What is Natural Capital?

What is Natural Capital?

Natural capital is the world's stock of natural resources and ecosystems—including geology, soil, air, water, and all living organisms—that yields flows of ecosystem services providing value to people. The concept frames nature as an asset that generates returns (clean water, fertile soil, stable climate, pollination) and can be depreciated through overuse or enhanced through investment, mirroring the treatment of financial, manufactured, and human capital in economic thinking.

Why It Matters

Natural capital underpins all economic activity. The World Bank estimates that natural capital accounts for 23% of the wealth of low-income countries, where dependence on agriculture, fisheries, and forestry is highest. Even in high-income economies, sectors from pharmaceuticals (bioprospecting) to insurance (natural flood defenses) to technology (rare earth elements) depend on natural capital stocks.

Yet natural capital is being depleted at unprecedented rates. The Global Assessment Report on Biodiversity and Ecosystem Services documented that 75% of land surface is significantly altered, 66% of ocean area experiences increasing cumulative impacts, and 85% of wetland area has been lost. This depreciation threatens the ecosystem services that economies depend on—a risk that financial markets are only beginning to price.

The Natural Capital Protocol, published by the Capitals Coalition, provides a standardized framework for businesses to identify, measure, and value their natural capital impacts and dependencies. Over 400 organizations have applied the protocol, generating insights that reshape supply chain decisions, site selection, risk management, and stakeholder engagement.

The financial sector is integrating natural capital into investment analysis. The Network for Greening the Financial System (NGFS) has identified nature-related financial risks as systemic. The TNFD framework requires financial institutions to assess portfolio exposure to natural capital depletion. Central banks in the Netherlands, France, and Brazil have published assessments showing that significant portions of their financial sectors are exposed to nature-dependent economic activities.

How It Works / Key Components

Natural capital encompasses renewable resources (forests, fisheries, freshwater systems) that regenerate over time if managed sustainably, and non-renewable resources (minerals, fossil fuels, soil in human timescales) that are finite. The distinction is critical for management: renewable natural capital can be maintained indefinitely through sustainable use, while non-renewable capital requires efficiency and substitution strategies.

Measurement approaches range from biophysical assessments (hectares of forest, tonnes of soil organic carbon, population counts of key species) to monetary valuation (dollar value of water purification services, timber production, or carbon storage). The UN's System of Environmental-Economic Accounting (SEEA) provides a statistical framework for national-level natural capital accounts, adopted by over 90 countries.

Corporate natural capital assessment follows the Natural Capital Protocol's four stages: frame (why assess natural capital?), scope (which impacts and dependencies?), measure and value (quantify in biophysical and/or monetary terms), and apply (integrate findings into decision-making). The TNFD's LEAP approach (Locate, Evaluate, Assess, Prepare) provides a complementary framework specifically designed for financial disclosure.

Risk assessment identifies where natural capital depletion could affect business performance. Physical risks include water scarcity affecting operations, soil degradation reducing agricultural yields, and extreme weather increasing costs. Transition risks include regulatory restrictions on natural resource use, shifting consumer preferences, and liability for environmental damage. Dependencies and impacts across the value chain often reveal risks and opportunities invisible to traditional financial analysis.

Council Fire's Approach

Council Fire helps organizations identify, measure, and manage their natural capital dependencies and impacts using established frameworks including the Natural Capital Protocol and TNFD. We translate ecological assessments into strategic insights that inform risk management, investment decisions, and stakeholder disclosures.

Frequently Asked Questions

How is natural capital different from ecosystem services?

Natural capital is the stock—the forests, soils, waters, and organisms themselves. Ecosystem services are the flows—the benefits these assets generate (timber, clean water, carbon storage, pollination). Managing natural capital sustainably ensures ecosystem services continue; depleting natural capital reduces or eliminates service flows.

Can natural capital be valued in monetary terms?

Yes, though with important caveats. Methods exist to monetize many ecosystem services (replacement cost, avoided damage, market valuation of provisioning services). However, some natural capital values—existence value of species, spiritual significance of landscapes—resist monetization. Monetary valuation is useful for decision-making but should complement, not replace, biophysical assessment.

Which industries are most dependent on natural capital?

Agriculture, forestry, fisheries, and water utilities have the most direct dependencies. However, virtually all industries depend on natural capital through their supply chains—food and beverage, textiles, pharmaceuticals, construction, and tourism are particularly exposed. The ENCORE tool maps these dependencies at sector and subsector levels.