Natural capital - importance to the Scottish economy: research

Conclusions & Recommendations

Natural capital is important to the Scottish economy, as it supports many industries, jobs, and regions.

• This study estimated a £40.1 billion reliance of the Scottish economy on natural capital, with around 261,600 jobs estimated to be supported by natural capital. In other words, at least 14.4% of Scotland’s total economic output is estimated to be reliant on natural capital.
• The sectors found to be most reliant on natural capital were agriculture, fishing and aquaculture, forestry, water and sewage, electricity, and the spirits and drinks sector (Method 3 results).
• The regions found to be most reliant on natural capital were the Highlands & Islands, and Glasgow Regional Economic Partnerships (Method 3 results).
• The Highlands & Islands, Tay Cities, and South of Scotland REPs had a high share of key habitats providing ecosystem services, which were worth £2.1 billion in output in 2019 for all sectors in the Scottish Economy (Method 3 results).
• It is worth nothing that, while these were the most robust estimates available using the approach adopted in this study, the range of estimates should be treated as a lower limit for Scotland’s reliance on natural capital. These values are conservative as formal recognition of the non-provisioning value of nature, especially the non-substitutable share, would further increase the share of total output reliant on nature.

Definition of natural capital as based on renewable resources.

• This study adopted a renewables-based definition of natural capital. The estimates of the analysis excluded sectors reliant on non-renewable resources (i.e. resources that will not regenerate after exploitation within any useful time period). The non-renewable industries were considered as part of a sensitivity analysis.
• Industries supported by non-renewable sectors included mining and mining support, coal and lignite, oil and gas extraction, and metal ores. A proportion of output from electricity generated from non-renewable resources (47% of total energy consumption in 2019) was included as well.
• Including non-renewable industries in the definition of natural capital increased the contribution of natural capital to the Scottish economy in Method 1 estimates significantly. This increase was largely driven by the inclusion of the remaining non-renewable electricity generation.

The share of output and jobs numbers are comparable to previous studies.

• The share of industries reliance on natural capital to total output were 7%, 13% and 14% for Methods 1-3. These estimates are similar to the more conservative estimates of natural capital reliance from the literature.
• The job estimates varied between methods, where the 261,600 jobs (Method 3) more closely reflected estimations in the Cambridge Econometrics study (242,000 jobs).

Method 3 findings showed that provisioning ecosystem services are highly valuable for certain industries but not captured in conventional statistical systems measuring economic activity.

• The market value of natural capital may not accurately reflect the relative importance of natural capital to an industry. Metrics such as gross domestic product and gross value added do not capture the value of natural capital except where it provides revenue on the market.
• Only 27% of provisioning ecosystem services can be substituted by engineering solutions or human interventions. This shows the limited ability of our economic system to replace essential ecosystem services.

The link between habitats, ecosystem services and economic impacts shown in this study emphasises the importance of maintaining natural capital.

• Traditional statistical accounting systems do not reflect the value placed on maintaining natural capital, but reflect social and political preferences of valuing resources and their uses.
• Industries that are highly reliant on natural capital should directly support their supply chain to better manage the key habitats that provide nature-based services and inputs. Companies can also protect or enhance habitats as part of their Environmental, Social & Governance (ESG) and Sustainable Development Goal (SDG) alignment as recognition of the vital ecosystem services for their production activities.
• Policy makers should recognise this non-market and social value of nature and communicate the benefits along with traditional economic data. Habitats that provide ecosystem services that are not substitutable should be prioritised for protection and environmental management and in development policies.
• Degraded or lost habitats can have important repercussions for the economy, including:
  • Higher cost of replacing nature-based inputs or services
  • Potential for direct jobs in nature protection or management being replaced by jobs in the manufacture of synthetic substitutes, leading to regional labour market imbalances
  • Higher cost of damage and repair, and possible higher insurance costs
  • General decline in productivity of the economy

Regional analysis also shows the weakness of conventional statistical systems to demonstrate the economic importance of natural capital industries.

• Some regions may have higher output or job values for industries highly reliant on nature if the head office is located there rather than the location of the nature-based economic activity.
• The Highlands & Islands, Tay Cities and South of Scotland had a high share of key habitats providing ecosystem services worth £369 million domestic expenditure and £1.1 billion output in 2019 for the top 5 industries in the whole of Scotland.

Given the complexity of measuring the economic value of industries’ reliance on nature, the three methods presented in this study provided a useful range to consider given their respective pros and cons.

It should be noted that the estimates below excluded the non-renewable sectors, such as oil and gas, which are a big part of economic activity in Scotland. To start with, £12.5 billion of Scottish output was reliant on natural capital, which represented 5% of Scottish output. This could have increased to £25 billion considering downstream sectors in the economy, which represented 9% of Scottish output in 2019. This could have further increased to £34.6 billion if we considered non-market but vital ecosystem services, which was around 12% of the Scottish output. It is, however, worth nothing that, while these were the most robust estimates available using the approach adopted in this study, the range of estimates should be treated as a lower limit for Scotland’s reliance on natural capital. These values were conservative as formal recognition of the non-provisioning value of nature, especially the non-substitutable share, would have further increased the share of total output reliant on nature.

Limitations and recommendations for next steps

It needs to be clearly noted this study did not conduct Input-Output modelling by adjusting existing matrices to accommodate new environmental services and goods. We think more research is first required on understanding the value of non-provisioning (i.e. cultural and regulating) benefits from nature for certain industries, followed by additional surveys and monitoring systems to reflect the value of ecosystem services in our economic system.

Since being used in WSP and eftec’s work on The Importance of Natural Capital to the Scottish Economy for Scottish Government in July 2024, the ENCORE tool has been updated. This update improves the useability of ENCORE for the analysis conducted by WSP and eftec, thereby confirming the relevance of the approach taken to use it within Method 3 in the report. While the ENCORE update does not undermine the validity of the methods used in the report, nor the overall policy conclusions about the importance of nature capital in the economy, it should be noted that the latest version of ENCORE would produce different results for some specific sectors in Method 3 (e.g., the ecosystem dependencies in service-based sectors such as accommodation, health and education are significantly highers following the update).

The recommendations from this report are:

• Disseminate and present this study in key national and regional policy forums to obtain feedback on the pros and cons of each Method used to measure economy’s reliance on natural capital.
• Undertake 1-2 pilot studies for key industries e.g., beer and malt or textile sector to dissect Method 3 valuation steps in more detail. This will help to validate and more thoroughly test the robustness our findings on the importance of ENCORE indexing for ecosystem services and the substitutability options.
• To adjust ENCORE scoring, using Scottish expert judgement as recommended to provide input on the materiality scoring for individual industry sectors. At a high level, steps to undertaking this assessment could include:
  • Review the list of ecosystem services listed in ENCORE and align them with the definition with NatureScot ecosystem services aligned with the Ecosystem Land wheel and Ecosystem Seas wheel.
  • Develop a list of criteria for establishing Scotland-specific scores (possible criteria were explored in this project, which include: the extent that ecosystem services could be substituted for physical capital, the importance of high-quality natural capital and the importance of natural capital to brand value).
  • Develop criteria weightings based on further desktop review and test these weightings with an expert panel. This could include representatives from Scottish Government, academia, and industry, as well as a broad cross sector of climate and environmental experts. This could be used as an adjustment to materiality scores or as an additional importance weight.
  • Develop questions that align with the criteria for each industry and test these questions in a workshop and / or interview setting.
  • Undertake background research to provide evidence against the criteria and questions developed.
  • Convert results into a rating and reconcile with an expert panel.