Making Nature Count

“With aging infrastructure and mounting financial pressures brought on by climate change, we literally can’t afford not to put climate and our natural assets at the centre of how we plan and measure the success of our municipalities.” As the Chief Financial Officer for the City of Rossland, B.C., Michael Kennedy spends a lot of time thinking about how the organization can better conceptualize, account for and manage natural assets such as wetlands, forests and riparian areas to reduce risk, liability, and improve service delivery. “We’ve started inventorying our natural assets to get a sense of what we own, what we rely on, and to deliver core services like drinking water and stormwater management and will continue to make progress,” says Kennedy. The catch, though, is a Public Sector Accounting Board (PSAB) prohibition that prevents organizations such as his from considering natural assets as tangible capital assets.

It is one of the reasons Kennedy joined a record number of attendees at a November PSAB discussion group meeting, as well as a follow-up discussion at this year’s Local Government Accounting & Auditing Workshop—a joint professional development event presented in partnership with the Chartered Professional Accountants of BC (CPABC) and the Government Finance Officers Association of BC (GFOABC). In the virtual PSAB meeting, presenters and observers encouraged PSAB to allow public sector entities to reflect the monetary value of natural assets in their financial statements. The discussion group came to the consensus that PSAB should develop a formal project on natural assets guidance.

“Natural assets - such as wetlands, forests, streams - provide many core services to public sector entities such as local governments and their citizens,” said Roy Brooke, Executive Director, Municipal Natural Assets Initiative (MNAI). “These services range from filtering drinking water to managing stormwater. But currently, local governments cannot account for those natural assets or their services in their budgets or annual reports and by not doing so, they’re effectively putting a zero value on nature.”

As an example, a wetland or aquifer could provide the same functions as a water treatment plant, but “if public sector entities are only able to record the water treatment plant as an asset on their Statement of Financial Position, they have less accountability to maintain the wetland or aquifer,” said Bailey Church, Partner, Accounting Advisory Services, KPMG. This limitation has contributed to the mismanagement of natural assets and the deterioration of the services they provide.

In addition to providing core municipal services, natural assets play key roles in recreational, health and aesthetic amenities, biodiversity, and are instrumental in adapting to climate change by building climate resilience and reducing greenhouse gas emissions (often termed naturebased solutions). Natural assets contribute all these services and solutions that contribute enormously to the economy but is not properly reflected.

The discussion group encouraged PSAB to require local governments to disclose financial and other information about natural assets, which means local governments would need to understand how reliant they are on natural assets and their services, the risks those assets face, and the potential exposure of the local government to future costs. This knowledge will help local governments make informed decisions about how to best manage and budget for both engineered and natural assets.

This shift in perspective and approach that recognizes we cannot

Stormwater management in Oshawa, Ontario. MNAI’s project findings show that natural assets along this segment of the Creek currently provide a stormwater management value of $18.9 million.

Stormwater management in Whistler, B.C.

separate core decision-making from the natural world would be consistent with all global policy discussion, as expressed by many reports including the Dasguta Review, the IPBES, the World Economic Forum, the Living and Non-living Resources, and many others.

“The private sector has funds available to invest in natural capital but there is currently no consistent way of measuring the return on investment as natural assets are not routinely valued,” said Joanna Eyquem, Managing Director, ClimateResilient Infrastructure, Intact Centre on Climate Adaptation at the University of Waterloo. Luckily that is changing as more and more local governments in Canada, like the City of Rossland, are starting to account for natural assets in a meaningful way. MNAI’s work with nearly 100 local governments to-date has been developing standards, methodologies and tools to measure, value and account for natural assets and their services.

Now is a key opportunity in Canada for accountants to also play a role in recognizing the value of natural assets and supporting long-term management of the services they provide to our communities.

The PSAB discussion group meeting was a follow-up to its consultation paper earlier in the year where the Intact Centre on Climate Adaptation, KPMG, and MNAI coordinated a response with nearly 70 signatories representing Canada’s financial sector, most of Canada’s major cities, professional associations, asset management groups, consultancies, think tanks, research centres, river basin authorities, and NGOs. For more background, to read the response letter, or to get involved, please visit PSAB consultation response.

At the City of Rossland, Michael Kennedy continues to actively pursue a means to account for natural assets and other climate-related externalities. “It represents arguably both the biggest opportunity and threat to professional accountants,” said Kennedy. “One of the major challenges we face is lacking basic accounting standards on something so fundamental. We’ll find work-arounds but there is no question this prohibition is an impediment to considering the true value of services from nature.”

ROY BROOKE, Executive Director, Municipal Natural Assets Initiative served as Director of Sustainability for the City of Victoria between 2011-2013. Between 2003-2011 he worked for the United Nations, including the World Health Organization, United Nations Environment Programme and UN Office for the Coordination of Humanitarian Affairs. During his time with the UN he was based in Geneva, Switzerland, and later in Rwanda, where he was UNEP’s Environment Programme Coordinator. Prior to this he served as a political advisor to Canada’s environment minister.

JOANNA EYQUEM, Managing Director, Climate Resilient Infrastructure at Intact Centre on Climate Adaptation, is engaging the financial sector in considering natural capital and physical climate risk in investment decisions. Prior to joining the Intact Centre, Joanna was the National Climate Change Practice Lead at AECOM in Canada. She is a Professional Geoscientist (P.Geo.), Chartered Water and Environmental Manager (CWEM) and Chartered Environmentalist (CEnv.)

BAILEY CHURCH, Partner, Accounting Advisory Services Leader, KPMG, leads the National Public Sector Accounting Advisory service line at KPMG. Bailey is a well-known speaker at seminars and conferences across the country, including the Government Financial Officers Association, the Institute of Internal Auditors, the Financial Management Institute, the Canadian Comprehensive Auditing Foundation, and the Office of the Auditor General.