University of Waterloo: Canada’s financial and accounting systems fail to recognize the financial value of nature

As Canada prepares to unveil its National Adaptation Strategy at COP27 and to host the COP15 biodiversity conference in Montreal, nature is still assigned a value of zero in our financial and accounting systems.

A new paper calling for recognition of the financial value of natural assets, from the University of Waterloo’s Intact Centre on Climate Adaptation, KPMG, and the Municipal Natural Assets Initiative argues for a revamp of accounting rules to safeguard natural resilience.

The services nature provides Canadians are not routinely valued in investment decisions, asset management or financial reporting. As a result, economic decisions continue to lead to the degradation of natural assets, such as rivers, wetlands and forests. To tackle the dual crises of climate change and biodiversity loss, the United Nations urges G20 countries to triple their investment in nature-based solutions by 2030.

“Wetlands, forests, saltmarshes and grasslands aren’t only vital to biodiversity,” said Mike Pedersen, chair of Business Development Bank of Canada, corporate director and chair of Nature Conservancy of Canada. “They are our front-line allies in reducing the impacts of flooding and erosion, extreme heat and drought, as well as removing carbon emissions to slow down climate change. The value of these services makes nature a sound economic driver. We need an accounting system that recognizes this reality.”

COP27 is a key opportunity for Canada to scale up its commitment to working with nature to reduce climate risks.

“This is an opportunity not to be missed,” said Joanna Eyquem, managing director of Climate Resilient Infrastructure at Waterloo’s Intact Centre. “A national adaptation strategy that does not attach value to the critical services nature provides would be fundamentally flawed.”

As the report states, the good news is that more than 90 local governments across Canada are taking matters into their own hands. These communities are already identifying and valuing natural assets that provide services to their citizens, such as the role of wetlands soaking up stormwater and maintaining good water quality and the role of trees offering shade to reduce urban heat and maintain good air quality. The glitch is that financial reports cannot reflect the values economists identify due to Canada’s accounting rules. Both the Canadian Public Sector Accounting Board and the International Public Sector Accounting Standards Board (IPSASB) have projects underway to look at ways to address this shortcoming.

“For accountants, leaving out natural assets means we are completely missing a large proportion of benefits, as well as potential liabilities,” said Bailey Church, lead for Public Sector Accounting Advisory at KPMG Canada. “It is effectively a huge systematic oversight.”

The report points to three pathways to take now to mainstream recognition of the role and financial value of services nature provides:

Allow for the inclusion of natural assets from public sector financial statements, as currently being considered by the Canadian Public Sector Accounting Board, which sets standards for public sector accounting.
Establish national guidelines and standards for identifying and valuing natural assets in Canada.
Engage Canadian financial institutions and organizations in setting frameworks and metrics that account for the value of nature, guide private-sector investments to protection and restoration opportunities, and enable the measurement of the return on investment in nature.
Internationally, countries— including the United Kingdom, South Africa and the United States— have taken steps to value nature in their national accounting systems. With motivated local governments and a wealth of natural assets, this report shows that Canada can still be an agenda setter rather than an agenda taker in this space.

“Canada’s local governments are showing how understanding the value of services from nature can steer action on the ground to manage natural assets effectively,” said Roy Brooke, executive director of Municipal Natural Assets Initiative. “Ultimately, it’s the action that counts, not just assigning a value.”

Currently, nature is effectively assigned a financial value of zero, with little incentive for effective management. This report argues that this must change if Canada is serious about investing in nature, the basis of our economy.