Natural capital - market framework: engagement paper

Section 1: Introduction

This section explains the purpose of Scotland’s Market Framework for Natural Capital. It also describes how the Scottish Government will develop Scotland’s Market Framework, it defines key terms and describes the current context.

Background:

Natural capital is our geology, soil, air, water, plants and animals. We depend on our natural capital for goods and services that make our lives possible and worthwhile. The most obvious include food, clean water, energy, building materials and medicines. Other services include carbon sequestration, natural flood defences, pollination of crops and inspiration from nature.

The 2021 Dasgupta Review^[1] highlighted the ways in which our economy is also embedded in nature. Economic activity is fundamentally dependent on the natural world to supply the resources and services it needs, to assimilate its wastes, including greenhouse gas emissions and sustain human health and wellbeing.

The Scottish Government’s Environment Strategy and National Strategy for Economic Transformation (NSET) recognises this dependency on nature and set out a vision for building a wellbeing economy - creating an economy that is fairer, wealthier and greener. Within this strategy the Scottish Government committed to develop a values-led and high-integrity market for responsible private investment in natural capital. ^[2]

The Scottish Government is now developing a Natural Capital Market Framework (Market Framework) for publication in 2024. Drawing on extensive research and practice the Framework will set out how we will take forward the NSET commitment by:

• Providing useful guidance for those seeking to enhance Scotland's natural capital via private investment, taking into account the need and expectation for a financial return on investment;
• Strengthening Scotland’s interim principles for responsible investment;
• Setting out expectations for market governance;
• Describing alignment with Scotland’s current and emergent policy context (including the forthcoming biodiversity investment plan);
• Describing actions to develop a pipeline of investable projects in Scotland.
• Setting out the benefits from private investment in natural capital.

We are using the ‘Scottish Approach to Service Design’ to develop the market framework. The method places co-development at its core by engaging stakeholders, leveraging their expertise and insights. The process includes i) a discovery phase - to identify key areas of debate ii) an engagement phase - to discuss key issues with interested participants and iii) a validation phase – to sense check early drafts of the market framework ahead of Ministerial consideration.

This engagement paper is designed to inform and structure the engagement phase. It summarises the key market development issues identified during the discovery phase and sets out a series of questions to get input on these issues. It will be shared with stakeholders ahead of meetings and workshops to inform discussion and elicit feedback. There will also be opportunity for written feedback between April and June 2024.

Natural Capital Markets

Natural capital markets are a composition of systems, institutions, procedures, social relations and infrastructures which enable people to pay for and invest in natural capital. They increase opportunities for investment in nature restoration by providing mechanisms through which companies can pay their fair share to restore and maintain the resources they rely on; or by quantifying the value of restoration activity to encourage investors; or by creating long-term returns for financial institutions such as pension funds.

There are already natural capital markets operating in Scotland:

• The Peatland Code steers private investment towards high-integrity peatland restoration projects for carbon storage and water management;
• The Woodland Carbon Code steers private investment towards the creation of high-integrity woodland habitats for carbon sequestration, recreation and timber production.

Meanwhile, likely market developments could help to increase the flow of private investment into a wider range of natural capital such as:

• restoring biodiversity;
• reducing flood risk through natural flood management. For example, riparian planting for flood mitigation, protection of salmon populations and pollution control, or the restoration of natural river channels to help reduce flood risk;
• planting high quality street trees to provide urban cooling and help manage air quality;
• implementing regenerative agriculture to ensure healthy soils for crop production for generations to come;
• improving access to and engagement with the natural environment;
• enhancing coastal and marine environments - investing in habitats to support species in these environments, blue carbon and restoration;
• enhancements of coastal ecosystems such as saltmarsh habitats to help manage coastal flooding and erosion.

Current Context

In 2019, Scotland's natural capital was estimated at £230 billion, comprising 13% of the UK's total asset value. Scotland's economy heavily relies on natural assets, including renewable energy, tourism, agriculture and fisheries. Ecosystem services in Scotland were valued at £15 billion annually, constituting 30% of the UK's total. ^[3] Furthermore, nature-based jobs totalled 195,000 in 2019, representing 7.5% of Scotland's workforce. NSET (2022) acknowledges the significance of natural capital and advocates for investment in it to foster a wellbeing economy - one that thrives economically, socially and environmentally.

Furthermore, if investment in natural capital markets were to increase to a level sufficient to meet Scotland’s climate and nature restoration goals, it is estimated that approximately 146,000 direct and 197,000 indirect jobs could be created with a significant portion of this increased prosperity located in rural areas. The most substantial job growth would likely occur in the forestry sectors with additional opportunities arising in the supply of agricultural machinery and equipment, as well as peatland and coastal restoration initiatives. Such an investment in nature restoration activities could generate a substantial output effect of £17 billion for the Scottish economy, highlighting the potential for both environmental and economic gains from such investments.^[4]

The Scottish Government is currently developing a Green Industrial Strategy, setting out how the Scottish Government intends to help businesses and investors realise the enormous economic opportunities of the global transition to net zero. The net zero transition, including our natural capital, provides opportunities to build internationally competitive clusters in new global growth sectors.