How to Recognize Nature’s Value in Natural Asset Management
Oscar Wilde once observed that “a cynic knows the price of everything and the value of nothing”. A century and a half later, it turns out that both ‘value’ and ‘cost’ are important concepts when it comes to natural asset management, but must be approached carefully to gain useful insights.
First, let’s spend a minute on why “value” and “nature” even belong in the same sentence.
Nature and Critical Services
Simply put: natural assets such as forests, wetlands, riparian areas, and coastal dunes provide services that underpin our economies, societies, and life itself; historically, our actions suggest otherwise.
Let’s use a wetland as example. It may provide infrastructure services to adjacent communities including stormwater management, drinking water filtration, aquifer recharge, and flood risk reduction, along with non-infrastructure services such as carbon storage, recreational opportunities, and urban cooling. However, traditional planning, zoning, land use investment, and other decisions typically do not contemplate, much less integrate, a detailed understanding of these services. As a result, neither site specific nor cumulative risks related to the alteration or loss of natural features are brought into decision-making.
This includes financial risks: if the wetland in our example is degraded, there is no way to understand what future costs an organization may incur in terms of property damage or replacement infrastructure to provide lost services, unless basic due diligence has been done to understand the asset in the first place.
Basic due diligence should include, at a minimum, understanding what natural assets a given entity (e.g., a local government) relies upon; the condition of those assets; the risks they face; and the services they provide.
Natural asset management includes these due diligence steps and gives local governments and others a starting place for understanding the services they depend on for resilient and liveable communities and the health of natural system. And, this typically happens before even discussing values and costs.
If every organization in Canada got even this far — understanding services from nature — then decision-making would be vastly improved, to the betterment of natural systems, service delivery, human well-being, and affordability.
Bringing in Value and Cost
Western society places a premium on dollar values, so these are often part of natural asset management alongside a broader understanding of services from nature.
Some benefits from nature have market prices, which makes valuation simpler. For example, there is a market price for carbon offsets, harvested timber, and non-timber forest products like mushrooms that are sold commercially. However, markets are sometimes a poor reflection of overall societal value, and, in the case of pure public goods like air quality, they are not bought or sold so there is no market price. In these cases, non-market valuation can be applied.
The valuation of these public goods (referred to as ‘non-market ecosystem services’) are measured in money values based on the willingness of individuals to pay (WTP) for a given good or service, or on their willingness to accept (WTA) for giving up a good or service. WTP and WTA reflect the wellbeing derived from a good or service and does not necessarily correlate with price. For example, the price people pay for water is often far less than the value they place on water. This is particularly the case when the good or service is scarce.
When dollar figures are brought into the picture it is important to understand why we want them, what they tell us, and perhaps above all, what they do not. Just as cash flow and balance sheets provide entirely different pictures and serve different purposes in accounting, different values express different things in natural asset management.
It is vital to recognize that dollar figures tell us nothing about nature’s intrinsic value, just as salary or net worth do not speak to an individual’s value as a human being.
However, dollar figures can offer insights, some of which can be very useful in decision-making. We’ve included some examples below.
Ecosystem services valuation
Let’s return to the wetland example. It provides a multitude of services, some of which are understood and can be expressed in financial terms. Where this is the case, there are well-established economic methods to derive values.
For example, to determine the value of stormwater management, flood risk reduction, and drinking water filtration services, modelling can be used to determine the capital and operating costs of engineered alternatives to provide the same services; or, more approximate estimates can be developed using standard economic methods. A recent example of such a valuation can be found in Ontario’s Grindstone Creek, where the estimated capital value of stormwater management services alone is equivalent to over $2 billion in engineered infrastructure replacement costs, excluding operating costs.
To these infrastructure services can be added, for example the value of carbon storage, which can be readily calculated; as well as the value of recreation, for example, using accepted economic techniques such as revealed preference. For example, NAI’s recent work in the Town of Pelham determined annual values for carbon sequestration to be an estimated $12.2 million per year, and recreation another $1.6 – $4.1 million per year.
A valuation of infrastructure and non-infrastructure services provide a composite valuation of ecosystem services. They necessarily represent a minimum understanding of values since they are based on a subset of the wetland’s services, often those that are of most interest to a given entity. These values are used in asset (and natural asset) management to better understand the contributions of natural assets as a part of overall infrastructure services, and to inform implementation and budget decisions related to the management of these assets.
Ecosystem services valuations can be used for:
- Raising awareness that nature is more than something pretty to look at and has economic value in addition to its intrinsic value.
- Helping beneficiaries see the value of services or benefits — for example an insurer, local government, and business owner might each care about different elements of the valuation.
- Providing a rationale for increased investments in operations, maintenance, management actions, and stronger governance.
- Determining the value of services in various future potential scenarios (e.g., climate change, following restoration, or degradation).
Replacement costs
Replacement costs are used in asset management to give organizations a sense of what it would cost to replace an asset. They are applied to engineered assets based on the assumption that they will eventually degrade and be replaced, as grey infrastructure has a finite lifecycle. The concept must be used carefully when considering natural assets, for several reasons.
- When properly maintained, many natural assets will likely never degrade or need replacement; in fact, they will improve over time and with protection and stewardship.
- It is unlikely that an entity would ever choose to simply “replace” a forest they way they could a swing set or park bench.
- Many natural assets are irreplaceable, in several senses of the word. Aquifers, for example, can never be ‘replaced’ — the best humans can do is build filtration and treatment plants to recreate some aquifer services. Badly degraded areas, such as a clear-cut forest, may take decades or generations to return to more pristine states.
- Some things are simply too priceless to even consider loss and replacement, in the sense of being too important, or possibly sacred to some.
When applied to natural assets, replacement costs will often tell us what a full-scale restoration project might involve, should the natural system require this. This can have uses including:
- Making sure the value of a natural asset is recorded. This may help justify its maintenance since protecting and maintaining a natural asset is cheaper than restoring it once damaged.
- Demonstrating financial liabilities where the asset is not sufficiently protected and maintained from external pressures (e.g., overuse, encroachment from urban developments, pollution, extreme weather, etc.).
- Highlighting capital cost of natural assets that has been provided for free by nature.
Levels of service and valuations
Levels of service provide another way to think about costs and value. Levels of service define expected performance of assets and services, and are essential for asset management. Defining them for natural assets enables organizations to be clear about the services they expect from natural assets, the investments and actions they need to take to get those services, and the cost of those investments and actions.
Let’s return to our wetland example. Suppose modelling shows that it stores enough water to protect an adjacent neighborhood from a 1 in 100-year storm event; but, after looking at climate projections, the town wants protection for a 1 in 200-year storm event.
In this case, the town can determine what rehabilitation, acquisition, or management is required to increase the wetland’s storage capacity to allow it to absorb flow from a 1 in 200-year event, and costs for doing so.
These figures can help organizations plan investments to achieve a given level of service.
Accounting and Natural Assets
Accounting rules in Canada do not allow natural assets to be considered as assets at all for accounting purposes. This leads to challenges including natural assets showing up on the books only as a costly expense to maintain, and potentially creating a risk that financial statements are creating a misleading picture of financial risks and liabilities. Efforts to overcome this will not be straightforward, but they are essential and ongoing (see Getting Nature on the Balance Sheet for NAI’s current work with KPMG and the Intact Centre on Climate Change Adaptation).
Nature is Priceless, Not Valueless
All communities and organizations will benefit when they understand better the natural assets they own and rely on, the specific services they receive, and the actions they can take to continue benefitting from these services. Determining ecosystem service, replacement cost, and other values are not synonymous with natural asset management, but when used carefully, can be an important component.
