management at SLYCAN Trust, a non-profit think tank based in Sri Lanka. His work focuses on climate change, adaptation, resilience, ecosystem conservation, just transition, human mobility, and a range of related issues. He holds a Master’s degree in Education from the University of Cologne, Germany and is a regular contributor to several international and local media outlets.)