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Canada’s natural-resource wealth must be included on balance sheets

Lyn Brown is managing director of the Council for Clean Capitalism. Julie Desjardins is director, reporting and capital markets, of the Chartered Professional Accountants of Canada.

The amount of natural-resource wealth within Canada's borders is impressive. Natural-resource assets, which include timber, oil, natural gas and other subsoil minerals, have been valued by Statistics Canada at about $1-trillion. This puts Canada in an enviable position relative to other countries.

As with financial and produced or physical assets, natural capital (land, ecosystems and natural-resource stock) generates economic value in various ways. Accounting for Canada's natural capital enables informed policy and capital-allocation decision making. While Statistics Canada has valued our natural-resource assets, it has not as yet fully incorporated natural capital into its national macroeconomic accounts.

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To understand the importance of accounting for and integrating natural capital in public accounts, consider the private sector. Strategic and operating decisions about a business affect its ability to create value and can only be effective or reliable if decision-makers have a complete understanding of relevant assets, liabilities, supply chains, resource bases, stakeholder relationships and other factors.

Today, governments face competing land uses – agricultural, industrial production, energy generation, housing development, recreation, to list just a few. Providing hard data that make the tradeoffs explicit in policy models would foster better-informed public debate and decision making.

Canada's ecosystems are vast and diverse, contributing essential factors to almost every thriving industry and municipality where businesses operate. Including natural capital in the national accounts is a necessary step toward identifying when and how the depletion of Canadian resources will affect the productive capacity of the economy. It will inform sustainable resource allocation and policy decisions.

The expansion of national macroeconomic accounts and the inclusion of natural capital in decision making are vital if the economy is to remain robust and generate opportunities for long-term value creation and prosperity for future generations.

It is promising then, that Statistics Canada has initiated the process of integrating "a portion of energy, mineral, timber and land resources" into the natural-resource stock accounts of the national balance sheet, with the first release slated to occur in December, 2015.

Statistics Canada has one of the most advanced monetary data sets in the world for subsoil assets and timber, which provides a logical and relatively inexpensive starting point to include our natural-resource wealth on the nation's balance sheet. Other countries have already made the move to begin to account for natural capital: Australia is already accounting for subsoil, land and timber assets. China has begun to develop a natural-capital balance sheet at the municipal level.

Natural-capital accounting as a tool for devising and evaluating economic strategy (as well as for policy formulation and evaluation) has proven successful around the world. We also have an important precedent here in Canada. Former Newfoundland and Labrador premier Kathy Dunderdale identified the durability of the province's economic strength as a movement "from the position of strength gained as we developed our non-renewable resources for our benefit, to a greater, lasting strength based upon a prosperous, infinite renewable-resource-based economy."

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Similar reasoning is reflected in Norway's leverage of its natural-resource wealth, largely from oil and gas revenue, into $1.1-trillion in investments through its sovereign wealth fund. Compare that with Alberta's Heritage Fund portfolio of just $17.9-billion.

Canada, therefore, has an extraordinary opportunity to identify how and when wealth should be created through employing natural capital and, if appropriate, converting it into financial, intellectual and other capital.

The consequences of not accurately including or analyzing all pertinent resources in the context of a balance sheet can be damaging. To preserve and grow wealth, whether in a business or an economy, decision makers need all relevant information.

According to the 2013 Trucost report Natural Capital at Risk: The Top 100 Externalities of Business, unpriced natural-capital costs from production activities total $7.3-trillion (U.S.) globally. These would have a tangible impact on domestic macroeconomic accounts, and could impact policy and capital-allocation decisions.

Expanding the national balance sheet may eventually go beyond natural-capital stocks, or assets, to include liabilities such as costs for greenhouse gas emissions and pollution, which, at some point, may need to be settled by the state. There is an ongoing debate in both academia and policy circles about what liabilities would merit recognition, and how best to measure or integrate them.

At present, the initial steps Statistics Canada is taking to account for the value of mineral assets and timber are prudent and commendable; the infrastructure required to account for the physical resources is already in place.

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Adjusting the national accounts is certainly nothing to take lightly, especially when other countries, corporations, non-governmental organizations and individuals will seek international comparability sooner or later. Nevertheless, strong precedents have been set, domestically and internationally, for Statistics Canada.

While not everyone agrees on whether integrating natural capital into the national accounts can capture its full market value, there is a strong consensus that if kept invisible, effective tracking and management will remain impossible.

Including natural capital on balance sheets is the first step toward ensuring that our forests, rivers, lakes and ecosystems, as well as other natural resources, will endure to meet our future needs.

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