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Christian Heller, CEO, Value Balancing Alliance

Natalia Moudrak, Director of Climate Resilience, Intact Centre on Climate Adaptation

Robyn Seetal, Principal, IkTaar Sustainability

David Steuerman, Deputy Director, Global Affairs Canada

Mike Puddister, Director, Restoration and Stewardship at Credit Valley Conservation

Roy Brooke, Executive Director, Municipal Natural Assets Initiative

 

Beyond the immediate health and economic impacts of the COVID-19 crisis, one of the most pressing threats facing Canada and the world is the degradation of nature, incontrovertibly exacerbated by climate change.

The emerging ecological disaster has been matched by an increasingly destabilized global economy and gaping inequality, which have fuelled destructive populist politics that are threatening the core of many established democracies. Our relationship with nature has put civilization on a dangerous path, one that has us testing the limits of our planet. As we recover from the pandemic, we have an opportunity to create a new normal. One fundamental challenge will be ensuring that nature is understood to be of core importance to business models – ­and that its value is properly accounted.

Current measures of GDP are often distorting. Economic activity, whether productive or destructive, is seen as a positive and encouraged. Our approach to our personal bank accounts is quite different: money comes in (salary, benefits, other income) and money goes out (taxes, rent, food, etc). If the latter consistently exceeds the former, the account is depleted and we risk spiralling into debt and bankruptcy. Shift that framing to a global model, replace bankruptcy with ecosystem, societal and economic collapse, and we get a clearer picture of the value of green accounting.

A lot of groundwork has already been laid.

NGOs and numerous other organizations have emerged to provide guidance to reporting organizations and users, including the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD), the Corporate Reporting Dialogue and the International Integrated Reporting Council (IIRC). These organizations have developed environmental reporting standards for the calculation and disclosure of environmental metrics.

Additionally, there has been significant documentation of the process for gathering data, converting company-level results to impacts and dependencies, and selecting prices by, among others, the Capitals Coalition, ISO 14007 and 14008 protocols, and the Impact Institute.

There are also many examples of financial institutions (Impax, ASN, Manulife, etc.) and companies (Kering, BASF, etc.) that have begun piloting valuation and integrating natural capital into decision making.

A number of Canadian municipalities have begun the shift to a new normal, one that recognizes that nature is our most vital asset. They are measuring, valuing, investing in and ultimately managing natural assets such as forests, wetlands and foreshores for the vital municipal service-delivery benefits they offer, such as storm water management, drinking water filtration and coastal zone protection. A key organization driving this effort is the Municipal Natural Assets Initiative (MNAI), which helps local governments understand and manage natural assets within their core financial and asset systems just as they would with critical engineered alternatives.

MNAI’s findings are particularly illustrative of the value that natural assets offer for climate resilience. It has found, for instance, that a seven-kilometre riverbank in the Oshawa Creek watershed in Ontario provides $18.9 million of stormwater conveyance benefit to nearby communities that would otherwise require an engineered solution. Naturally occurring ponds in White Tower Park in Gibsons, B.C., provide $3.5 to $4 million of stormwater storage services annually.

MNAI works directly with municipal governments, creating norms and tools that allow natural asset management to become mainstream practice for local governments across Canada.

Clearly, natural infrastructure assets play a role in climate resilience, and their contributions can be quantified in dollars and cents. In 2016, a framework was established by the Intact Centre on Climate Adaptation (University of Waterloo), Insurance Bureau of Canada and the International Institute for Sustainable Development to help assess this contribution.
Public sector financial statements, however, have not yet recognized natural infrastructure as a valuable asset. A prohibition in the CPA Canada Public Sector Accounting Handbook (Financial Statement Concepts, Section PS 1000, Paragraph .57), states:

“Purchased natural resources and Crown lands are recognized in government financial statements. However, when natural resources and Crown lands have been inherited by the government in right of the Crown and have not been purchased, they are not given accounting recognition as assets in government financial statements. These items are not recognized as assets because the costs, benefits and economic value of such items cannot be reasonably and verifiably quantified using existing methods.”

While this exclusion results in conservative financial reporting, it also means that financial statement users have no way of knowing the extent or value of natural infrastructure assets, and how they might contribute to a public sector entity’s future ability to provide services. Financial statement users also have no transparency concerning any potential changes in the value of these natural assets. This creates a dichotomy in public sector financial reporting.

If, for instance, a municipality has vast natural resources, such as wetlands, forests and ponds, it’s prohibited from reflecting those as an asset on its financial statements. The municipality is also not required to report in its financial statements whether those natural resources have been damaged by pollution. This lack of transparency ultimately results in less accountability for safeguarding natural resources.
Recent statistics suggest that the loss of natural infrastructure in Canada is already a pressing problem. In southern Ontario, an estimated 72% of the original wetlands have been lost to development (e.g., agriculture, urban sprawl and other land conversion). In Alberta, approximately 64% of the original wetlands in settled areas no longer exist. In B.C., more than 70% of the original wetlands have disappeared in the lower Fraser Valley and parts of Vancouver Island, and an 85% wetland loss has been documented in the South Okanagan.

