Natural capital: economic benefits assessment

Investment in nature objectives

The first phase of the project involved scoping and determining nature objectives for Scotland and the required scale of investment in those objectives (including already committed and additional spend needed to meet the nature objectives). This section provides an overview of nature objectives, natural capital markets and investment requirements, both public and private. It is based on the Green Finance Institute (GFI) model on finance gaps for nature-positive outcomes, with additional analysis of the drivers and enabling mechanisms to propel private investment for nature objectives in Scotland.

Nature objectives, natural capital markets and investments

The Scottish Government's commitment to net zero and a nature positive economy reflected in its National Strategy for Economic Transformation (NSET) recognises the key role that natural capital markets can play in achieving them. Scotland benefits from a wide range of ecosystem services provided by its natural capital, such as provision of clean water and biodiversity that underpins food security.

As described in the previous section, an ambitious increase in scale of overall investment in nature, including private funding, is required to close the finance gap. Scotland has been leading work to develop viable natural capital markets across the wide range of nature-related outcomes. For example, it has supported the development of the Woodland Carbon and Peatland Codes aimed at financing projects leading to woodland creation and peatland restoration respectively. It also recognises the need to continue developing new markets to address the finance gap for other nature-related outcomes. Many of these financing drivers and enabling factors have not been introduced yet but the efforts to implement them are ongoing (e.g. biodiversity, water quality).

This and the following section outline the key Scottish nature-related outcomes (and activities) and link them with the relevant natural capital markets and investments which, if implemented, could support the Scottish Government's efforts to address the nature finance gap.

Introduction to the GFI model

The UK-Nature-13102021.pdf">Finance Gap for UK Nature report (2021) was commissioned by the Green Finance Institute (GFI) and produced by eftec with the support of Rayment Consulting Services. This serves as the primary reference for undertaking analysis of nature objectives, natural capital markets and investments for Scotland for this study. The overall purpose of the GFI report was to "identify the finance gap across the UK to achieve nature-positive outcomes in order to assess the potential need for private investment." The GFI project steering committee was comprised of a range of public, private and third sector and country-specific experts, including public bodies from across the UK and Scotland such as Joint Nature Conservation Committee, Environment Agency, Defra, NatureScot and Scottish Forestry.

In this report, the "GFI model" refers to the nature finance gap model developed to estimate the current and required spending on nature across the UK which was summarised in the GFI report. The GFI model covers six geographic boundaries: United Kingdom (UK-wide), England, Wales, Scotland, Northern Ireland and Overseas Territories. In this current report, only Scotland-specific estimates were used. Given the high uncertainty around the long-term market developments and public commitments aimed at addressing the nature objectives, this study looked only at the 2022-2032 GFI figures (i.e. the short-term, 10-year horizon)^[6].

Investment requirements were estimated for each of the four UK countries, which provided the data for Scotland used in this work. The GFI model is composed of seven "nature-related outcomes". In the absence of sufficiently well-defined nature-related outcomes for England and each of the three UK Devolved Administrations (DAs), the investment targets analysed in the GFI model were adapted from seven of the ten environmental outcomes outlined in Defra's 25 Year Environment Plan for England as shown in Table 1, as well as drawing on input from the project steering committee (including experts from Scottish public sector organisations).

For the purposes of this study, no further change to the nature-related outcomes in the GFI model was made. Given the scope and resources of this study, the GFI model adequately covered key nature-related outcomes in the Scottish context and produced relevant finance gap estimates across the outcomes.

The GFI model distinguishes three main nature spending results: (i) committed; (ii) required; and (iii) finance gap. Committed spending is public spending that has formally been committed (and in some instances invested) to date (within the 2022-2032 assessment period); required spending indicates the funding needed to achieve the targets defined by the nature outcomes. The finance gap therefore shows the difference between the required and committed spending. The GFI model primarily implies anticipated spending from the private sector as the existing public commitments are often found to be insufficient to address the finance gap^[7]. The finance gap for Scotland as estimated by the GFI model serves as an appropriate starting point for assessing the value and scale of private investment that may be required to achieve stated nature outcomes for Scotland, as well as the potential economic impacts of this investment estimated in subsequent sections of this report.

Description of GFI outcomes and nature-related activities for Scotland

The GFI model consists of seven nature-related outcomes (listed and defined in Table 2). While each outcome is unique and the model produces a specific finance gap for each outcome, the outcomes are not always mutually exclusive – there may be instances where spending may contribute to more than one outcome. For instance, increasing plant species abundance as part of biodiversity and nature restoration may help to reduce flood risk through natural flood management measures or reduce carbon emissions, both of which would contribute to other nature-related outcomes. The model produced both unadjusted and overlap-adjusted finance gap figures to present the gross and net spending required to achieve each nature-related outcome.

Source: GFI, eftec and Rayment Consulting (2021)

In the GFI model, each outcome has at least one associated "nature-related output" (or "nature-related activity" as referred to in this report). A nature-related activity is a detailed type or category of spending under each of the seven broad nature outcomes. Some outcomes such as "clean water" are not broken down into more detailed activities, whereas other outcomes such as "enhance biosecurity" consist of multiple activities. Table 3 outlines and defines each nature-related activity across the seven nature outcomes using the definitions from the GFI model.

