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Natural Assets

In December 2022, COP15 in Montreal saw the successful adoption of the Kunming-Montreal Global Biodiversity Framework — a landmark agreement to preserve at least 30% of earth’s land and water by 2030. What gets measured, gets managed. The Institute for Sustainable Finance has been leveraging the latest satellite imagery data and machine learning models to map and appraise current natural assets in Canada.

What are nature and natural assets?

“Four realms – land, ocean, freshwater and atmosphere, make up nature.”1 The concept of natural assets, also known as natural capital, refers to “the stock of renewable and non-renewable natural resources (e.g., plants, animals, air, water, soils, minerals) that combine to yield a flow of benefits to people.”2 Charykov

Why do natural assets matter?

Nature provides the building blocks for human prosperity and for global economies. It provides us with essential resources such as food, fibre, fuel and water; regulates and maintains climate, air, soil, water and habitat; and enriches our health and well-being (e.g., through recreation and spiritual inspiration). It is estimated that US$44 trillion – over half of the world’s GDP, depends on nature.3

At the intersection of nature and climate, nature-based solutions, which harness the benefits of natural assets, are vital to reducing greenhouse gas emissions (i.e., climate mitigation) and building resilience against extreme weather events such as floods, droughts and hurricanes (i.e., climate adaptation). For example, forests, mangrove forests in particular, are powerful carbon capture and sequestration ecosystems; wetlands such as bogs provide a first line of defence against floods and erosion.

Public accounting for natural assets

Admittedly, human uses of natural assets are subject to market failures. This is known as the tragedy of the commons. Public goods such as nature are subject to depletion due to individuals’ tendency to act in their own interest.

However, we are starting to take positive steps toward valuing, preserving and restoring natural assets. With the historic Kunming-Montreal Global Biodiversity Framework, adopted at COP15, nearly 200 countries agreed to “ensure the full integration of biodiversity and its multiple values into policies, regulations, planning and development processes… and, as appropriate, national accounting…” (Target 14). What gets measured, gets managed. And by taking natural assets into account, the public sector will be able to make more informed economic and environmental decisions.

How does one account for natural assets? In order to consolidate global efforts and improve methodological alignment, in March 2021 the UN Statistical Commission adopted the System of Environmental-Economic Accounting Ecosystem Accounting (SEEA EA), a comprehensive statistical standard. The framework accounts for natural assets in both physical and monetary terms. Importantly, while the guidance document of SEEA EA acknowledges the limits of expressing values of natural assets in monetary terms, it notes that doing so helps decision-making and evaluating trade-offs.

Statistics Canada currently publishes the Ecosystem Accounts annually, based on the SEEA EA framework.

Private sector efforts and the TNFD

The private sector plays an instrumental role in achieving the ambitious targets and timelines of the Kunming-Montreal Framework, through aligning its capital flows with nature-positive outcomes. Meanwhile, changes in the natural world such as land degradation and deforestation can also materialize as financial risks to business that will pass on to the financial system via loans, investments, insurance, etc.4 Similarly, on the opportunity side, restored ecosystems with greater biodiversity can enhance current business operations and even create new markets.

To facilitate better nature-related target-setting and risk management, market-led and voluntary-based initiatives, such as the Taskforce on Nature-related Financial Disclosures (TNFD), have emerged over the last couple of years. The drafted TNFD framework (Beta v0.3) released in November 2022, is built on the four pillars of Governance, Strategy, Risk & Impact Management, Metrics & Targets.5

TNFD adopts a LEAP (Locate-Evaluate-Assess-Prepare) approach for risk and opportunity assessment, which covers locating the business-nature interface, evaluating nature-related dependencies and impacts, assessing material risks and opportunities, and preparing to respond and report.6 With much anticipation and engagement from Canada and across the globe, TNFD recommendations will be finalized in September 2023.

This series explores the foundations of sustainable finance, one of the most important emerging fields of our time. Sustainable finance aligns financial systems and services to promote long-term environmental sustainability and economic prosperity.