NATURAL ASSETS: GIVING A DOLLAR VALUE TO FORESTS, GREEN SPACES AND WETLANDS ON GOVERNMENT FINANCE REPORTS (2021)
Beyond the immediate health and economic impacts of the COVID-19 crisis, one of the most pressing threats facing Canada and the world is the degradation of nature, exacerbated by climate change.
The emerging ecological disaster has been matched by an increasingly destabilized global economy and gaping inequality, fueling destructive populist politics that threaten established democracies. As we recover from the pandemic, we have an opportunity to create a new normal. One fundamental challenge will be ensuring that nature is understood to be of core importance to business models – and that its value is properly accounted.
Much groundwork is already laid. Current measures of GDP are often distorting. Economic activity, productive or destructive, is seen as a positive and encouraged. If funds going out of business accounts exceed income, we enter bankruptcy. Translate to global speak: replace bankruptcy with ecosystem, societal and economic collapse, and we get a clearer picture of the value of green accounting.
Non-governmental organizations (NGOs) have emerged to provide guidance to reporting organizations and users, including the Sustainability Accounting Standards Board (SASB)1, the Global Reporting Initiative (GRI)2, the Task Force on Climate-related Financial Disclosures (TCFD)3, the Corporate Reporting Dialogue and the International Integrated Reporting Council (IIRC). 4 These organizations have developed environmental reporting standards for the calculation and disclosure of environmental metrics.
Additionally, there has been significant documentation of the process for gathering data, converting company-level results to impacts and dependencies, and selecting prices by, among others, the Capitals Coalition5, ISO 14007 and 140086 protocols, and the Impact Institute.7
Financial institutions (Impax, ASN, Manulife) and companies (Kering, BASF) have begun integrating natural capital into decision making. It is time for mainstream business organizations and governments to adopt this work and these philosophies into an accurate accounting of natural assets.8
A number of Canadian municipalities have begun the shift to a new normal, one that recognizes that nature is our most vital asset. They are measuring, valuing, investing in and ultimately managing natural assets such as forests, wetlands and foreshores for the vital municipal service-delivery benefits they offer, such as storm water management, drinking water filtration and coastal zone protection. A key organization driving this effort is the Municipal Natural Assets Initiative (MNAI), which helps local governments understand and manage natural assets within their core financial and asset systems just as they would with critical engineered alternatives.9
MNAI’s findings are particularly illustrative of the value that natural assets offer for climate resilience. MNAI works directly with municipal governments, creating norms and tools that allow natural asset management to become mainstream practice for local governments across Canada.10
Background
Natural infrastructure assets play a role in climate resilience, and their contributions can be quantified in dollars and cents. In 2016, a framework was established by the Intact Centre on Climate Adaptation (University of Waterloo), Insurance Bureau of Canada and the International Institute for Sustainable Development to help assess this contribution.11
Public sector financial statements, however, have not yet recognized natural infrastructure as a valuable asset. A prohibition in the CPA Canada Public Sector Accounting Handbook (Financial Statement Concepts, Section PS 1000, Paragraph 57), states:
“Purchased natural resources and Crown lands are recognized in government financial statements. However, when natural resources and Crown lands have been inherited by the government in right of the Crown and have not been purchased, they are not given accounting recognition as assets in government financial statements. These items are not recognized as assets because the costs, benefits and economic value of such items cannot be reasonably and verifiably quantified using existing methods.”
While this exclusion results in conservative financial reporting, it also means that financial statement users have no way of knowing the extent or value of natural infrastructure assets, and how they might contribute to a public sector entity’s future ability to provide services. Financial statement users also have no transparency concerning any potential changes in the value of these natural assets, and responsible investors no reliable measures.
If, for instance, a municipality has vast natural resources, such as wetlands, forests and ponds, it’s prohibited from reflecting those as an asset on its financial statements. The municipality is also not required to report in its financial statements whether those natural resources have been damaged by pollution. This lack of transparency ultimately results in less accountability for safeguarding natural resources.12
Many businesses continue to see green initiatives as corporate social responsibility rather than central to operating. This confuses investors and doesn’t move the dial forward.13
There is a strong interest in getting Canadian governments, companies and standards bodies more deeply involved in the work of the Capitals Coalition.14 A series of roundtables in Ottawa and Toronto are ongoing so that stakeholders can share information and best practices. This will allow more regular sharing of information and assist Canada to be represented in the work of the Capitals Coalition globally.
