Natural capital is a way of thinking about nature as a stock that provides a flow of benefits to people and the economy. It consists of natural capital assets such as water, forests, and clean air that enable economic activity by providing businesses with materials, inputs to production, protection from natural disasters, and absorption of the pollution they emit. Any adverse change in a natural capital asset can have a negative effect on the businesses that depend on it; in much the same way as the impairment of a conventional asset might affect the cashflows of the business owning it. The portfolios of financial institutions are exposed to these natural capital risks that affect the businesses that they lend to, insure, or invest in. By focusing on risks to businesses resulting from environmental degradation, rather than on the businesses’ environmental impacts which have traditionally been the focus of environmental risk assessment, natural capital risk analysis allows financial institutions to see the risks that they are exposed to in a new light.
