The natural resources of Sanikiluaq owe much to its geographic location. The hamlet is on one of the largest islands within the Belcher Island archipelago–Flaherty Island. The town is situated near the shores of Eskimo Bay to the north and Sanikiluaq Lake to the south. The archipelago consists of approximately 1500 islands with a land area of around 1300 square kilometers; they are located about 150 kilometers from mainland Quebec in the southeastern part of Hudson Bay. Though this is the southernmost point of Nunavut and is far below the Arctic Circle, the climate is still that of the Arctic tundra. There are no trees on the islands and temperatures are often very cold and accompanied by strong winds. As with many northern islands, the weather is noteworthy for its sudden winter storms and dramatic temperature drops. Travelers to the island should take this into account.
The Hudson Bay is home to over fifty species of birds that have adjusted to the arctic weather conditions. Many of these birds make their home on the island where Sanikiluaq is located. The numerous large cliffs near the hamlet, some as high as 150 meters, are nesting grounds for many species of birds, including the Eider duck. The people of Sanikiluaq have long depended on the Eider for food and for their feathers which they have collected from the nearby cliffs. Amongst the other species of birds that live on the island are loons, Merganser ducks, rock ptarmigan, snow bunting, Peregrine falcons, black guillemot, arctic tern, Lapland longspur, and the snowy owl. Many of the birds depend on marine life for food, and the shore beds are home to mussels, sea urchins, and sea cucumbers.
Fishing and subsistence hunting remain important to the economy of Sanikiluaq. Local marine life includes beluga whales, walruses, and seals; polar bears, lemmings, foxes, and arctic hares are found on land. Since 1978, reindeer were reintroduced to the region to replace the vanished caribou herds. Aside from the larger marine life, the coast near Sanikiluaq is also home to arctic char, capelin, cod, lumpfish, and sculpin. In the lakes, one can also find char and white fish. Considering the importance of the natural environment, during the 1990s, the community of Sanikiluaq took a leading role in addressing risks to the marine ecology and wildlife of the region, spearheading a movement to observe and assess risks to the environment posed by the development of hydroelectric dams.