Natural capital: economic benefits assessment

Applying the model to regional case studies

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.

The three case studies cover different combinations of natural capital interventions and with different scales of capital investment involved. They were identified through collaboration with the project steering group and desk review of a longer list of potential case studies. A brief description of the three case studies is provided in the next section and the main economic findings (quantitative) are given below.

Depending on data availability within each region, the environment-economy model has been applied to an entire region for some case studies, and to a selection of projects in others. For example, the model has been applied regionally to the Loch Lomond and the Trossachs National Park (LLTNP), whereas, for the South of Scotland and the City of Edinburgh, it was applied to a selection of projects only. It was important to ensure representation of both rural and urban contexts across case studies, hence the application of the model to rural (LLTNP and South of Scotland) and urban (City of Edinburgh) contexts.

Figure 5 below provides a summary of the economic impact results for each case study. The output effect is always greater than capital expenditure and represents the indirect impact of any capital expenditure on natural capital projects in the regional economy. The potential number of jobs created by the capital expenditure and the output effect is shown as the direct jobs and direct plus indirect jobs, respectively.

There are differing natural capital interventions in each of the case studies 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 focussed, with access creation having a greater investment-output ratio than others due to the component activities such as construction having a higher output effect.

The net jobs created across all three case studies is comparatively high with approximately 16 jobs created per £1 million invested. Some of the jobs created will be temporary but a proportion will be permanent. Jobs related to maintenance and management are the most likely to be permanent.

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 greatest investment in £ and area is in the LLTNP case). 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 to 13,495 direct and indirect jobs created.

The City of Edinburgh has the highest output-investment ratio as a result of a greater proportion of their investment spend in higher output multiplier related SIC codes. For example 22% of investment falls within the construction of other civil engineering projects, which has one of the highest associated output multipliers.

Potential areas of skills 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. The following electoral regions were used to evaluate job leakages: Central Scotland, Glasgow, Highlands and Islands, Lothian, Mid Scotland and Fife, North East Scotland, South Scotland and West Scotland. The case studies encompass the regions West Scotland, South Scotland and Lothian^[24].

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. However, Loch Lomond and the City of Edinburgh are more likely to experience leakage to surrounding regions, given their lack of relevant specialisms in the types of natural capital interventions required. Loch Lomond and the City of Edinburgh are likely to experience leakage to other regions of 59% and 50% of direct and indirect jobs, respectively.

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.

Table 17 presents the natural capital interventions disaggregated by investment amount and time horizons for each case study. Approximately 11.6%, 52.7% and 100% of the total investment for Loch Lomond, South of Scotland and Edinburgh respectively is likely to happen in the short term. The majority of investment in Loch Lomond is assumed to be in the medium-to-long term given the physical scale of the Park and corresponding time to achieve natural capital goals. All investment timelines (South of Scotland and Edinburgh) or hectarage goals (Loch Lomond) were obtained through stakeholder engagement. A more detailed breakdown of these goals can be found in the footnotes.

Table 18 presents the natural capital interventions disaggregated by output effect and time horizons for each case study. Approximately 12%, 53% and 100% of the total output effect for Loch Lomond, South of Scotland and Edinburgh respectively is likely to happen in the short term.

Table 19 presents the natural capital interventions disaggregated by jobs effect and time horizons for each case study. Approximately 12%, 53% and 100% of the total jobs for Loch Lomond, South of Scotland and Edinburgh respectively is likely to happen in the short term.

Qualitative overview of the case studies

The three case studies, Loch Lomond and The Trossachs National Park, the Borderlands Natural Capital Innovation Programme in the South of Scotland, and the City of Edinburgh comprise projects that capture a range of natural capital interventions: woodland creation and management, peatland restoration and management, regenerative agriculture overall, regenerative agriculture management (covering the management of existing regenerative practises and not the conversion from traditional methods), coastal restoration, catchment approach to clean water, river re-naturalisation and natural flood management and footpath creation. The Borderlands in the South of Scotland and the City of Edinburgh case studies look at the impact of select projects, while the Loch Lomond and The Trossachs National Park case study accounts for a significant programme of nature restoration for the whole National Park.

