Physical climate effects and natural capital: interactions and implications for economic and financial risk

Elizabeth K. Kiser and Caroline Conley Norris

Chapter 3 in Handbook of Climate Change and Financial Markets, 2026, pp 25-57 from Edward Elgar Publishing

Abstract: Economic and financial risks arising from physical climate effects and attempts to lower these risks through adaptation figure prominently in a growing academic literature. A distinct but related literature seeks to measure, assess, and understand the value of natural capital assets and the potentially undermeasured services that flow from natural capital stocks. This chapter explores the interactions between physical climate effects and natural capital assets along several dimensions and analyzes four channels of risk amplification and mitigation that may flow from these interactions. Specifically, the geophysical and economic literature indicates how (1) physical climate damages can affect natural capital assets and service flows, (2) how natural capital assets can directly affect the process of climate change, (3) how natural capital assets can lessen physical climate damages, and (4) how human responses to climate change can directly affect natural capital assets through (4a) actions to mitigate the process of climate change and (4b) actions to adapt to physical climate damages. Upon reviewing these channels in the literature, we find that externalities are present that may cause mismeasurement of climate-related financial risks; that complementary investments in climate mitigation, climate adaptation, and natural capital assets have the potential to reduce economic and financial risks; and that improved measurement of these interactions could improve precision in risk assessments and policy analyses.

Keywords: Climate Change; Natural Capital; Ecosystem Services; Financial Risk (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035340415
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