The Value Balancing Alliance (VBA, a new business-led non-profit) 15 is standardizing the process of integrating business into society and nature for better decision-making. The VBA has been tasked by the European Commission to develop generally accepted accounting principles and guidelines around environmental impacts for business. This will entrench common standards and consolidate other initiatives for measuring and valuing environmental impacts in monetary terms.
A new normal in the market system might include:
- New/updated accounting standards to measure and value natural resources;
- Update regulations to balance environmental profit and loss against actual profit and loss;
- Re-allocation of capital to incentivize investors to redirect investments in green-aware companies; and
- Working closely with the Capitals Coalition in the Impact Management Project, helping investors measure and report the impacts of their investments.
Reliable measurement of natural assets has, in the past, proved a challenge. Since 2016, data measurement, some of which has emerged from the Insurance Bureau of Canada; the International Institute for Sustainable Development; and the Intact Centre on Climate Adaptation has given us ways to estimate total economic value of natural assets. One example is southern Ontario wetlands could reduce building damage costs related to hurricanes and severe weather by $50 million. Other examples are as robust.16
Investing in green infrastructure creates jobs. A European study recently concluded sustainable infrastructure projects create five jobs more per $1 million invested than traditional projects.17
Dr. John Janmaat of the University of British Columbia Okanagan has reported on the economics of water resources; water use in the Okanagan and other regions; and policy options to encourage more effective use of water.18 In this area of Applied Environmental Economics, we are now able to measure the value of environmental assets which are not traded.19
The federal debt as the pandemic begins to show signs of weakening, has caused economists to question how the red ink of $500 billion (and growing) can be managed. If we were to add the natural assets of Canada to the plus column, their value would be higher than the COVID-19 debt. The econometrics of this challenge are becoming better known, and an example additional to the above would include carbon sequestration – the ability of nature to capture carbon dioxide in the atmosphere – which slows down the rate of climate change.
Ecological habitat and water by definition have serious implications to business, industry, commercial, residential and personal property and welfare. Who is entitled to use water, at what proportions and how land is valued and accounted needs study. Many regulations, federally and provincially protect and identify those values. While the ask appears simple (appreciate and evaluate the wealth of natural assets), the practicality of this ask is complex with implications for the country’s future economic health.
Certainty of process and accountability will follow from better green data.
THE CHAMBER RECOMMENDS
That the Provincial Government with the Federal Government:
- Recognize Bioeconomics as a key area which Canada should focus on for economic sustainability, financial growth, job security and green-based solutions to pandemic-induced budget shortfalls and recognition of green asset value in the future;
- In advance of new international standards, work with accounting agencies to revise their accounting rules to enable public sector entities to use natural infrastructure for climate change mitigation and adaptation (i.e. CPA Financial Statement Concepts, Section PS 1000, paragraph 57) and ensure transparency;
- Work to ensure cooperation at an international level, and establish universal standards, i.e. at the United Nations, the World Trade Organization and at regional trade forums;
- Collaborate with municipalities and private business organizations to agree how natural asset valuation might contribute to a public sector entity’s future ability to provide services; and
- Encourage Canada to work within the Capitals Coalition and have a meaningful presence on the world stage in pursuing these changes.
1 April 12, 2021 “Climate Risk: Technical Bulletin” https://www.sasb.org/knowledge-hub/climate-risk-technical-bulletin/
2 The global standards for sustainability reporting The GRI Standards create a common language for organizations – large or small, private or public – to report on their sustainability impacts in a consistent and credible way. This
enhances global comparability and enables organizations to be transparent and accountable.