Case study interviews were conducted with relevant stakeholders for each region, covering the following:

• Linking projects within each region to natural capital interventions in the model;
• Linking natural capital interventions in the region to the GFI outcomes;
• Project size in terms of geographic scale / extent in area (hectares) or investment value (£);
• Information on main habitats and management measures;
• Information on drivers and enabling mechanisms in relation to regulations and markets; and
• Information on the extent of private, public and blended financing initiatives.

Table 20 provides a key relating to graphics found in Table 21, Table 24 and
Table 27.

Case study 1: Loch Lomond and The Trossachs National Park

This case study focuses on Loch Lomond and The Trossachs National Park (LLTNP). The natural capital interventions that are key to the Park include woodland creation and management, and peatland restoration activities, followed by investment into visitor infrastructure to help enable sustainable access. The potential for natural capital investment in Loch Lomond and The Trossachs National Park covers nature activities such as 61,000ha of woodland creation and management, 54,100ha of woodland management, 56,600ha of peatland restoration, and 11,400ha of peatland management. The interventions listed in Table 21 were provided by the National Park Authority and, in consultation with them, mapped against natural capital interventions in the environment-economy model, and to GFI outcome categories.

Economic impacts of investment

The investment required for this total area of 183,100 hectares is £859,993,790, with a further £1,762,500 for footpath creation, the latter of which equates to 58,750 meters of track^[31]. Table 22 below provides a breakdown of capital expenditure, jobs and output effect by SIC industry code.

Table 23 examines the economic impacts of the natural capital interventions associated with the case study.

Financing the investment

Discussion with Park stakeholders provided more information on the sources of funding and the various policy and market drivers generating investment for these natural capital interventions.

Finance sources - Funding from national government, Peatland ACTION and Place programme. Other funding sources included community funding trusts, Countryside Trust and funding from forestry agencies such as RSPB, Forest and Land Scotland, Woodland Trust, National Park Authority.

Drivers and enabling mechanisms – the Woodland and Peatland code have been the main market enabling drivers for private sector funding. Our responses also suggested that private sector investment are motivated by clear policies, strategies, plans, regulations. In this case study, these specifically refer to Scotland's Forestry Strategy (2019-2029) and then the LLTNPA Trees & Woodland Strategy ((2019-2039), Draft National Park Partnership Plan (2024-2029) and Future Nature Route Map.

Case study 2: Borderlands Natural Capital Innovation Programme, South of Scotland

This case study focuses on the Borderlands Natural Capital Innovation Programme taking place in the South of Scotland (comprising Dumfries & Galloway and the Scottish Borders). The natural capital interventions that are key to the programme include woodland creation and management, peatland restoration, overall regenerative agriculture, regenerative agricultural management, and coastal restoration. Project-level information under the Natural Capital Innovation Programme has been provided through interviews with key stakeholders and from a report by the Borderlands Partnership/Hatch. The projects listed in Table 24 were provided by stakeholders relevant to the case study and, in consultation with them, mapped against Natural Capital Interventions in the model, and to GFI outcome categories.

Economic impacts of investments

The key projects outlined under the Borderlands Natural Capital Innovation Programme equate to investment of approximately £13 million^[33]. This investment in natural capital activities such as woodland creation & management, regenerative agriculture, regenerative agriculture management and coastal restoration could create significant economic impacts in the Borderlands area. The majority of the expenditure may be attributed to labour (61% of investment), with woodland creation and management being particularly labour intensive (see Appendix D for further breakdown of expenditure). Table 25 below provides a breakdown of capital expenditure, jobs and output effect by SIC industry code.

Table 26 examines the economic impacts of the natural capital interventions associated with the case study.

Financing the investment

Discussion with stakeholders associated with the Borderlands Natural Capital Innovation Programme provided more information on the sources of funding and the various policy and market drivers generating investment for these natural capital interventions.

