Natural Capital Market Framework

Section 2: Supporting responsible, values-led, high-integrity natural capital investments

Integrity is the foundation of natural capital markets. Scotland, and the UK more widely, is very well-positioned to supply high-integrity carbon credits thanks in part to the science-based, government-backed WCC and PC. However, recent concerns about low standards in international carbon markets – particularly those that reward avoided emissions – highlight the risks of low integrity, which can hold back investment and damage efforts to restore nature.

Feedback from market participants shows a clear demand for guidance on "what good looks like." This section sets out actions to provide that guidance, reducing risks for investors, the public, and communities, while supporting increased investment. It outlines Scotland's policy direction and assists land managers, financial investors, and other market participants in aligning with its principles for responsible, values-led, high-integrity investment.

Definition of high-integrity

Scotland's 2022 interim principles for responsible investment in natural capital^[33] were widely welcomed. The Scottish Government now confirm these principles as Scotland's criteria for responsible investment in natural capital. The following principles outline the expectations for investment in Scotland's natural capital:

• principle 1: investment that delivers integrated land use;
• principle 2: investment that demonstrates engagement and collaboration;
• principle 3: investment that delivers public, private and community benefit;
• principle 4: investment that is ethical and values led;
• principle 5: investment that is of high environmental integrity;
• principle 6: investment that supports diverse and productive land ownership.

The market framework now explains why each principle is vital, outlines the responsibilities of market participants, and details Scotland's role in fostering market development aligned with them.

Principle 1: Investment that delivers integrated land use

What is expected

Scotland's land is a vital resource for its economy, environment, and communities. An integrated approach to land use is essential to maximise its delivery of environmental, social, and economic benefits. Stakeholders, especially land managers and communities, have emphasised that this approach mitigates risks and ensures projects are appropriately located:

• investment and management decisions should demonstrate consideration of positive and negative impacts across four capitals (natural, social, economic, human);
• carbon management^[34] should be integrated with delivery of wider environmental, social and economic outcomes, such as biodiversity improvements, resilience to food supply and natural flood management;
• investment and management decisions should recognise and respond to local circumstances, acknowledge the suitability of land for particular uses and seek to protect and enhance existing natural capital.

What is happening

• Forestry practice: WCC projects must also comply with The Forestry and Land Management (Scotland) Act 2018^[35], and the UK Forestry Standard.^[36] Taken together the act, standard, and Scotland's Forestry Strategy^[37] provide the foundation for sustainable forest management in Scotland. Recognising wider land use objectives they aim to increase the area of sustainably managed forests and woodlands and deliver more benefits for the economy, the environment, and people.
• The Scottish Land Rights and Responsibilities Statement (LRRS)^[38]: Investment and management decisions should align to the LRRS. It exists by virtue of the Land Reform (Scotland) Act 2016 and it articulates our vision for the ownership, use and management of land. It sets out how the Scottish Government sees the balance between the rights of landowners, managers, local communities and society at large.
• Nature networks: Nature networkscan help investors to identify local priorities. There is a target to establish nature networks in every local authority area by 2030.
• RLUPs can help to inform investment and management decisions by articulating local land use priorities. RLUPs bring together local governments, communities, landowners, and other stakeholders to consider how large areas of land can be best used to address the twin climate and biodiversity crises.
• Regional Adaptation Partnerships: These partnershipshelp to foster the collaborations needed for effective climate adaptation, including action to restore nature.
• Scotland's river basin management plans (RBMP) include an integrated assessment of the condition of the water environment across water quality, water resources, physical condition and fish migration. This enables an integrated programme of measures to be delivered to address human pressures causing impacts. The aim of RBMP is to protect and improve the water environment to safeguard the benefits people, wider society and the economy derive from it.
• Several other local networks provide valuable networks and local plans that can be beneficial for developing natural capital projects. For example: national parks, enterprise agencies, common grazing committees, the Integrating Trees Network^[39], deer management groups (DMGs), and voluntary partnerships like Cairngorms Connect.^[40] Project developers should coordinate with these networks and resources to effectively address local opportunities and challenges.
• NatureScot's habitat map of Scotland^[41] brings together in one place and in one classification system all available habitat and land use data. It could be a powerful tool for those seeking to develop natural capital projects.
• Cairngorms National Park Authority's peatland restoration planning tool and guide^[42] has been produced as an aid to peatland restoration. It enables agencies, land managers and their advisors to target resources and funding to where they are most likely to be effective in delivering large scale peatland restoration as rapidly and efficiently as possible.

