The Compelling Case for Government Accounting for Natural Assets

From: Peter van Dijk, James K. Stewart and Joanna Eyquem
To: Canadians concerned about natural asset values
Date: February 14, 2025
Re: The Compelling Case for Government Accounting for Natural Assets

As governments face the accelerating impacts of climate change and biodiversity loss, valuing and reporting natural assets in public sector accounts is more critical than ever.

Natural assets deliver essential services such as water storage and filtration, clean air, and climate regulation, supporting economies and human well-being. These assets help mitigate severe weather events such as flooding and extreme heat that are becoming more frequent and intense due to climate change. Investing in natural capital preservation and restoration enhances resilience, reduces economic and financial risks and lessens future government spending.

Although natural assets are integral to economic resilience and sustainable development, their valuation is absent from most governments’ finance reports, apart from a small minority of forward-looking municipalities. Inadequate accounting for natural assets means their contributions often go unrecognized, hindering sound financial decisions and economic policymaking. Clearer government accounting for the true costs and economic contributions of these assets is critical to direct public sector financial flows in a way that truly supports the public interest and human well-being.

The Intact Centre on Climate Adaptation’s 2025 guide on integrating natural asset disclosures into government financial reports represents a significant step forward in enhancing financial reporting practices. Developed with input from more than 120 professionals, including many chartered professional accountants, the guide offers practical recommendations for unaudited disclosures.

The inclusion of natural assets in financial statements remains dependent on formal standards from Canada’s Public Sector Accounting Board, which are expected to align with the finalized related draft standards from the International Public Sector Accounting Standards Board.

Economic Implications: The economic case for broad-based public sector adoption of financial reporting of their natural assets is compelling. The absence of proper accounting means the costs of pollution, wetland destruction, and biodiversity loss are neither accurately measured nor allocated to users. In the context of the ongoing large-scale depletion of natural capital, especially its plunge since the early 1990s, this glaring omission is especially problematic.

Despite its crucial role in economic growth, productivity and resilience, natural capital remains overlooked in mainstream economic frameworks and policy. For instance, Canada’s ongoing loss of wetlands persists in spite of their estimated $225 billion annual value in ecosystem services. Integrating these values into fiscal decision-making can encourage investments in conservation initiatives and natural capital (“green”) infrastructure projects.

Fiscal Impacts: Proper accounting for natural capital can help governments address rising acute and chronic fiscal exposure to climate change and biodiversity loss. Emergency spending due to extreme weather events (acute risks) and ongoing costs for climate adaptation (chronic spending needs) continue to escalate. Accurate financial reporting can identify cost-saving opportunities and materially improve the assessment of green infrastructure investments, especially versus traditional man-made (“grey”) infrastructure.

Debt Management and Borrowing Capacity Effects: Integrating natural capital into financial reports would enhance financial market scrutiny and improve credit risk assessments for public sector issuers. Contrary to the concerns of some critics, while government asset bases would expand by incorporating natural capital, the borrowing capacity of public sector issuers would not change. Rating agency views, as well as investor demand for and pricing of public sector credits, reflect the debt servicing capacity of government borrowers. This capacity is based on key criteria such as the sustainability of operating and capital budgets, economic fundamentals, and the ability to generate revenue – not solely on asset valuation.

Additional factors constraining debt capacity would be the greater transparency with natural capital accounting regarding the increasing acute and chronic risks for governments. Any rigorous assessment of public sector trends in their aggregate natural capital in recent decades would also show a marked deterioration in these assets’ quantity and quality over time.

Greater transparency in financial reporting of natural assets could drive better fiscal decision-making and help attract investors interested in climate-conscious projects. It would enable governments to better demonstrate their commitment to fiscal prudence and sustainable development and foster greater investor confidence in their financial management strategies.

Natural capital accounting enhances transparency, reduces economic vulnerabilities, and fosters more prudent fiscal policies. It is a vital step toward climate adaptation, biodiversity conservation, and responsible governance. Governments must act decisively to integrate natural assets into their financial frameworks. They already have the tools to do this in their financial reports. At a time of extraordinary risks from US policy and the urgent need for effective Canadian action, stemming the erosion of our natural capital must be a priority to support Canada’s economy.

Peter van Dijk and James K. Stewart are senior fellows at the C.D. Howe Institute and Joanna Eyquem is Managing Director, Climate-Resilient Infrastructure at the Intact Centre on Climate Adaptation.

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The views expressed here are those of the authors. The C.D. Howe Institute does not take corporate positions on policy matters.