3 “Canadian corporations push back against internationally aligned-climate reporting” January 19, 2021: Bankers association, Loblaw parent co oppose mandatory "one size fits all" climate-risk disclosure, diversity targets. https://www.corporateknights.com/channels/climate-and-carbon16110600/
4 https://www.corporateknights.com/channels/natural-capital/valuing-nature-15901362/ “It’s time for our financial statements to reflect the vital value of nature”; May 22, 2020
5https://capitalscoalition.org/canadian-cities-are-counting-on-nature-its-paying-off/ October 21, 2017
6 ISO 14007 “Guidelines for determining environmental costs and benefits”; ISO 14008 “Monetary valuation of environmental impacts and related aspects” https://committee.iso.org/files/live/sites/tc207sc1/files/Explaining%20%20ISO%2014007%20and%2014008%20by%20case%20 study%20-December.pdf
7 To empower organizations and individuals to realize the Impact Economy by creating a common language for impact through the publication of open-source standards. https://www.impactinstitute.com/
9 Defining & Scoping Natural Assets, March 2017, Making Natural Assets Count. https://www.assetmanagementbc.ca/wp- content/uploads/definingscopingmunicipalnaturalcapital-final-15mar2017.pdf
10op. cit.
11 Across the country, natural assets provide substantial economic benefits in their ability to mitigate the growing costs of extreme-weather disasters, and in particular, flooding. Naturally occurring ponds in Gibsons, BC, provide up to $4-million in storm-water storage benefits; a restored wetland in Manitoba provides a $3.7-million value in reducing floods, improving water quality and sequestering carbon; protecting four wetlands in New Brunswick delivers $1.4-million in reduced flood-damage benefits for Moncton; and wetlands provide a $49.8-million benefit to Quebec City for their ability to manage rainwater and reduce flooding. If these natural powerhouses didn’t exist, we would have to build grey infrastructure at considerable cost to contain the damage they mitigate for free. https://www.theglobeandmail.com/business/commentary/article-its-time-to- reveal-the-hidden-value-of-canadas-natural-assets/
12 Recent statistics suggest that the loss of natural infrastructure in Canada is already a pressing problem. In southern Ontario, an estimated 72% of the original wetlands have been lost to development (e.g., agriculture, urban sprawl and other land conversion). In Alberta, approximately 64% of the original wetlands in settled areas no longer exist. In BC, more than 70% of the original wetlands have disappeared in the lower Fraser Valley and parts of Vancouver Island, and an 85% wetland loss has been documented in the South Okanagan.
13 As Canada advances its climate commitments made under the Paris Agreement, the United Nations’ Sendai Framework for Disaster Risk Reduction, and the Pan-Canadian Framework on Clean Growth and Climate Change, it needs to revise its accounting rules to enable public sector entities to use natural infrastructure for climate change mitigation and adaptation. If it does not change its internal accounting rules, Canada’s natural assets will continue to degrade and disappear – and the costs of climate catastrophes will continue to climb.
14 The Capitals Coalition is a global group – encompassing many larger companies, governments, international organizations and standards bodies – that shares knowledge from around the world, establishes global standards and advocates to convince the various players to synchronize their efforts. It has also developed a series of protocols that combine current thinking from different organizations.
https://capitalscoalition.org/canadian-cities-are-counting-on-nature-its-paying-off/ October 21, 2017
15 Value Balancing Alliance: https://www.value-balancing.com/ Time for companies to move away from profit maximization to value optimization by taking responsibility for the impact of their action
16 Across the country, natural assets provide substantial economic benefits in their ability to mitigate the growing costs of extreme-weather disasters, and in particular, flooding. Naturally occurring ponds in Gibsons, BC, provide up to $4-million in storm-water storage benefits; a restored wetland in Manitoba provides a $3.7-million value in reducing floods, improving water quality and sequestering carbon; protecting four wetlands in New Brunswick delivers $1.4-million in reduced flood-damage benefits for Moncton; and wetlands provide a $49.8-million benefit to Quebec City for their ability to manage rainwater and reduce flooding. If these natural powerhouses didn’t exist, we would have to build grey infrastructure at considerable cost to contain the damage they mitigate for free. https://www.theglobeandmail.com/business/commentary/article-its-time-to- reveal-the-hidden-value-of-canadas-natural-assets/ and Intact Centre on Climate Adaptation: study on Southern Ontario wetlands, reducing damage to the Grand River watershed by $50 million in severe weather events.
17 Mark Carney, UN Special Envoy Climate Action & Finance
18Drought Impacts, Irrigator Attitudes, and the Potential for Water Trading in the Okanagan. Janmaat, J.
19 Commodification of water: Okanagan Basin Water Board seeks answers on commodification of resource: February 27, 2021,