Understanding the local economic impacts of natural capital investment

Context for the research

Scotland's National Strategy for Economic Transformation (NSET) has emphasised the role of a natural capital approach in supporting a just transition to net zero, with the overall vision that by 2032 Scotland will be a wellbeing economy thriving across social, economic and environmental dimensions.^[2] In recognition of the significant opportunity for Scotland, NSET includes a commitment to establishing a values-led, high-integrity market for responsible private investment in natural capital, supported by a national project pipeline for nature-based solutions.

As an early action to support the delivery of this NSET commitment, Scottish Government published a set of Interim Principles for Responsible Investment in Natural Capital.^[3] The Interim Principles set out the Scottish Government's ambitions and expectations for a values-led, high-integrity market for responsible private investment in natural capital to communities, investors, land managers, land owners, public bodies and other market stakeholders.

Scotland has already recoginised that the transition to a nature-positive economy can generate millions in business value and jobs. The nature-based sector accounts for 195,000 jobs or 7.5% of Scotland's workforce in 2019.^[4] It has also shown international leadership through international and national pledges. At COP26, the First Minister endorsed the Leaders' Pledge for Nature, an international commitment to reverse biodiversity loss and create a "nature-positive" world by 2030. The Scottish Environment Strategy sets out framework for this transition with emphasis on supporting responsible private investment in nature-based solutions.

The Green Finance Institute (GFI) Finance Gap for UK Nature Report^[5] revealed that the investment gap to secure nature related outcomes in Scotland is between 15 and 27 Billion pounds for the current decade. In addition, there is interest in understanding the types and numbers of jobs likely to be created by increasing natural capital investment.

Given the investment, especially from the private sector, required in the restoration of natural capital and the Scottish Government's commitment to a just and fair economy, a better understanding of the business case for investment and economic contribution of natural capital investments into local economies is needed to support decision-making.

Currently the Scottish Government Input-Output (I-O) tables aren't able to accurately reflect the full local economic impacts (including capital expenditure and jobs) of different types of economic activities linked to investment in natural capital, such as peatland restoration or woodland planting for non-commercial reasons. This lack of evidence makes it difficult to understand the impact of natural capital investment, which in turn means it's difficult to assess natural capital investments on par with other investments which are better evidenced. These challenges also mean that it is difficult to create the right training and skills development programmes to ensure economic opportunities do not leak out of regional economies.

The lack of information around natural capital investments has led to an increased risk that the degradation of nature is not fully accounted for within investment strategies. In addition, there is a chance that opportunities within natural capital investments are missed because the potential benefits are not fully known. Better information will allow financial institutions and companies to incorporate nature-related risks and opportunities into their strategic planning, risk management and asset allocation decisions. These principles are outlined in the latest Taskforce for Nature-related Financial Disclosures (TNFD) framework (2022).^[6]

NatureScot and Scottish Government have developed this project to provide evidence and methods that will enable a better understanding and estimation of the local economic impacts of investing in natural capital, for use by those considering natural capital investments, including local authorities, enterprise agencies and the private and third sectors.