Natural capital: economic benefits assessment

Executive Summary

Scotland has set a strong precedent for taking action to support responsible investment in natural capital as part of a just transition to a net zero and nature-positive economy. The Scottish Government's National Strategy for Economic Transformation (NSET) includes a commitment to developing a values-led, high-integrity market for responsible investment in natural capital. This builds on existing market mechanisms such as the Woodland Carbon and Peatland Codes, which aim to help mobilise private investment into nature-based projects.

This report builds on a project that WSP undertook for Scottish Government in 2021/22 on Understanding the local economic impacts of natural capital investment. Together with eftec, WSP looked at the economic benefits of committed, planned and investment gap spending (the Green Finance Institute (GFI) UK-Nature-13102021.pdf">Finance Gap for UK Nature report (2021)) to secure nature-related outcomes in Scotland by 2030.

The approach mapped the GFI outcome categories (e.g. clean water, protect and / or restore biodiversity, reduce flood risk) across different types of natural capital interventions (e.g. woodland creation and management, peatland restoration, regenerative agriculture) through desktop research and stakeholder engagement. These natural capital interventions allowed us to link environmental-economic activities, using Input-Output models and Standard Industrial Classification (SIC) codes identified in the previous study, to GFI outcome categories.

The study estimated that public and private investment forthcoming to address the GFI nature finance gap for Scotland (over the period 2022-2032) could be £12.5bn. Deploying this capital on nature restoration activities would generate an estimated output effect of £17bn into the Scottish economy, meaning every £1 invested in nature recovery would generate £1.35 for the economy.

In terms of jobs created, the potential economic impact of closing the £12.5bn nature finance gap investment could be around 146,000 direct and 197,000 direct and indirect jobs. The study also provided an indication of how these economic impacts could be distributed over time, based on the maturity of current, planned and future drivers and market enabling mechanisms.

The largest output effect was observed in silviculture and the provision of other forestry services, yielding an output effect of £4.4 billion and 66,990 direct and indirect jobs created. Significant output effects may also be seen in sectors concerning: (i) the renting and leasing of agricultural machinery and equipment; and (ii) in the provision of support services to forestry.

Mapping natural capital interventions to the GFI outcome categories

Of the 197,380 direct and indirect jobs created, 190 jobs may be leaked outside of Scotland. Although this is a small percentage of the total jobs created as part of the investment, investment in appropriate local training and skills provision could better position Scotland to retain these jobs.

Market Structures

Current

Woodland carbon code (established); data from FGS

Peatland code (expanding rapidly)

Catchment (natural flood management/nutrients) (pilots); Food & drink sector.

Potential

Short-term:Biodiversity credits (voluntary)

Medium-Long term: Saltmarsh Code

Agro-Forestry Code

Soil Codes

Finally, to ensure that the GFI and environment-economy models are fit for purpose, and to demonstrate their capabilities, the models were applied to three case studies in Scotland selected after stakeholder consultations (see below). These case studies capture different scales and type of natural capital interventions, funding sources and market / policy drivers (see figure above). Stakeholder responses suggest that private sector investment is motivated by clear policies, strategies, plans, regulations in addition to market drivers such as the various natural capital codes (e.g. woodland, peatland – see figure above).

Details of natural capital investment case studies considered in the research

Investment in natural capital across the three case studies ranges from between £1.7 million and £0.9 billion, covering an area between 424ha and 183,100ha. The natural capital investment generates an output effect ranging between £2.3 million and £1.1 billion, between 19 and 10,051 direct jobs generated, and between 27 and 13,495 direct and indirect jobs created. This is detailed in full on the figure below.

The model findings show high value for money from investment in natural capital interventions. There are differing natural capital interventions in each of the case study areas resulting in differing output effects. Edinburgh creates the highest investment-output ratio at 1.41, where for every £1 invested £1.41 could be generated in the local economy. This is followed by South Scotland at 1.38, and Loch Lomond and The Trossachs National Park at 1.35. This is predominately due to the natural capital interventions in which the investment is focused, with access creation having a greater investment-output ratio than others. The net jobs created across all three case studies is comparatively high with approximately 16 jobs created per £1 million invested.

By comparison, investment in the transport and storage sector, electricity and gas sector, chemicals sectors or construction sector would return an output-investment ratio of 1.34, 1.64, 1.27 and 1.53 respectively. Investing £1 million into these sectors would generate and support approximately 14, 6, 5 and 19 direct and indirect jobs, respectively. Compared to these industries the natural capital case studies offer a mid-range output-investment return and on the larger side of the employment-investment ratio, likely due to the labour intensity required.

Potential areas of skill shortage or gaps were analysed to find likely areas of job leakage, and potential regions in Scotland and outside of Scotland to which these jobs could be leaked. Given the type of natural capital interventions in the Borderlands, the leakage effect is negligible, with most jobs likely to be absorbed in the region. All three case studies require substantial labour inputs, which is a good indicator that they will support local jobs. However, some of the jobs are desk based and can be provided in any location.

The modelling framework developed in this study has strong implications for project and programme design and delivery. Stakeholders indicated that the model can be used for prioritising investments and also in partnering with various development partners and funding entities.

The time horizon of this study is 10 years (between 2022-2032), which is in line with the time horizon of the finance gap estimations in the GFI study. Using the adapted GFI model, the project team estimated the required scale of investment in nature objectives for Scotland by linking the nature-related activities, drivers and enabling mechanisms, to different funding categories and their assumed time horizons. This being said, different market-related mechanisms have different rates of maturity and/or expected rates of development. With overlaps, scale and timing assumptions, the project team was able to model the expected future financial investment into nature recovery along the following lines:

• Mechanisms that are ready to operate and scale up are assumed to increase within five years: Example mechanisms within this category are the Woodland Carbon and Peatland Codes which are already in use across the UK (the former being more mature). These codes are voluntary quality assurance and certification standards which are already operational and issue verifiable carbon credits for new woodland creation and peatland restoration projects, respectively, in Scotland and the rest of the UK;
• Mechanisms that are in development but still several years from being ready due to further R&D being required: These are assumed to increase spending during the middle of the 10-year period. Example mechanisms include voluntary biodiversity credits, which are currently in the early development stages in Scotland; and
• Mechanisms with unclear development pathways: These will primarily increase beyond Year 10. The precise form of these mechanisms still has uncertainties, and so they only stimulate increased spending towards the end of the 10-year period at best.

Going forward, it is crucial to ensure that economic benefits in the nature-based sector can be captured in local and regional economies by ensuring strong enabling frameworks and skills programmes. There is also the opportunity cost and risk of delaying investments (e.g. in terms of missing climate change targets, loss of first-mover advantage etc). Further, complementing the economic impacts with community benefits and wider social value can create stronger drivers for scaling up investments in natural capital. Strong partnership models are required as nature-based solutions can have multiple impacts and require a range of capabilities. Finally, the study and the newly developed models therein can be used to test the delivery and planning frameworks mentioned in Scotland's latest Biodiversity Strategy.