What will be done

• The Land Reform (Scotland) Bill, which is currently being considered by the Scottish Parliament, aims to better ensure that the benefits of land ownership, and decisions about how it is owned, managed and used, are more widely shared. Further information on the content of the Bill and its current parliamentary progress can be found on the Land Reform (Scotland) Bill page of the Scottish Parliament website.^[43]
• Introduction of statutory nature restoration targets: set out in this year's Programme for Government, the Natural Environment (Scotland) Bill will be introduced this parliamentary year (2024/25). It is expected to contain provisions relating to a framework for statutory targets for nature restoration which could focus attention and drive action of land managers, governments and investors. The Scottish Government is engaging with experts as it develops its suite of targets to ensure targets are based on the most up-to-date scientific evidence.
• Scotland's nature investment portfolio: In 2025, NatureScot will produce a prospectus of landscape scale nature restoration projects in Scotland, informing investors of Scotland's priority landscape-scale nature restoration projects and attracting investment to them.
• Promoting best practice: Scotland's PINC programme will use the work of the public land project and our ongoing work with RLUPs to develop and showcase examples of good integrated land use practices, providing learning opportunities that can inspire other projects.
• Developing a landscape scale natural capital tool for Scotland:^[44] NatureScot is leading the development of a tool designed to support a natural capital approach to land management at the landscape scale. This tool, the first of its kind in Scotland, is being created in partnership with Liverpool John Moores University.
• Nature Networks Tool^[45]: As part of the work on Nature Networks, NatureScot and Scottish Wildlife Trust are co-sponsoring a CivTech 8 Challenge looking to address "How can technology help to create a nature network across all of the different areas of Scotland?".
• FIRNS: Investment and management decisions can be informed by the lessons of FIRNS funded projects, many of whom are exploring integrated approaches to land-management. For example: The Flow Country project^[46] explores ways to maximise environmental, economic and social benefits through acting as a project aggregator, allowing smaller land parcels to participate in large scale peatland restoration projects and access finance otherwise not available to them. In turn these projects provide strong commercial benefits to local communities.
• Scotland's river basin management plan (RBMP): SEPA will consult on the significant water management issues for Scotland's Water Environment to inform the review and update of RBMP. Following this consultation, by December 2026 SEPA will consult on a review and update of the RBMP. The consultation and draft update of RBMP is likely to focus on the need for a more integrated approach to land management.

Principle 2: Investment that demonstrates engagement and collaboration

What is expected

Engagement and collaboration with stakeholders and communities increases the effectiveness of natural capital markets and individual investments by bringing higher levels of awareness and support. Local knowledge and expertise improve project proposals. They also attract resources from a wider range of sources, minimise risk to individual organisations, facilitate aggregation and provide mechanisms for fair and equitable sharing of risks and benefits. In Scotland, natural capital projects should:

• engage with local communities in decisions about land and land use change, in line with the Scottish Government's guidance on engaging communities in decisions relating to land^[47].
• collaborate openly with other landowners and public bodies to contribute to a coherent approach to delivering benefits;
• when acquiring new land, investors should seek early engagement with relevant local communities to inform them of future plans, seek their views on those plans based on local knowledge and expertise, and identify opportunities for the delivery of community benefits.

What is happening

• Forestry practice: WCC projects must comply with the Forestry and Land Management (Scotland) Act 2018^[48], and the UK Forestry Standard^[49]. These require people with a recognisable interest in a forestry proposal or its outcomes to be given the opportunity to be involved in its development.
• The British Standards Institution's 'overarching principles^[50]' for natural capital markets require participants to make key information accessible and transparent to local communities.
• There is existing guidance, including: The Scottish Government's 'guidance on engaging communities in decisions relating to land'^[51]; the Scottish Land Commission's guides 'delivering community benefits from land'^[52] and 'responsible natural capital and carbon management'^[53]; and Adaptation Scotland's Community Climate Adaptation route map.^[54]
• FIRNS: Investment and management decisions can be informed by the lessons of our FIRNS funded projects, many of which tested optimal ways to develop natural capital projects based on principles of engagement and collaboration. For instance, The Dreel Burn project seeks a bottom-up approach to project design, to ensure investors respond to the local context by co-designing with the community. The project will develop a sample investment case which considers the co-design of interventions and a community benefit vehicle, project engagement is supported by a community communication and engagement plan.

