Natural capital: economic benefits assessment

Scale & Size of Investment

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, from the previous section, to different funding categories and their assumed time horizons.

The overall confidence rating for estimations of scale and size of investment in this section is 'moderate' due to assumptions, data gaps and other uncertainties or risks (e.g., rapidly expanding markets). This implies that the results presented in the section should be interpreted with caution. Specific assumptions made in the model for this project are explained below, whenever appropriate to the discussion.

Modelling funding categories and time horizons

The time horizon of this study is 10 years (between 2022-2032), which is in line with the time horizon of the finance gap in the 2021 GFI study. Nevertheless, the GFI study estimated only the value of investment required to achieve the core nature outcomes; it did not determine how and at which point in time the finance gap would start to be actively decreased through private market investments (i.e. beyond the public committed spending identified at the time). As a result, for the purpose of this study, the GFI finance gap per activity had to be adjusted to reflect the anticipated current and future market developments (i.e. such as through the public and private drivers / enabling mechanisms identified in the previous chapter).

To achieve this, the size and timing of spending to close the finance gap over the next 10 years was estimated for each nature-related activity. The timing category assigned aimed to reflect the maturity of the relevant drivers and enabling mechanisms in Scotland. Where possible, areas of spend were mapped onto and across specific time periods – this detailed mapping was based on the collective knowledge of the project team and expert stakeholders who provided input on modelling assumptions for the GFI model adapted for Scotland during the February 2023 workshop.

The range of different timings and assumptions for the drivers and enabling mechanisms applied in the study for Scotland covered:

• Mechanisms that are ready to operate and scale up, and are assumed to increase within five years. Example mechanisms within this category are the Woodland Carbon Code and Peatland Code which are already in existence across the UK. 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^[9].
• Mechanisms with unclear development pathways that 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.

Appendix A, Table A.1 shows detailed timing assumptions for each nature-related activity across all outcomes. These detailed assumptions account for granularity in assumed timing of spending. For instance, the project team determined that the nature-related activity "Sustainable soil management" is expected to increase in Year 3, which falls within the first timing assumption category (increase within five years).

Modelling and funding assumptions

Different market-related mechanisms have different rates of maturity and / or expected rate of development. With overlaps, scale and timing assumptions, the project team was able to model the expected future financial investment into nature recovery.

Final assumptions used to estimate the total anticipated reduction in the finance gap per nature-related activity are shown in Table 7. Participant input from the workshop in February 2023 helped to refine these timing assumptions and to identify and match nature-related activities with the appropriate drivers and enabling mechanisms for Scotland.

In Table 7, the last column reports the reduction in the finance gap that is expected to be addressed until 2032 through the drivers and enabling mechanisms identified for each activity. The potential predicted reduction totals £11.7 billion and covers 58% of the overall finance gap for Scotland^[10]. This leaves an estimated outstanding finance gap for the period 2022-2032 of £14.6 billion^[11].

Note that as some of the drivers and enabling mechanisms are assumed not to be ready to be implemented with an immediate effect, they can only help address the nature-related activity finance gaps shown in Table 4 during part of the 10-year timescale^[12]. Hence, despite the assumption that the annual maximum reduction in the finance gap per outcome can be equal to a tenth of the total finance gap estimate for this outcome (i.e. each year the gap can be reduced by an equal amount (in real terms) across the 10-year period^[13]), the annual reduction can start occurring at a different point in time depending on each outcome. For instance, the finance gap for "All clean water" is £3,179 million from 2022-2032 for Scotland in the GFI model, but the estimated reduction in the finance gap expected through the drivers and enabling mechanisms listed for that activity is £954 million (as the market mechanisms and other drivers for this outcome will not be ready before Year 6 over the 10-year time span, see "Timing assumed" in Table 7). Similarly, the finance gap for "Sustainable soil management" is £320 million, but the estimated reduction in the finance gap expected is £256 million (as the drivers and enabling factors are not ready to be implemented with an immediate effect).

For some spending, new / updated commitments have been made since the GFI model was developed. For example, the Scottish Government Nature Restoration Fund (NRF) has committed £65 million over a ten-year period^[14]. As this spending is already committed, it reduces the finance gap estimated in the GFI model for Scotland from 2022-2032.

Certain nature-related activities show a finance gap of "Unknown" because the GFI model was not able to produce a finance gap based on a missing required and/or committed spending figure for that nature-related activity. There was one nature-related activity ("Reduce risk of flooding through natural flood management") for which the finance gap is £0 as the committed spend exceeds the assessed required spend.

The modelling and funding assumptions and final finance gap estimates outlined in Table 7 are used in the subsequent sections to model the expected socio-economic impacts of anticipated investment in nature in Scotland.

Notes:

(1) Some nature-related activities are excluded from this table as the timing assumption was indeterminate.

(2) The nature-related activity "climate mitigation through bio-carbon", indicated with a single asterisk (*), was broken down into two timing assumptions in this table as the status and timing of the various drivers and enabling mechanisms within the activity vary.

(3) The last column on reduction in finance gap shows estimates of figures that are not discounted.