Ecosystem Restoration Code: engagement paper

Executive summary

In the 2024 Natural Capital Market Framework, the Scottish Government (SG) committed to supporting the development of an Ecosystem Restoration Code (ERC) for Scotland as a new high-integrity market mechanism that could attract responsible private investment into nature restoration and biodiversity projects. This commitment is being delivered in 2025 via an SG-NatureScot partnership project.

This Engagement Paper summarises the results of the Discovery Phase of this project. It sets out the key issues that will be explored during co-development of the ERC with nature / biodiversity market stakeholders during the Engagement Phase (May to July 2025).

A summary of evidence from the Discovery Phase is included below along with the key questions that we will be asking during the Engagement Phase.

High-integrity

Chapter 2 outlines our current thinking on what is required for a high-integrity ERC. This includes alignment with relevant standards from the BSI Nature Investment Standards Programme and the SG’s principles for responsible investment in natural capital. Priority BSI principles for consideration in ERC-development include:

• Additionality;
• Permanence and durable / lasting benefits;
• Quantification of units; and
• Various other principles relating to monitoring, reporting and verification (MRV).

There are also important decisions to make in relation to stacking and bundling in the ERC. Stacking of ERC nature credits with other ecosystem services (e.g. carbon) may be attractive in theory but challenging to implement in practice.

1. High-integrity question

What principles, actions or steps should be followed to ensure a high-integrity ERC?

Supply-side

Chapter 3 sets out what we know currently about the factors that might support or hinder the engagement of landowners and managers with the ERC. SG is committed to ensuring that tenant farmers, smallholders, crofters, new entrants and other land managers have equal access to participate in high-integrity natural capital markets, should they wish to do so. Several generic factors are likely to determine whether farmers and other land managers are willing to engage with the ERC, including:

• How straightforward the process is;
• Clarity on metrics and credits and therefore what interventions are likely to be most effective and investable;
• Collaboration processes / rules allowing smaller landholdings to participate; and
• Alignment of public and private incentives via policy and public funding.

2. Supply-side question

What actions and design features should the ERC adopt to enable land managers to participate in these markets?

Demand-side

Chapter 4 outlines our current thinking on demand for high-integrity Scottish nature / biodiversity credits for both voluntary and compliance based motivations. This is informed by three potential use cases of credits:

• Evidence based contributions / corporate disclosures – using credits to make positive contributions to nature / biodiversity outside of the areas of the buyer’s direct (e.g. operations) and indirect (e.g. value chain) impacts;
• Regulatory demand – local compensation / offsetting to compensate for significant, unavoidable, residual negative impacts on nature / biodiversity from development activities; and
• Supply chain insetting / risk mitigation – proactive investment within supply chains to enhance biodiversity related productivity.

Initial discussions with stakeholders and biodiversity market experts suggests that voluntary demand for credits is likely to be insufficient to support a functioning market, at least in the short-term. We are therefore considering whether and how the ERC could be designed to operationalise multiple use cases, markets and metrics and would value views from stakeholders on this.

3. Demand-side question

How can the ERC be designed to ensure that it best meets the requirements of high-integrity investors and users of nature / biodiversity credits?

Policy alignment

Chapter 5 assesses the ERC’s potential to support SG policy objectives (in terms of biodiversity, climate and economic transformation) whilst also remaining accessible and attractive to land managers, investors and buyers of nature / biodiversity credits. The ERC is explicitly adopting an ecosystem approach – by working at scale and supporting projects that can encompass whole ecosystems as functional units (the proposed minimum project size for the ERC is 200ha).

This approach is well-aligned with the Scottish Biodiversity Strategy (SBS), which also adopts an ecosystem approach. However, there are potential tensions between scale and how achievable this is for many of Scotland’s land managers (90% of Scottish landholdings are smaller than 200ha^[1]).

The ERC is intended to be an integrated Code / market mechanism cutting across many of Scotland’s terrestrial habitats and land system contexts. Therefore, subject to scheme specific rules and the development of suitable additionality tests for the ERC, it may be possible to blend private nature finance via the ERC with all current SG payment / support schemes for land use and nature-based solutions projects.

4. Policy alignment question

How should the ERC be designed to support delivery of SG policy whilst being sufficiently accessible and attractive to market actors?