What will be done

• The publication of good practice guidance on engagement in woodland creation projects by the Confederation of Forest Industries (Confor). The guidance has been developed in collaboration with community representatives and supported by Scottish Forestry.
• Delivery of further training for forestry professionals on community engagement. Scottish Forestry will continue to work with Confor to identify opportunities to run more training events and increase the number of professionals who have undertaken this training.
• Scottish Forestry will continue to work towards strengthening the alignment of its guidance and processes with the Scottish Land Rights and Responsibilities Statement 2022, and improving understanding of engagement requirements and processes in forestry.

Principle 3: Investment that delivers public, private and community benefit

What is expected

Community benefits are the intentional social and economic benefits from land that are offered to the local community, on a negotiated basis, for their lasting well-being. They should be delivered in a way that is proportionate to the scale and impact of the landholding or activity, but without unduly compromising the practical or commercial viability of the landholding or activity.

Investment and management decisions should:

• create benefits that are shared between public, private and community interests;
• provide benefits for local communities;
• support community wealth building by reinvesting value in local economies to their long-term benefit.

What is happening

This market framework:

• endorses the Scottish Land Commission's (2023) good practice guidance 'delivering community benefits from land'^[55] and expects natural capital projects to deliver such benefits;
• and recommends the Land Commission's (2023) protocol on 'responsible natural capital and carbon management'.^[56]

Advice is available from the Scottish Land Commission^[57] and other experienced parties to support the development of effective community benefit strategies.

What will be done

• Developing minimum standards: The Scottish Government will co-fund and co-lead with DEFRA a project to establish a thematic standard for community benefits as part of the BSI Nature Investment Standards Programme. This partnership project will create an agreed minimum standard for how the UK's high-integrity natural capital markets deliver place-based community benefits. Scottish input will be crucial in aligning this standard with our values-led market vision, our unique land ownership patterns, and our cultural expectations around land use.
• Certifying community benefits: A FIRNS funded project is exploring the viability of a certification process for community benefits, tailored to the Scottish context. If successful, a tier one certification would enable projects to verify their compliance to the BSI's community benefit thematic standard. Whereas higher certification tiers could verify projects that go above and beyond this standard.
• Enhancing Transparency: Scotland's PINC programme will advocate for the UK Land Carbon Registry to further improve transparency on benefits generated for local communities.
• Exploring assurance: we will work with other UK governments to explore the development of assurance mechanisms that promote the adoption and application of BSI's standards. This includes its thematic standard for community benefit once it is published. Furthermore, building on our experience with FIRNS, Scotland's PINC programme will explore opportunities to incorporate reasonable and proportionate community benefit requirements into other natural capital funding initiatives.
• Promoting Best Practice: Scotland's PINC programme will use the work of the public land project to develop and showcase examples of good practice, including in relation to the measurement of community benefits and wider social impacts from land and natural capital. This will provide learning to inspire other projects.
• Natural capital partnership officers: With the right support, communities can take important steps toward unlocking opportunities of natural capital markets. The Scottish Land Commission will work with partners to pilot a network of 'natural capital partnership officers'. These officers will support communities, landowners, investors, and project developers in implementing community benefits, offering practical case studies, guidance, roadmaps, and draft contracts and agreements.
• Supporting business cases for community-led projects: For example, the FIRNS fund supports Dumfries and Galloway Council Solway coast and marine project^[58] to develop a business case for a community stake in the expansion of the Loch Ryan oyster fishery.

Box 3: Public, private and community benefit

Public benefit:

A well-designed natural capital project can deliver a range of environmental, social and economic public benefits, including enhanced resilience to climate change, improved carbon management, improved biodiversity and increased community well-being.

Moreover, such projects can deliver significant economic outcomes like enhanced local employment opportunities, particularly in rural areas with sectors such as renewable energy, tourism, agriculture and fisheries all heavily reliant on natural capital. In 2019, the financial value of Scotland's natural capital assets was estimated at £230 billion, with these assets providing ecosystem services in Scotland valued at £15 billion annually.^[59] Furthermore, nature-based jobs totalled 195,000 in 2019, representing 7.5% of Scotland's workforce. 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 proportion of this increased prosperity located in rural areas. ^[60] By embracing an integrated approach to land use (principle 1) and fostering engagement and collaboration (principle 2), projects are more likely to achieve these diverse benefits concurrently.