Table 4 then presents a breakdown of the estimated finance gap for Scotland for the period 2022 to 2032. Where a value is not presented (i.e. a blank cell), the GFI model did not determine a figure for the committed spending, required spending or finance gap for that particular nature-related activity. The finance gap was assessed as £0 for only one outcome ("Reduce flood risk") as the committed spending exceeded the required spending for the ten-year period^[8]. The finance gap was indeterminate for one outcome ("Enhance biosecurity") due to data gaps. For each of the other five outcomes, the finance gap across any of the nature-related activities is aggregated at £20.4 billion and shown in the "overall gap" column.

The Scottish Government Nature Restoration Fund (NRF) is a multi-year £65 million fund that grants awards to projects focusing on wildlife and habitat restoration and / or addressing biodiversity loss and climate change. In an update to the GFI model, this study treats £65 million as additional committed spending under "Protect and / or restore biodiversity." The last two rows of Table 4 show totals across required spending, committed spending, finance gap and overall gap for both the 2021 GFI model estimates (GFI figures only) and the updated model (with GFI adjusted for additional NRF committed spend).

Source: GFI, eftec and Rayment Consulting (2021)

Notes:

(1) Nature-related activities for which no finance gap, required spending and/or committed spending was given for Scotland in the GFI model are indicated with a single asterisk (*).

(2) Nature finance gaps estimated in the GFI model can be divided into two types: a "specific" finance gap and an "overall" finance gap. The specific finance gap for a given nature-related outcome is derived by taking the difference between the assessed required spending and the committed spending for that outcome. The overall finance gap is an aggregate of all nature-related outcomes for a selected region (e.g., Scotland) and time period, with adjustment for overlaps between outcomes.

Note: For outcomes with multiple nature-related activities, the overall gap is a sum of finance gaps across the activities within that outcome. For some outcomes, the overall gap is adjusted for any overlap across the activities and outcomes to avoid double counting, e.g. safeguarding landscape features might simultaneously help protect biodiversity. For "Clean water" and "Reduce flood risk," the overall gap is a repeat of the finance gap shown for the single, aggregated nature-related activity. An overall gap is missing for "Enhance biosecurity" due to data gaps. The last two rows of Table 4 show totals across required spending, committed spending, finance gap and overall gap for both the GFI model (GFI figures only) and the updated model (with GFI adjusted for additional committed spend from the Nature Restoration Fund (NRF) which was not considered in the scope of the GFI study). For more information about the assumptions used in the GFI analysis please refer to the GFI Finance Gap for UK Nature Report: UK-Nature-13102021.pdf">https://www.greenfinanceinstitute.co.uk/wp-content/uploads/2021/10/The-Finance-Gap-for-UK-Nature-13102021.pdf At the outcome level, Table 4 shows that "Climate mitigation through bio-carbon" (approximately £8,870 million) and "Protect and / or restore biodiversity" (approximately £6,542 million) constitute the outcomes with the largest finance gaps in Scotland from 2022 to 2032.

Further details on GFI study data and extrapolation methods for Scotland can be found in the Appendix.

Description of drivers / enabling mechanisms for Scotland

The total finance requirements identified in Table 4 represent substantial potential spending. It is unrealistic to expect such an increase in finance to happen in a single year. Therefore, to understand the expected size and timing of spending to address the finance gap for nature, it was necessary to consider what might stimulate the relevant spending. This study developed a typology of Scotland-specific drivers and enabling mechanisms needed to foster private (and in some cases also public) investment into nature outcomes and activities.

Table 5 presents definitions of selected drivers and mechanisms identified as relevant to Scotland.

Sources: (1) David Foreman and The Rewilding Institute, What is Rewilding? (n.d.). (2) World Economic Forum, How biodiversity credits can deliver benefits for business, nature and local communities (2022). (3) IUCN UK Peatland Programme, Introduction to the Peatland Code (n.d.). (4) Woodland Carbon Code, UK Woodland Carbon Code (n.d.). (5) NatureScot, Catchment management (2023). (6) (International Organization for Standardization, Certification (n.d.). (7) NatureScot, Flood management (2023). (8) NatureScot, Scottish Government Nature Restoration Fund (NRF) (2023).

Figure 3 presents a classification of natural capital markets and mechanisms from non-public sector entities for Scotland. In this study, market structures are broken down into "current" and "potential". Current market structures are those that are presently implemented and functioning whereas potential market structures are those that are still in concept or development stages. Regulated sectors are those that are subject to some form of regulatory oversight. Finally, other private sector investment covers investment from private sources that are not part of a formal market structure. Note that the figure presents a subset of drivers and enabling mechanisms, which also include policy and other mechanisms.

Table 6 pertains to drivers and mechanisms across the GFI outcomes and associated activities that are relevant to Scotland. By and large, these tend to support multiple outcomes. For instance, voluntary biodiversity credits can be used towards multiple nature-related activities in the biodiversity outcome, but may also be relevant to the "Provide accessible green and blue space" activity which falls under the nature-related outcome "Improve access and engagement with natural environment." Similarly, Woodland Carbon and Peatland Codes can contribute to all nature-related activities, barring any marine-specific ones, across the seven outcomes. This is because many of the nature-related outcomes are interrelated at a high level (i.e. spending may contribute to multiple outcomes).

Notes: (1) This is a subset of drivers and enabling mechanisms, which also include policy, regulatory and other mechanisms. (2) The table provides the list of drivers and enabling mechanisms only for the outcomes/ nature-related activities for which the finance gap was estimated in the GFI model. (3) "Enhance biosecurity" is not shown in this table as it is the only outcome with one aggregate indicator. No drivers and enabling mechanisms were identified for this outcome due to data gaps in the GFI model.