Conversely, allowing public sector entities to account for natural assets would make financial statements more transparent and would improve accountability on preserving the natural infrastructure that society and businesses rely on.

As Canada advances its climate commitments made under the Paris Agreement, the United Nations’ Sendai Framework for Disaster Risk Reduction, and the Pan-Canadian Framework on Clean Growth and Climate Change, it needs to revise its accounting rules to enable public sector entities to use natural infrastructure for climate change mitigation and adaptation. If it does not change its internal accounting rules, Canada’s natural assets will continue to degrade and disappear – and the costs of climate catastrophes will continue to climb.

Nevertheless, most companies are in the dark when it comes to accounting for their impacts and dependencies on the environment, and investors struggle to compare what little disclosure there is in a meaningful way.

Many businesses look at this as a form of corporate social responsibility (CSR) rather than as central to their way of operating. As a result, they make only cosmetic changes or apply green accounting to side projects – but don’t touch their core enterprise management systems. In addition, many of these changes don’t extend to supply chains, which are responsible for most of the impacts. Even when they do, the generally small to medium-sized enterprises on the lower tier of the supply chain will be ill-equipped to take meaningful action. A mixture of economic and technical support and meaningful regulations will be necessary to encourage and enable the changes needed. This will also require some degree of cooperation at the international level, to establish universal standards (an exercise for the UN, the World Trade Organization and various regional trade forums to work on).

How do we close the gap?

The Capitals Coalition is a global group – encompassing many larger companies, governments, international organizations and standards bodies – that shares knowledge from around the world, establishes global standards and advocates to convince the various players to synchronize their efforts. It has also developed a series of protocols that combine current thinking from different organizations.

There is a strong interest in getting Canadian governments, companies and standards bodies more deeply involved in the work of the Capitals Coalition. To this end, a series of roundtables in Ottawa and Toronto are being planned to bring together stakeholders to share information and best practices. Ideally, this will result in the development of a Canadian chapter of the coalition, which will allow for more regular sharing of information and ensure that Canada is represented in the work of the Capitals Coalition globally.

The Value Balancing Alliance (VBA, a new business-led non-profit) is standardizing the process of integrating business into society and nature for better decision-making, as part of the work being done by the Capitals Coalition. In line with the European Green Deal, the VBA has been tasked by the European Commission to develop generally accepted accounting principles and guidelines around environmental impacts for business. This is expected to soon lead to a common standard (which consolidates numerous other initiatives) for measuring and valuing environmental impacts in monetary terms.

This summer, the VBA will make public an early version of a methodological tool for companies to measure their impacts on society: environmental boundaries, social stability and inclusion, and economic prosperity. This will be followed in September by a version that integrates public reporting tools to assess an enterprise’s value more comprehensively, including additions for social capital, human capital, natural capital and governance.

Working closely with the Capitals Coalition is the Impact Management Project, helping investors measure and report the impacts of their investments.

What would it take to create a new normal in which the economic subsystem operates in symbiosis with the larger planetary and societal system that makes life on Earth possible?

 

1. A few things are required for this to happen within the market system:

Redefine prosperity and adapt our measures of success

  • We must view ourselves as part of nature and part of a world that depends on nature.
  • We must address the blind spots that are not covered by GDP, the main metric for prosperity, by incorporating comprehensive wealth, or a capitals approach to measuring, valuing and reporting on prosperity and success.

2. Update our accounting standards and develop related guidance

We need tools for accountants to value nature so it can be properly accounted for in income statements and balance sheets, starting with large corporations and governments all the way down to small businesses and individuals. Practically, this will require major accounting standard-setting bodies (critically the International Accounting Standards Board and the Financial Accounting Standards Board) to adopt accounting-for-nature principles and detailed guidance to enable implementation.

3. Establish supporting regulations

We need governments to establish the rules to close the gap between a company’s environmental profit and loss (EP&L) account and actual profit and loss, perhaps through regulatory support of integrated reporting.

4. Re-allocate capital

We need to incentivize investors to re-allocate investments in companies, taking multi-capitals into account and providing a net-positive value to nature, society and the economy.

 

As Peter Drucker famously said, “What gets measured, gets managed.” Let’s get on with measuring the one asset on which all other assets rely upon.

 

Watch our Valuing Nature roundtable, recorded May 22, 2020.

 

 Other relevant initiatives working on more holistic measurement of business value and impact:

● Impact-Weighted Accounts initiative out of Harvard Business School
● European Commission sustainable taxonomy
● World Economic Forum initiative to come up with common metrics for reporting sustainable value creation
● Accounting for Sustainability, a program of The Prince of Wales’s Charitable Foundation (PWCF)
● The Canadian Public Sector Accounting Board has convened a technical working group to address the exclusion of natural assets

 

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