Natural capital - market framework: engagement paper

Section 3: Supply in Natural Capital Markets

This section outlines the most important considerations regarding the use of Scotland’s land for natural capital projects aimed at generating commercial returns. It argues that action is needed to boost the number, scale and variety of natural capital projects. It also argues that markets can only be considered high-integrity and values-led if they deliver public, private and community benefit and – for terrestrial projects – if they adopt integrated land use practices.

Section summary:

Natural capital markets have the potential to enhance Scotland’s wellbeing economy. However, for this to happen:

• communities must share in any benefits;
• action is needed to boost the number, scale and variety of natural capital projects; and
• land-based projects should adopt integrated land-use practices.

This section’s detailed discussion explores each of these in turn.

Detailed discussion:

1. Community Engagement and Community Benefit

Discussion Prompt

High-integrity, values-led natural capital markets must deliver public, private and community benefit. This requires engagement, collaboration and community agency. Please consider:

1. What guidance should the market framework provide for those negotiating meaningful community benefit in natural capital markets?

2. How else can the market framework ensure the delivery of community benefits in natural capital markets?

Context:

Natural capital investments can result in long term changes with the potential to impact upon the lives and livelihoods of local communities. This can include changes to the aesthetic and amenity of the area, the types of industries, jobs and employment, the number of people using or visiting an area, availability of housing and the viability and sustainability of a community. There will be a range of benefits and disbenefits from these changes.

Internationally, community engagement (process) and community benefits (outcomes) are established as important for undertaking responsible investment in natural capital markets (IC-VC, 2023; TCFD, 2017; TNFD, 2023; Vera, 2016).

In Scotland we are clear that communities should be engaged in, benefit from and exercise agency within natural capital markets (Scottish Government, 2022; WCC, 2022; IUCN, 2023). This is essential for ensuring that natural capital investments are delivered in ways which benefit local communities and meet Scotland’s wider land-use ambitions. It also minimises the potential for tension and conflict between stakeholders.

The market framework will incorporate the Scottish Land Commission’s (2023) guidance on delivering community benefits from natural capital markets. It will also advance discussions about strategies for meaningful community engagement and delineate the known next steps for the development of community benefit tools.

What is community benefit?

Scottish Land Commission (2023) finds that community benefits:

• are proportionate to the scale and impact of a landholding and how that landholding is used;
• benefit the local geographic community, inclusive of farmers and other land managers;
• can be monetary or non-monetary;
• promote the sustainable development of communities;
• can contribute to community wealth building;
• require meaningful engagement with the community;
• align with local strategic plans (where available);
• are tailored to the community’s needs and agreed through deliberation;
• are monitored and reported on publicly; and
• are long term.

Specific examples of community benefits might include:

• shared ownership, use and governance of land and natural capital projects;
• ongoing community involvement in decision-making;
• the provision of things needed by the community (for example low-cost housing, enhanced amenity and recreational opportunities);
• supporting local enterprise through procurement and access to resources such as land;
• local employment, training and personal development opportunities;
• local climate change adaptations;
• creation of appropriately governed local or regional community benefit fund;
• improved local access to land and nature.

How to deliver community benefits in natural capital markets?

Community engagement should be used as a means of finding out what the issues are for local people in relation to land use and negotiating suitable plans and benefits. Scotland has well-established guidance and practical tools for community engagement in land-use decisions.^[8] The market framework will signpost these for use by natural capital projects.

The same tried and tested tools for delivering community benefit in natural capital markets do not exist yet. Although, there is emerging guidance and best practice case studies. The market framework will outline emerging good practice, including:

• engage early with the community;
• understand community needs and priorities, publish transparent information, set up inclusive decision-making structures;
• provide a clear point of contact for inquiries or concerns;
• share a draft engagement plan for feedback;
• understand the local context: refer to existing community action plans, local development strategies and engage with key stakeholders such as councillors, community councils and development trusts;
• engage widely on community benefits: formalise agreements with core local groups where possible;
• regularly review benefit agreements to align with project’s market value and evolving community needs;
• seek advice from the Scottish Land Commission and other experienced parties for effective community benefit strategies.

What next steps might the market framework commit to?

