Bailey Church is partner of Accounting Advisory Services at KPMG LLP and Natalia Moudrak is director of climate resilience at the Intact Centre on Climate Adaptation at the University of Waterloo.
The unprecedented levels of government debt brought by the COVID-19 pandemic have Canadians questioning how this debt can be managed. The federal government’s Debt Management Strategy forecasts financial requirements of $469-billion for fiscal 2020-21 alone.
What is not reflected on the government’s balance sheet, however, is a significant source of wealth: the country’s natural infrastructure. The economic value of our abundant network of forests, wetlands and green spaces is not reflected in financial statements, even though it could be higher than our debt. Nature’s ability to capture carbon dioxide in the atmosphere – known as carbon sequestration – helps to slow down the rate of climate change. In coastal regions, dunes, reefs and coastal marshes reduce the impacts of storm surges, flooding and erosion. Elsewhere, wetlands, ponds and other green spaces protect communities from flooding, while providing a range of other valuable benefits – cleaner water, enhanced habitat and recreational space.
One argument for why natural assets aren’t currently recognized in government financial statements is that their value can’t be reliably measured. But new data-driven techniques are emerging to help make that happen. In 2016, the Insurance Bureau of Canada, the International Institute for Sustainable Development and the Intact Centre on Climate Adaptation established a framework to estimate the total economic value of natural assets. The group highlighted the value that wetlands offer in disaster-cost reduction for flood-prone communities. For instance, estimates show that wetlands in Southern Ontario would reduce damage costs to buildings in the Grand River watershed by more than $50-million if we were to experience another severe weather event such as Hurricane Hazel in 1954.
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, B.C., 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.
If these benefits were reflected in public-sector financial statements, they would provide a transparent accounting of nature’s economic contributions, and help communities maintain this precious resource over time.
Clear accounting guidelines and reporting standards are needed. Right now, if climate change or land development cause damage to our natural assets, the associated economic loss is not reflected in financial statements. But work is under way to address this. Canada’s Public Sector Accounting Board is looking at ways that natural infrastructure can be included in government financial statements and the International Public Sector Accounting Standards Board launched a project in 2019 to develop accounting standards for natural resources in the public sector. PSAB is collecting stakeholder feedback on an exposure draft of a conceptual framework by mid-May.
As Canada looks toward economic recovery, our natural assets can play a further role: Investing in sustainable management of our green infrastructure can create jobs. Mark Carney, United Nations Special Envoy on Climate Action and Finance, recently cited evidence from Europe that suggests sustainable infrastructure projects create five jobs more per $1-million invested than traditional projects.
Our country’s natural assets offer a hidden wealth that should be reflected in government financial statements, especially in the face of rising costs of extreme-weather disasters and rising debt levels caused by the pandemic. It is in the public interest to provide transparent information on its value and we are moving in the right direction. Canada’s role as co-lead of the Nature Based Solutions initiative under the Global Commission on Adaptation, for instance – which seeks to implement large-scale, nature-based solutions to “minimize climate risks and maximize economic, social, and environmental benefits” – should help propel investment into natural infrastructure and inspire fundamental changes to our accounting standards.
Canada has an opportunity to be a leader in creating new accounting standards to help us measure our hidden wealth and to reap the benefits of the “green recovery” that we need to achieve long-term sustainability and economic goals.
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