What is Natural Capital?

Natural capital is a term that describes an economy's natural resources such as water, timber or oil.

How Does Natural Capital Work?

Let's say Company XYZ is a paper manufacturer. It owns 50,000 acres of forestland in various states, which it uses to harvest timber and replants with trees for future harvest. Company XYZ has a lot of natural capital.

Countries with a lot of natural capital can become very prosperous if they can learn how to leverage that capital. For instance, if a particular country happens to have 75% of the world's supply of a particularly useful mineral, it has a distinct advantage over other countries that produce the remaining 25%.

Why Does Natural Capital Matter?

Having natural capital is often a tremendous competitive advantage because this form of capital is often limited. However, natural capital requires unique maintenance compared with financial capital, for instance. Natural capital is often part of an ecosystem, and so harvesting, redeploying or changing natural capital can create ripple effects that can harm the environment and a company's reputation. For instance, harvesting trees can cause landslides, create water pollution or harm animal habitats. It is also important to note that not all natural capital is renewable.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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