From our research, these are known activities currently being undertaken in Scotland to help develop community benefit tools: -

• Scotland’s ‘Community Benefits Advisory Group’ intends to:
  • generate more Community Benefit Case Studies from a wider range of contexts; and
  • engage with specific sectors, for example forestry, to identify practical approaches, guidance and tools.
• The Scottish Government, through its input into the BSI project intends to:
  • promote ‘community engagement’ and ‘community benefit’ within the BSI’s Nature Programme.
• The Facility for Investment Ready Nature in Scotland (FIRNS)^[9] projects include:
  • ‘Deciding Matters’ to develop and test a certification that would provide assurance on community benefits in natural capital projects.
  • Highland Rewilding’s Joint Ventures to be explored as a mechanism for involving more people in nature restoration, boosting the economy, skills development, job creation and cohesion in local communities.
• Scottish Land Commission intends to:
  • develop model or standard partnership agreements;
  • refine guidance on delivering community benefits from land.

2. Growing the number, scale and diversity of projects seeking private investment

Natural capital markets require a robust pipeline of nature-based projects that are sizeable enough to attract responsible private investment from institutional investors. Achieving a sufficient number of natural capital projects requires 1) the participation of users and owners or managers of natural resources, such as farmers and land managers and 2) the ability to collaborate or aggregate projects to a land-scape scale. Without a sizeable pipeline of projects, investors cannot be confident that they will receive a financial return on their investment.

Please consider: -

• How can the market framework increase the number, diversity and scale of projects ready for investment?
• How can the market framework help to ensure projects are encouraged at landscape level?

Scale, aggregation and collaboration

Thriving, high-integrity natural capital markets are made-up of landscape scale, joined-up nature-based projects. This scale enables the enhancement of ecosystem services such as water management and biodiversity. It also aligns well with the preferences of institutional investors. It is thought that the following strategies might help achieve this scale without hindering market entry for smaller projects:

• aggregation mechanisms to pool resources from individual larger projects or several smaller projects, reducing transaction costs and improving participation.
• collaboration across ownership and management boundaries. There are existing landscape-scale mechanisms in Scotland that could play a facilitating role, some already do (for example, Deer Management Groups (DMGs), common grazings, Regional Land Use Partnerships (RLUPs), National Parks, landscape-scale collaborations including with public land estates and voluntary partnerships like Cairngorms Connect).

Example: participation of farmers and land-managers

Natural capital markets, coupled with agricultural reform and the changing demands of supply chains, are further incentivising farmers and other land-managers to enhance natural capital. However, to take advantage of these opportunities, it will be necessary to consider how to make it easier for tenants and crofters to participate while providing appropriate protection for the interests of landlords.

There are currently cultural, practical and financial barriers to participation in natural capital markets. Scotland’s Market Framework will have to describe how to begin overcoming the following obstacles:

• Tax: Uncertainty about the tax treatment of land management schemes is said to hinder the ability of land managers to engage with a range of natural capital markets. Areas where tax treatment is uncertain includes Income Tax, Inheritance Tax and VAT and Land and Buildings Transaction Tax.
• Ownership and tenancy arrangements: Land tenure can present both a constraint and opportunity for the supply of nature-based projects in Scotland. Some distinctive forms of tenure (for example crofting, including common grazing, and tenant farms) raise challenges for participation in natural capital markets as the division of risk and reward may be uncertain or skewed. Tenants cannot generally go ahead without the agreement of the landlord and landlords are limited in their ability to restore land without the agreement of the tenant. Conversely owner occupiers, particularly of larger landholdings (for example large upland estates), are relatively unconstrained and can have a large influence on the supply of projects (for example peatland) but may do so without consideration of land users and communities. This raises risks for equity of access to new markets, revenues and investment.
• Skills development: The availability of nature-based projects is hampered by limited capacity and skills for project design and delivery. Expertise and capacity within supply chains for nature-based projects are lacking. Furthermore, the capacity of verifiers to assess projects' performance against the Woodland Carbon and Peatland Codes has, at times, restricted the rate of project supply. Natural capital markets need significant development of skilled capacity across various sectors, including land management, ecology, remote sensing, and financial technology.
• (For land-based projects) Impact of deer and other herbivores: The success of nature-based projects on land is fundamentally constrained by deer and other herbivore pressure and the effectiveness of associated management (for example deer control) and policy. Woodland requires low or zero grazing pressure to establish, and peatland restoration is vulnerable to trampling, especially in the first few years following restoration. This is a cross-cutting issue of importance to many, if not all aspects of land management for nature in Scotland.
• Lack of guidance on the creation of commercial agreements.
• Diversification legislation. Including inconsistency between code rules and tenancy diversification provisions.
• Potential first-mover disadvantages. For example fear of missing out on future agriculture support policy and private supply chain requirement to be net zero.

Case Study: FIRNS (Facility for Investment Ready Nature in Scotland)

The Scottish Government and NatureScot currently partner with the National Lottery Heritage Fund to co-fund FIRNS. One of the fund’s aims is to help create a pipeline of nature-based projects that are ready to meet the demands from responsible buyers and investors.

