environmental assessment
iStock.com / Daniel Balakov

This article appears in the April 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

What is the value of natural assets such as forests, wetlands, rivers and grasslands?

Take a look at the financial accounts of the municipal governments and public-sector agencies that own the bulk of Canada’s natural infrastructure and you’ll find an answer that Joanna Eyquem simply cannot abide: zero.

Although natural assets don’t generate cash flow, said Eyquem, managing director of climate resilient infrastructure at the University of Waterloo’s Intact Centre on Climate Adaptation, there’s no doubt they contribute significantly to bottom lines across the country through a variety of valuable services. Those services — which the public tends to notice only after they have fallen victim to destruction or development — include carbon storage and sequestration, and mitigating the impact of flood and erosion.

However, under current accounting regulations, Canada’s public-sector authorities are barred from listing the value of these natural resources in their financial statements.

“We haven’t traditionally valued nature, but it’s becoming more and more mainstream for national and local levels of government to recognize that it does provide financially valuable services,” Eyquem said. “If we don’t make that financial value transparent, there’s a risk that we won’t manage natural assets well, and we will lose things without even realizing what we are losing.”

A recent report Eyquem co-authored with representatives from KPMG LLP and the Municipal Natural Assets Initiative urged the Canadian Public Accounting Standards Board and its international counterpart to change regulations. This proposed change is the first in a three-step process to bring the natural-asset class into the financial mainstream and accelerate private investment in nature-based assets.

Once natural assets can be included on financial statements, the report states, national standards should be developed for their identification, management and valuation.

In addition, the report calls for financial institutions to set metrics that account for the value of nature and enable the measurement of returns on investment in natural assets. The proposal builds on the recently formed Taskforce on Nature-related Financial Disclosures (TNFD) — a G20-backed initiative designed to enable financial institutions to incorporate nature-related risks and opportunities into their decision-making.

Stephen Freedman, head of research and sustainability, thematic equities, with Pictet Asset Management in Geneva, Switzerland, has noticed a recent spike in interest in natural capital in both policy-making and financial services circles. He has seen rising interest in a biodiversity market modelled on the existing trade in carbon credits, which has led to the creation of a whole set of carbon-credit investment products.

“While I think that the idea of transferring this type of framework to nature and natural capital is a good one, it’s at a really early stage,” Freedman said. “We’re just grappling with basic concepts still.”

He explained that investor coalitions and scientific advisory groups working to reduce biodiversity loss have used the global infrastructure built to combat climate change as a template. For example, the TNFD follows in the footsteps of the Taskforce on Climate-related Financial Disclosures, whose recommendations are now integral to institutions’ net-zero planning.

“The positive side is that we can piggyback off what has happened on climate,” Freedman said. “The whole process for biodiversity is maybe five or six years behind climate, but it’s moving much faster.

“On the negative side,” Freedman added, biodiversity “is a much more complex problem than climate.” Although the challenge of reducing greenhouse-gas emissions to net zero is a daunting one, he said, that environmental equation is relatively simple because of the way carbon dioxide is pumped into the atmosphere.

“You have one big pot, so location doesn’t really matter. Ultimately, there is one budget for the planet, and efforts are aimed at mitigating those emissions,” Freedman said.

By contrast, damage to natural assets manifests itself in numerous ways.

“If you want to tackle biodiversity loss, you ultimately have to operate at a level higher upstream on those forces. And so, in a way, it’s much more comprehensive,” Freedman said. “Getting there is going to require a very steep learning curve, where people have to start understanding these biological processes a lot better.”

In the meantime, he said, investors can begin engaging the companies in their portfolios regarding biodiversity topics and encouraging them to comply with the TNFD framework once it’s finalized.

“These standards initially will only be voluntary,” Freedman said. “So, it’s something where nudging portfolio companies and signalling that we, as investors or asset managers, care about that type of disclosure will contribute to setting a virtuous cycle in motion.”