Private benefit:

Private investments in natural capital markets must provide the returns required by investors and land managers if they are to be considered attractive and viable investments. Section 1 of the market framework has addressed the necessity of investor returns and detailed our seven interventions planned by 2026 to promote responsible investment. Meanwhile, section 3 of the market framework outlines strategies to support and enhance the involvement of land managers.

Community benefit:

Natural capital projects require long-term land use change with the potential to impact the lives and livelihoods of local communities, both now and in the future. There will be a range of benefits and disbenefits from these changes. As a result, Scottish Government is clear that communities local to a project should be engaged in a meaningful way, and benefit from natural capital markets.

Principle 4: Investment that is ethical and values led

What is expected

To maintain public trust in the integrity of natural capital markets, investment in high-integrity projects must be ethical and guided by strong values. A key element of this is "buyer integrity," which focuses on the conditions under which nature credits are sold and used. High-integrity natural capital markets require credits to be applied correctly—primarily to offset unavoidable, negative environmental impacts (VCMI, 2023).

In voluntary carbon markets, credits should not replace emissions reductions. Instead, they must supplement efforts where buyers already have plans and demonstrable actions in place to reduce emissions as close to zero as possible, in line with the Paris Agreement. Purchasing nature credits for less ambitious purposes—such as offsetting impacts that are avoidable, reducible, or repairable—is considered greenwashing.

• Investors should meet the six UN principles for responsible investment^[61]
• Investment should comply with the values of Scottish Government as set out by our policies on just transition^[62], fair work^[63] and land rights & responsibilities.^[64]
• Public sector-influenced funds dedicated to natural capital in Scotland should establish clear ethical contribution policies, as exemplified by the 'Scottish Marine Environment Enhancement Fund' (SMEEF). These policies must outline the criteria for accepting and rejecting contributions, ensuring that donations align with the fund's core objectives and maintain trust in the fund, its projects, and its participants.
• Investment in offsetting should not be a replacement for emissions reductions and should always be made in addition to having plans and demonstrable actions in place to reduce emissions as close to zero as possible, and as part of targets and transition plans aligned with the Paris Agreement.
• Landowners considering the sale of carbon credits should consider their own current and future carbon management needs before doing so.

What is happening

• The voluntary carbon market integrity initiative's claims code (VCMI, 2023) provides a comprehensive framework for high-integrity carbon credit usage. UK companies are encouraged to utilise this code to certify their carbon integrity claims.
• BSI Flex 701 Overarching Principles and Framework (version 1)^[65] sets out principles relevant to buyer integrity including: Reducing environmental impacts principle – purchased units are used to reduce environmental impacts, based on a mitigation hierarchy; claims principle – claims of environmental performance, based on units purchased in natural capital markets, measure that performance in a manner aligned to the measurement processes used to quantify the units for sale; and ethical actors principle - buyers and suppliers provide information to allow market stakeholders to assess their integrity. There are also other guidelines and principles that are relevant to buyers using natural capital markets including the green claims code and environmental reporting guidelines.
• The Scottish Marine Environment Enhancement Fund (SMEEF) has an ethical contributions policy^[66] that defines the criteria for accepting or refusing contributions. This policy ensures that all donations align with the fund's core objectives and do not compromise, or pose a risk to its reputation, financial standing, or that of its partners. The nature investment partnership is developing a similar ethical framework to guide the investment and to ensure high-integrity.

What will be done

There is a need to consolidate and update standards for buyer integrity and establish effective processes for their implementation. The Scottish Government expects to collaborate with other UK governments to identify the most effective mechanisms for ensuring buyer integrity in nature markets. In the coming months, UK Government will develop and issue a consultation on interventions that could help to strengthen high-integrity voluntary carbon and nature markets to contribute to net zero and wider environmental improvement. The consultation will be led by the Department for Energy Security and Net Zero, DEFRA and HM Treasury. Scottish Government will contribute to any such consultation to seek interventions aimed at securing integrity the demand side, such as means of operationalising the VCMI framework.

Principle 5: Investment that is of high environmental integrity

What is expected

Natural capital markets must deliver lasting, meaningful benefits. Environmental outcomes should be verified, long lasting, and offer additional value beyond what would have occurred in the absence of the intervention, with safeguards in place to prevent double counting. Outcomes need to be measured - using consistent and transparent methodologies – and verified such as through the government backed WCC and the PC. Where rights to or control over carbon or other natural capital are transferred to a third party, this information should be made available in an open and transparent way such as through the UK Carbon Registry to enable scrutiny and help maintain public confidence.