The 27 projects funded in 2023/24 cover saltmarshes, iconic Atlantic rainforests, peatlands, rivers, lochs, farmland, biodiversity and green spaces for nature and people. All projects are working to Scotland’s Interim Principles for Responsible Investment in Natural Capital. There is a short summary of projects funded in 2023/2024 on the FIRNS webpage^[10]. Relevant learning will be included in the market framework.

Case Study: The Scottish Marine Environmental Enhancement Fund (SMEEF)

SMEEF is an innovative new approach to increase funding for marine restoration and enhancement. SMEEF enables those interested in the health of Scottish waters to voluntarily contribute to blended public-private funding grant pots which are then strategically distributed to projects across Scotland. Since its inception in 2022, SMEEF has awarded £3.7m to approximately 50 marine restoration and enhancement projects across Scotland. The Fund is managed by a Steering Group of NatureScot, Scottish Government’s Marine Directorate and Crown Estate Scotland, supported by an Ethical Contributions Board and Grants Panel. This provides critical insight, and assures robust governance and transparency.

3. Investment that delivers integrated land use

Discussion Prompt

High-integrity, values-led natural capital markets should strive for multiple outcomes that benefit both people and the environment. This includes biodiversity enhancement, community benefit, returns for investors, food supply resilience, local employment and natural flood management. Please consider:

• What is needed to enable projects to deliver multiple benefits through natural capital markets?
• How can the market framework ensure natural capital markets deliver multiple benefits at scale?

Context:

Integrated land-use is essential for maximising the contribution of Scotland's finite land to sustainable outcomes across social, economic, and environmental domains. Much of our land can accommodate multiple functions.

The Scottish Government’s land use strategy sets out our commitment to integrated land-use. The Land Reform Bill and Agriculture and Rural Communities (Scotland) Bill will also influence this area. Success hinges on the support and collaboration of land managers, owners, developers and local communities.

Integrated land-use can be defined broadly as the allocation of land to different uses across a defined area to achieve various economic, social and environmental outcomes. Integrated land-use in natural capital markets optimises ecosystem service flows, such as food, carbon and water, while concurrently delivering other available benefits like flood prevention, biodiversity enhancement and community well-being. Research by the RSPB^[11] underscores the imperative for strategic decision-making, particularly when planning large-scale land use.

How to achieve integrated land management in natural capital markets?

Integrated land-use decisions in natural capital markets are influenced by various contextual factors, including the presence of relevant spatial plans specific to a given area (see below). Natural capital decisions can be best made at a large scale (regional, local authority, landscape, national park, or river catchment level). However, they can be simpler to implement at a small scale (estate, farm, field, croft, or common grazing area). In practice, a balanced approach that incorporates a range of scales is essential for comprehensive planning and achieving successful outcomes.

Important considerations for natural capital projects include:

I. Mitigation against possible harms;

II. Maximization of the environmental benefits;

a. within an ecosystem (for example managing discrete woodlands for biodiversity, carbon and timber);

b. between ecosystems (for example habitat connectivity and enhancement of watercourses);

c. across ecosystems (for example ensure sufficient mix of different habitats, land uses on a holding);

iii. Amplification of economic and social benefits.

There are many sector-by-sector tools to help a project developer make integrated land use decisions.^[12] Regional, landscape, and sub-regional spatial plans exist and can also help a inform integrated land-use decisions.

Landscape-scale Planning

Spatial plans can help a project developer to:

• plan according to the local context;
• address specific opportunities and constraints (for example community interests, protected sites, habitat networks, land tenure); and
• work more effectively across ownership boundaries, leading to a larger scale project.

The place-based frameworks established by Scotland's five Regional Land Use Partnerships pilots (RLUPs) offer valuable structures for local natural capital projects. These frameworks articulate a clear vision and aims for land use within their respective regions. They delineate and endorse local land use changes that can contribute to Scotland's climate change and nature conservation goals. Moreover, they have the potential to help project developers when embarking upon their community engagement and benefit obligations by outlining the prioritised concerns of the diverse stakeholders affected by regional land use decisions.

There are other useful spatial policies and plans to guide the development of natural capital projects, including nature networks, landscape-scale collaborations and National Parks.

Proportionality

The scale of projects will influence approaches to land use integration. Large-scale projects can deliver more integrated management and therefore should be subjected to higher expectations.

Risk Management

Procedures should be in place to ensure social and environmental risks of a project are correctly identified, assessed and managed. For example, this may include guidance on the identification and protection of heritage sites that could be damaged by project activities or threatened and rare species from invasive and alien species.