Finance sources – Funding from the Borderlands Natural Capital Programme , Forestry Grants Scheme, private finance, Woodland Trust, National Lottery Heritage Fund, Tweed Forum. Scottish Blue Carbon Forum. Other public funding sources included: Peatland ACTION, Nature Restoration Fund, South of Scotland Tree Planting Scheme, the SEPA Water Environment Fund. Other private funding sources included: the Riverwoods Pioneer Fund, NithLife and the Tweed Forum Carbon Club.

Drivers and enabling mechanisms – the Woodland and Peatland code have been the main market enabling drivers for private sector funding, as well as biodiversity credits. Related supply chains are dairy, forestry and transport. Our responses also suggested that investment is motivated by clear policies, strategies, plans, regulations. In this case study, these specifically refer to the Solway Tweed River Basin Management Plan 3 (covering statutory targets for water environment improvements), local flood risk management strategies and plans; local biodiversity action plans; the South of Scotland Push for Net Zero; and climate emergency plans and route maps.

Case study 3: City of Edinburgh

This case study focuses on a selection of projects in the City of Edinburgh. Of these projects, the natural capital interventions that are relevant include woodland creation and management, clean water, river re-naturalisation and natural flood management, and access creation. The projects listed in Table 27 were provided by stakeholders related to the case study and, in consultation with them, mapped against natural capital interventions in the model, and to GFI outcome categories.

Table 27: Projects within the case study area – City of Edinburgh

Leith pollinator project & Craigleith and Prestonfield Raingardens
including low allergenic wildflower seed mix

Economic impacts of investments

An investment of £1.702 million in natural capital interventions including woodland creation and management, catchment-based approaches to clean water, river re-naturalisation and natural flood management in the City of Edinburgh. This equates to 424 hectares of intervention and generates 12,267 meters of footpath creation^[34]. These interventions create positive economic impacts for the City of Edinburgh. The majority of investment will flow into labour (77%) (see Appendix D for further breakdown of expenditure). Table 28 below provides a breakdown of capital expenditure, jobs and output effect by SIC industry code.

Table 29 examines the economic impacts of the natural capital interventions associated with the case study.

Financing the investment

Discussion with stakeholders at the City of Edinburgh Council for this selection of projects provided more information on the sources of funding and the various policy and market drivers generating investment for these natural capital interventions.

Finance sources – Funding applications have been put forward for the Facility for Investment Ready Nature in Scotland (FIRNS), the Woodland Trust, Greenspace Scotland, the Future Parks Accelerator (funded by the national Lottery Heritage Trust and Woodland Trust), and the Nature Restoration Fund.

Drivers and enabling mechanisms – the local strategies, plans and regulations relevant to this case study include Edinburgh Adapts, the Climate Change Adaptation Plan, Climate Ready Edinburgh, the Edinburgh Biodiversity Action Plan, and the Thriving Green Spaces Strategy.

Interpreting case studies

The case studies were analysed according to the overarching analytical framework in "Project approach and analytical framework" (Figure 2). In addition to the economic model, the case studies also provided important contextual information relevant to this study. In particular, some important challenges and issues were identified affecting investment in natural capital. Some of these main qualitative issues are summarised below.

Summary of main challenges and issues

Stakeholder consultations for each case study region highlighted overarching barriers to mobilising investment in natural capital. These include:

• a need for more certainty around developments and links with natural capital and carbon markets;
• a need for more certainty regarding financing mechanisms, including integration of different financing mechanisms to ensure a more holistic approach to financing for natural capital projects; and
• a need to understand the balance needed (and possible tensions) between different land use patterns and the impact that this has on natural capital and nature restoration.

Financing mechanisms

For case study regions such as Edinburgh, there are barriers to accessing funding for natural capital due to the complexity of initiatives that need to take place in an urban context in comparison to a rural context; as well as the differing nature of natural capital interventions required when comparing rural and urban contexts.

Delivery challenges in urban areas

The urban context is more complex when considering habitat creation or restoration. In a rural context, a smaller number of landowners can be identified, relatively limited consultation and design work required, and there is a focus on the number of hectares of land being transformed (generally habitat restoration, creation or management). In comparison, initiatives in the urban context can sometimes equate to planting a number of trees on a particular street, for example, as opposed to measuring natural capital interventions in hectares. This being said, the ecosystem services that those trees provide is still significant, not least because there are far more beneficiaries in urban areas. Furthermore, the design work needed in an urban context is complex and often more expensive due to the need for integration with hard landscaping, engaging with utility companies, and adhering to regulations surrounding the streetscape, archaeological and architectural considerations. While this would arguably still be required for rural projects, the consultations and assessments are likely to be fewer.

