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White Tower Park stormwater pond project in Gibsons, B.C., on Dec. 2, 2021. The Public Sector Accounting Board is looking at ways municipalities can add the value of its natural assets to their balance sheets.Jackie Dives/The Globe and Mail

The independent body that sets accounting standards for Canada’s public sector is proposing rule changes that would allow municipalities to include the value of wetlands, grasslands and other natural assets on their balance sheets.

The Public Sector Accounting Board (PSAB) has been scrutinizing ways to recognize the value of a wide range of natural settings, from rivers and ponds to fields and marshes. The board is embarking on a complex process that would pave the way for new standards governing what is allowed to appear on financial statements.

Advocates for revamping accounting rules say that during a time of heightened concerns over climate change, it’s crucial to place financial values on natural assets and their environmental benefits. For example, adding the value of a river or marsh to its assets would enhance a city’s credit rating and potentially reduce its borrowing costs.

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Proponents also say assigning values to natural resources would motivate civic leaders to take better care of those environmental assets.

“PSAB is active and engaged on the topic of accounting for natural resources,” board chair Clyde MacLellan said in a statement on Wednesday. “Broadly, areas like this are directly in line with our 2022-2027 strategic plan, which includes a key objective to support forward-looking accounting and reporting initiatives.”

Roy Brooke, executive director of the non-profit Municipal Natural Assets Initiative, welcomed the prospect of new accounting rules, although he cautioned that time is of the essence for Canadian cities, towns and villages seeking to help combat climate change.

“The jury’s out on how fast PSAB will move, but they’re certainly listening,” he said in an interview.

On the local level, the goal is to help fight climate change while increasing resilience to disasters such as flooding, and also reversing biodiversity loss.

“Local governments are closest to the front lines – that’s where the land use, zoning and planning decisions are happening,” Mr. Brooke said, adding that the changes would also apply to the provincial and federal governments.

Mr. Brooke is one of the co-authors of a report released on Wednesday titled Getting Nature on the Balance Sheet. The other co-authors are his colleague Michelle Molnar; Joanna Eyquem, managing director of the University of Waterloo’s Intact Centre on Climate Adaptation; and Bailey Church, a partner at consulting firm KPMG Canada who specializes in accounting advisory services.

The study said the spotlight is being placed on accounting treatment of natural assets because current rules prevent municipalities from assigning a financial value to the important climate role played by natural surroundings.

“There is therefore an increasingly urgent need to overcome the institutional, economic and accounting failures to recognize nature and its value,” the 40-page report said.

Ecosystems can contribute directly to local governments by providing services such as stormwater runoff, erosion control and maintaining water quality. The report said many local governments’ financial statements overlook the value of natural assets.

More than 100 Canadian municipalities have already found creative ways in recent years to recognize natural assets informally, such as notes attached to civic documents, but traditional accounting rules have prevented environmental asset valuations from appearing on balance sheets.

The study lists 91 municipalities that track natural assets in some unofficial manner, including 35 in British Columbia and 27 in Ontario.

“Local governments still are not allowed to put natural assets on their financial statements,” Ms. Eyquem said. “It’s fundamental that nature is worth something, because otherwise, why would we invest in it? So if it’s worth something, you would manage it more effectively.”

As part of the fact-finding process, PSAB is looking for guidance from the International Public Sector Accounting Standards Board. The deadline to submit comments to the international group for its consideration is Oct. 17. The international board released a consultation paper in May which it called a “first step in developing guidance on the recognition, measurement, presentation and disclosure of natural resources in the public sector.”

But Ms. Eyquem said PSAB needs to do much more on its own to push the climate agenda within Canada’s financial circles and not rely on the international body to do the heavy lifting for potential revisions to accounting standards.

Mr. Church said PSAB perceives complications in what is shaping up to be a drawn-out process, including setting guidelines for municipalities to demonstrate that they control specific areas within their jurisdiction and determining methods to measure what those areas are worth.

“There are a lot of wrinkles that need to be worked through,” he said. “It’s not by any means as far advanced as it needs to be, but it’s a start and that’s a good thing.”

It could take at least 18 months for PSAB to work out the fine print, Mr. Church said. “PSAB’s strategy for standard setting is that they adopt and refer to the international public sector accounting standards. It doesn’t mean Canada is obligated to use those, but PSAB refers to those as a starting point.”