High-integrity natural capital markets depend on standards, codes, schemes, and other governance mechanisms to create reliable conditions for payments and investments in natural capital projects. The UK's ability to supply high-integrity environmental units presents a distinct competitive advantage. The work mentioned within this market framework aims to preserve this advantage as a sustainable pathway to attracting increased levels of inward investment.

What is happening

• The PC is a high-integrity mechanism able to steer private investment towards peatland restoration by quantifying and verifying a project's impact on reducing carbon emissions.
• The WCC is a high-integrity mechanism, able to steer private investment towards the creation of high-integrity woodland habitats by quantifying and verifying carbon sequestration.
• BSI Flex 701 Overarching Principles and Framework (version 1)^[67] provides integrity principles and a common benchmark which will be applicable across all UK natural capital markets.
• The market framework also welcomes the work of those developing market infrastructure that could help to increase the flow of private investment into a wider range of ecosystem services. For example, the Saltmarsh Code, currently being piloted with support from Defra, holds the potential to verify and trade carbon sequestered through saltmarsh restoration across the UK. Similarly, we welcome ongoing efforts to implement the roadmap for high-integrity marine natural capital markets^[68] and other such initiatives.

What will be done

• DEFRA funded work with the British Standards Institution (BSI), including version 2 of flex 701 'overarching principles and framework', Flex 702 'supply of biodiversity benefits'. Flex 703 'supply of nature-based carbon benefits' and a thematic standard for community benefit. Together these establish a framework of standards for scheme operation and governance which ensure rigour, consistency, and confidence that environmental units generated through such schemes represent genuine, measurable, long-lasting and verified environmental outcomes. Without this work, complex and inconsistent approaches for codes and methodologies used in natural capital markets could become a barrier to investment and market growth.
• Scottish Government will continue collaborating with other UK governments to explore the development of robust assurance mechanisms that promote the adoption and application of BSI's guidance across the industry, including providing routes for organisations to demonstrate they meet the required standards.
• Scottish Government will actively support the development of high-integrity opportunities for private investment in biodiversity. This includes efforts outlined in Section 1 such as developing the WCC and PC, advancing work on an Ecosystem Restoration Code, facilitating compliance-based investments, the planning system and promoting landscape-scale investment opportunities.

Principle 6: Investment that supports diverse and productive land ownership

What is expected

The Scottish Government is committed to an ongoing programme of land reform aimed at bringing about a Scotland with a " strong and dynamic relationship between its land and people, where all land contributes to a modern, sustainable and successful country, supports a just transition to net zero, and where rights and responsibilities in relation to land and its natural capital are fully recognised and fulfilled". Land, and access to land, is essential for sustainable development, and is key to many important aspects of people's lives - from housing to recreation, from agriculture to mitigating climate change. As highlighted in research^[69] by the Scottish Land Commission, concentrated land ownership provides a landowner with a high degree of control over land in an area. This can negatively impact sustainable rural development of local communities, most critically in relation to land availability for affordable housing or economic development. There is a risk that if natural capital markets evolve unfavourably they could contribute to increased concentration of land ownership or negatively impact other industries, employment and communities. Natural capital markets should therefore promote fair, responsible, and productive land ownership and use.

• Those investing in natural capital projects should consider whether ownership of land is necessary.
• Landowners and managers should consider the impact of natural capital projects on any tenants and engage relevant parties early in discussions about how to manage risks and benefits.
• If a joint venture between landowners and tenants is proposed, appropriate sharing of risks, responsibilities, costs and incomes should be considered.
• Landowners and managers should work with the local community to identify opportunities to share the benefits from the management of natural capital and carbon with them and to support local priorities and aspirations.
• Landowners and managers should have full regard to the Land Rights and Responsibilities Statement.

What is happening

• Full guidance on what is expected of investment and land management decisions can be found in the Scottish Land Commission's (2023) protocol on 'responsible natural capital and carbon management'^[70].

What will be done

• Widening Market Access: The government will support initiatives to remove barriers to market participation for crofters and tenants.
• Land Reform (Scotland) Bill: This Bill, which is currently being considered by the Scottish Parliament, aims to better ensure that the benefits of land ownership, and decisions about how it is owned, managed and used, are more widely shared. Further information on the content of the Bill and its current Parliamentary progress can be found on the Land Reform (Scotland) Bill page of the Scottish Parliament website.^[71]
• Tax treatment: The Scottish Government will work with UK and Local Governments to explore the role of tax in supporting diverse and productive land ownership.