Balancing land use patterns

Key stakeholders in some regions cite a balance that needs to be struck between different land use patterns, e.g. between land that is set aside for forestry versus land set aside to promote bird species. It is suggested that this balance can be struck through Regional Land Use Partnerships as an effective intermediary.

In regions where tourism is a key economic driver, there is a perceived need to ensure that initiatives that promote tourism centred around natural capital are also consistent with the region and Scotland's net zero ambitions. To achieve this, some regions are considering sustainable travel initiatives, which require local skills development in areas including eco-tourism, agri-tourism and the adoption of electric vehicles.

Some regions recognize a need to adopt initiatives that encourage regenerative agriculture and those that reduce the amount of grazing (both from livestock and deer). It is anticipated that the forestry sector will need to grow in order to increase forestry cover. This will require an increase in forestry skills and related advisory, a skillset which is deemed to be a skills gap in some regions.

Summary of international market opportunities and barriers

The development of natural capital markets within Scotland are likely to provide opportunities for the Scottish business and labour markets to export the newly created skills and business models to the international market. Expansion of natural capital markets is likely to cause an increase in the number of services offered in the field but also drive innovation in how projects are designed and implemented. These new and innovated services are not currently captured within the environment-economy model and therefore not considered within the analysis. This work could be repeated as the SIC codes are updated to ensure they are considered in the analysis.

The majority of these international opportunities are expected to involve selling professional services required for the financing and delivery of the natural capital interventions. These should include but not be limited to: financial services, technical support services and consultancy, fintech, agri-tech, land management, ecosystem restoration, data and analytical services, remote sensing, environmental surveying.

The export of any professional services from Scotland is dependent on a sense of integrity within Scottish natural capital markets and on the good reputation of the advisors. This includes integrity of environmental markets in being robust, such as the additionality of credits, transparent regulation, and good governance. As stated in the Scottish Government report "Mobilising private investment in natural capital" (2023), Scottish peatland carbon credits appear to trade at a premium relative to international peatland units. This is potentially due to a perception of less reputational risk in the purchase of Scottish peatland carbon due to the high standards of the IUCN Peatland Code and the robust jurisdictional framework in Scotland.

These professional services are areas where the UK and Scotland already have a mature export sector. These services can be in a large part delivered from any location, so cost, reputation and expertise are key to successfully selling across the international markets. Scotland has relatively high costs, but also high expertise and this will grow with increased investment in nature recovery. There were approximately 2,000 employees in environmental consulting activities in Scotland in 2021, this number has grown by roughly 150% since 2015. The notional GFI natural capital investment modelled in this study is likely to generate roughly 2,458 direct and 3,269 direct and indirect jobs in environmental consulting activities in Scotland. To fulfil this job demand and requirement, the environmental consulting job market in Scotland must continue to grow at a similar pace. Labour demanded in the other professional services category is also likely to increase with natural capital investment in Scotland. There will be roughly 830 direct and 1,080 direct and indirect jobs created and required in things such as support on policy grants and management strategies. There are currently 8,000 employees in similar roles in Scotland, with a slower 33% growth since 2015 in this job field^[35].

Not all the services developed as part of natural capital market expansion are expected to be exportable to the international market. It is unlikely that there will be a market for manufacturing services and supply of equipment and machinery required for natural capital Interventions. This machinery tends to be heavy, and capacity already exists in other markets so it is unlikely that there will be a demand for Scottish products except for specialist equipment (e.g. soil carbon measurement tools perhaps).

The other challenge facing the international export of services is that the environmental management and investment for each country are very context-dependent and often require knowledge of the historic background. The biomes present within Scotland where natural capital markets operate are likely to limit the regions where expertise can be exported, most likely other temporal regions. This is not expected to be the case for all professional services, especially those related to finance and technology development.