Natural capital: economic benefits assessment

Introduction & Context

The Scottish Government (SG) commissioned WSP and Economics for the Environment Consultancy (eftec) to assess the cumulative, cross-sector economic benefits of private investment in natural capital on regional and national markets in Scotland. The project commenced in October 2022 and was completed in April 2023. This document is the Final Research Report for the project and provides guidance on how to use the Green Finance Institute (GFI) nature finance gap model (the "GFI model") adapted for Scotland, and the supporting economic model generated for the analysis of economic impacts. This report is best read in conjunction with the model, which has been published alongside the report.

This project is a progression from the local economic impacts project that WSP undertook for Scottish Government in 2021/22 on Understanding the local economic impacts of natural capital investment. One of the key differences between the previous and this study is the greater focus on the regional economy in Scotland in this report.

Aims and objectives for the project

The aim of the project was to assess the potential cumulative and cross-sector economic benefits of investment in natural capital in Scotland. To achieve this, the project objectives were to:

• Provide a comprehensive understanding of the potential and predicted impacts of national and regional natural capital market development and drivers, in relation to core and wider economic benefits;
• Link to current policy development work on scaling up private investment; and
• Help understand the implications of SG intervention and scenarios around different market factors like regional economic partnerships, international opportunities and beyond.

Context for the project

Scotland's National Strategy for Economic Transformation (NSET) emphasises the role of a natural capital approach in supporting a just transition to a net zero, nature-positive economy with the overall vision that by 2032 Scotland will be a wellbeing economy thriving across social, economic and environmental dimensions^[1]. Driven by the need to achieve net zero, meet ambitious targets for woodland creation and peatland restoration, promote biodiversity, and to understand and maximise the vast array of physical, economic and social benefits of natural capital, Scotland has committed to create a values-led, high-integrity market for responsible private investment in natural capital as part of the NSET. This market will be supported by a national project pipeline for nature-based solutions.

As an early action to support the delivery of this NSET commitment, Scottish Government published a set of Interim Principles for Responsible Investment in Natural Capital^[2]. The Interim Principles set out the Scottish Government's ambitions and expectations for a values-led, high-integrity market for responsible private investment in natural capital to communities, investors, land managers, land owners, public bodies and other market stakeholders.

Scotland has been at the forefront of work to create viable markets for nature, for example by supporting the development of the Woodland Carbon Code and the more recent Peatland Code, to name just two prominent examples. At the same time, Scotland has been leading work to ensure that new markets are inclusive and equitable, including via land reform policy and just transition policy and planning. In Scotland, a range of current natural capital market development efforts like the Scottish Wildlife Trust's (SWT) Riverwoods programme or recent Landscape Enterprise Networks reflect these principles of integrated land management and equitable distribution of benefits within blended finance initiatives. Scotland is also increasing public investment in nature, with the £65 million Nature Restoration Fund (NRF) that was secured through the cooperation agreement between the Scottish Greens and the Scottish Government.

These efforts are timely and likely increasingly urgent. At COP26 (2021) hosted in Glasgow, the burgeoning world of climate finance was a central theme. As many world leaders declared, up to half of climate finance needs to be linked to climate adaptation, making the impacts and market potential of nature capital benefits like flood prevention, air quality improvements, drought and heat protection even more urgent to understand. At COP26, the First Minister endorsed the Leaders' Pledge for Nature, an international commitment to reverse biodiversity loss and create a "nature-positive" world by 2030. The Scottish Environment Strategy sets out the framework for this transition with emphasis on supporting responsible private investment in nature-based solutions. At COP26, the newly created Glasgow Finance Alliance for Net Zero (GFANZ), a coalition of private sector investors, committed trillions of dollars to fight the climate emergency to 2030 – just one sign of how quickly the demand for high quality natural capital and climate solution investment vehicles may grow. In this context, Scotland has a huge opportunity to become a world leader in the development of natural capital markets.

At the UN Biodiversity Conference (COP 15) in Montreal December 2022, the most important contribution Scotland made to the talks was the Edinburgh process, which Scottish Government led on behalf of the Convention for Biological Diversity. It saw over 300 regions, cities and local authorities around the world sign the Edinburgh Declaration, which commits to transformative action to protect biodiversity and calls for an ambitious global deal for nature. Scottish Government also launched its Biodiversity Strategy at COP15. This biodiversity strategy sets out a clear ambition for Scotland to be Nature Positive by 2030, and to have restored and regenerated biodiversity across the country by 2045. It commits Scotland to statutory nature restoration targets that future governments can be held accountable for, the restoration of vital habitats like Scotland's rainforest and peatlands at scale, and taking new steps to promote nature-friendly farming, fishing and forestry.

The Green Finance Institute (GFI) Finance Gap for UK Nature Report^[3] revealed that the finance gap to secure nature-related outcomes in Scotland, as defined in the GFI report^[4], is between 15 and 27 Billion pounds for the current decade (2022-2032). In addition, there is interest in understanding the types and numbers of jobs likely to be created by increasing natural capital investment, in line with the natural capital approach adopted in the NSET. Given the pace and scale of investment required to restore nature in Scotland, and the Scottish Government's commitment to a just and fair economy, there is a clear need to better understand the business case for investment and the potential economic benefits for local and regional economies.

Contents of the final research report

The report is structured as follows:

This introduction chapter sets out the aims and objectives of the research and explains the purpose of this report and its structure; as well as the context for the research including an outline of the policy context for natural capital investment.

Project approach and analytical framework explains the concepts and methodology used to conduct the overall study.

Investment in nature objectives provides a typology for analysing natural capital markets and flows of private investment into natural capital markets. This includes a description of the GFI model, how it links to nature-related activities, and the drivers and enabling mechanisms for private investment.

Scale and size of investment presents the funding categories, time horizons and assumptions that underpin the adaptation of the GFI model for natural capital in Scotland.

The chapter onthe economic impact of nature related markets and investments provides an overview of the environment-economy model and its linkages with the GFI model. In this chapter, the model is used to conceptually estimate the impact of the total investment in the different GFI categories.

Applying the model to regional case studies presents case study results from applying the Input-Output models to real-world scenarios across three different regions in Scotland; and helps analyse the international opportunities and barriers for natural capital markets in Scotland.

The chapter on using the model to show current progress in natural capital funding across Scotland provides a user template for how to input data into the environment-economy model.

Conclusions summarize the main findings from the overall project, and provide recommendations for further research.