Getting nature on the balance sheet (although not quite yet…)

The University of Waterloo’s Impact Centre on Climate Adaptation has published Getting Nature on the Balance Sheet: Recognizing the Financial Value provided by Natural Assets in a Changing Climate.

The credited authors are Joanna Eyquem, Bailey Church, Roy Brooke and Michelle Molnar. The report focuses on the challenge of “mainstreaming recognition of the role and value of natural assets within a timeframe that supports accelerated investment in natural-climate solutions,” identifying “three avenues for short-term focus” as described in the executive summary:

  • Reverse Natural Asset Accounting Exclusions: Remove the explicit exclusion of natural assets from public sector financial statements, understanding that this does not obligate public-sector entities to include natural resources in their financial position statements…
  • Establish National Natural Asset Guidelines and Standards: Establish practical guidelines and national standards for inventory, management, and valuation of local government natural assets. The current development of a national standard for natural asset inventory is the first step in this process…
  • Engage Financial Institutions in Nature-Positive Action: Engage Canadian financial institutions and organizations in testing and refining the draft Task Force for Nature-Related Financial Disclosures framework (this was released in April 2022 for pilot testing and review, making specific mention of natural climate solutions as an opportunity to enhance natural resilience) and making investments that build natural capital. This includes both making investments that “do no harm” as well as actively investing in solutions that enhance and restore nature and the ecosystem services provided to people…

The first item refers to the fact that the current Conceptual Framework for Financial Reporting in the Public Sector specifies that certain types of assets are to be excluded from recognition in financial statements, including “natural resources and Crown lands that have not been purchased” (and also, by the way, “works of art and historical treasures.”). The report points out various consequences and risks under the current state of things, including:

  • Ill-informed decision-making: the costs of damage to natural infrastructure or the benefits of restoration are not appropriately factored into economic decision-making. Consequently, short-term monetary gains that often drive the degradation of natural assets are frequently prioritized above the long-term economic value of services provided year-on-year by intact natural assets.
  • Unknown or undocumented liabilities: Degraded natural assets may present otherwise undocumented liabilities. For example, a degraded aquifer can lead to substantial costs to find or build a suitable alternative water source.
  • Inappropriate representation of natural assets as an overall cost: Whereas the costs of managing and maintaining natural assets are included in financial reports, the value of services derived from these assets is currently excluded. Financial reports will therefore typically misrepresent the contribution of natural assets to the overall public sector entity budget.
  • Difficulty securing private investment in nature-based solutions: The exclusion of natural assets from public sector financial reporting makes it difficult to demonstrate the financial return on investment in nature-based solutions.

In setting that out, the publication has the good judgment to resist trotting out the tired old canard that “what gets measured gets managed” (although comes close in noting that “items that are not recognized risk being mismanaged.”) As we’ve addressed before, there’s a strong intuitive appeal to the measured/managed premise, backed up by the examples cited above, among countless others. But then you have George Monblot:

  • Unless something is redeemable for money, a pound or dollar sign placed in front of it is senseless: price represents an expectation of payment, in accordance with market rates. In pricing a river, a landscape or an ecosystem, either you are lining it up for sale, in which case the exercise is sinister, or you are not, in which case it is meaningless.
  • Still more deluded is the expectation that we can defend the living world through the mindset that’s destroying it. The notions that nature exists to serve us; that its value consists of the instrumental benefits we can extract; that this value can be measured in cash terms; and that what can’t be measured does not matter, have proved lethal to the rest of life on Earth. The way we name things and think about them – in other words the mental frames we use – helps determine the way we treat them.

As I suggested previously, if we think about it in a management context, it ought to be possible to see both sides. There’s little doubt that some entities could plausibly claim to better control the adverse environmental implications of their activities, as a result of having a way of quantifying those impacts, and then setting targets and monitoring progress relating to them. On the other hand, most of us can recall examples from our past or present work lives of how the drive to meet numerical targets can be counterproductive, at worst ignoring or even undermining their underlying point. Still, the overall drive toward better representation of such matters is surely for the best, if carried out in full awareness of the accompanying challenges. Whether the paper will succeed in accelerating that process remains to be seen…

The opinions expressed are solely those of the author.

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