Ecosystem Restoration Code: engagement paper

2. What is required for a high-integrity ERC?

This chapter addresses the overarching question: What is required for a high-integrity Ecosystem Restoration Code, including the approach to its operation, management and governance?

High-integrity supply and demand is the cornerstone of natural capital markets. The UK, particularly Scotland, is well-positioned to supply high-integrity carbon credits, supported by science-based, government-backed market mechanisms such as the Woodland Carbon and Peatland Codes (the WCC and PC). However, concerns about low standards in international carbon markets – especially those rewarding avoided emissions – underscore the risks of weaker integrity, which can undermine investment confidence in natural capital markets (globally) and hinder efforts to restore nature.

2.1 Alignment with existing high-integrity standards and principles

In order to be high-integrity the ERC shall, at a minimum, comply with relevant standards from the BSI Nature Investment Standards (NIS) Programme^[24]. Specifically, the ERC shall be aligned with the following Standards:

• Flex 701 – Overarching Principles and Framework^[25];
• Flex 702 – Supply of Biodiversity Benefits^[26]; and
• Flex 705 – Community Engagement and Benefits from Natural Capital Projects.

In order to demonstrate its high-integrity, the ERC should also be designed to align with the SG’s principles of responsible investment in natural capital^[27] where these require additional design commitments beyond those necessary for alignment with the BSI Standards:

Further advice and guidance on these principles and details of action that SG is taking to help embed and operationalise them is included in the SG’s Natural Capital Market Framework (published November 2024)^[28].

2.2 Key BSI principles for consideration in development of the ERC

The following sub-sections outline the likely implications for the ERC of key high-integrity principles from relevant BSI Nature Investment Standards.

2.2.1 Additionality

Development of the ERC should ensure that nature credits issued under the Code represent additional environmental benefits – i.e. improvements that would not have occurred without the intervention. This additionality is a crucial determinant of integrity and must be assessed against appropriate baselines. High-integrity codes should verify additionality using a legal additionality test, and at least one other additionality test (see Box 3 for the additionality tests used in the WCC / PC):

• Legal test: confirms that the actions taken were not already mandated by legal or statutory requirements (e.g. as part of a management agreement for a designated site);
• Financial test: determines if nature / biodiversity finance is essential for the project’s financial viability; and
• Common practice test and / or barrier test: checks whether the actions are already part of normal environmental management practices, or if they face barriers that are not otherwise overcome, respectively.

Box 3: Additionality tests adopted in the SG supported carbon codes

Additionality tests in the Woodland Carbon Code (WCC)^[29]

• Legal test: there is no legal requirement specifying that woodland should be created;
• Investment test: projects must demonstrate that without carbon finance, the woodland creation project is either not the most economically or financially attractive use for that land or is not economically or financially viable on that land at all; and

Additionality tests in the Peatland Code^[30]

• Legal test: no legal requirement specifying that peatland within project area must be restored; and
• Financial test: sets a maximum level of non-carbon income of 85% of projects restoration and management costs over the project duration (i.e. the full lifetime of the project – not just capital costs). Non-carbon income may be public grant funding (e.g. Peatland ACTION) and / or other private income.

Both the Woodland Carbon and Peatland Codes do not specifically refer to environmental additionality tests, which involve demonstrating that an activity will deliver an improvement in one or more environmental parameters against a quantified baseline. However, both effectively have these tests embedded in their methodologies for quantifying carbon credits.

2.2.2 Durable and lasting benefits

High-integrity nature markets should create long-lasting environmental benefits.

Nature market standards and schemes need to ensure that the environmental benefits associated with each unit are sustainable and durable by establishing robust requirements such as:

• Risk buffers for ex-ante sales: when units are sold based on projected outcomes, a buffer is maintained to mitigate the risk if the anticipated biodiversity or ecosystem condition gain are not fully achieved;
• Corrective measures: if the planned actions fail to deliver the expected benefits, no further nature / biodiversity units are sold until corrective actions or plans are implemented;
• Enforcement mechanisms: long-term permanence can be supported through legal requirements (e.g., mandated replanting under forestry laws) or contractual agreements; and
• Buffers: high-integrity codes (such as the WCC and PC) also enforce permanence by using buffers of unsold units and / or milestone-based credit releases.

Currently, BSI Flex 702 says biodiversity gains must last for at least 30 years, with the aim of delivering longer lasting benefits^[31]. This is aligned with the existing requirement in England for BNG. However, other approaches to permanence are being considered elsewhere, such as the framework proposed by the International Advisory Panel on Biodiversity Credits (IAPB)^[32]. This focusses on the durability of long-term positive biodiversity outcomes, and allows for the timeframe of durability to be disclosed at the scheme level, as long as this is transparent and science-based.

Box 4 outlines further considerations for permanence and durability of outcomes in the context of the ERC.

Box 4: Permanence / durability and the Ecosystem Restoration Code

The concerns around permanence / outcome durability broadly relate to the risks of any additionality achieved through a code being reversed at some point in time. Three broad types of risk to the permanence or durability of outcomes (in this case peatlands) can be identified^[33]:

• Internal risks: including project management risks, financial risks and legal risks (if land manager decides to reverse work post contract);
• External risks: such as land tenure and resource access, competing land uses, negative impacts from adjacent land holdings; and
• Natural risks: including wildfire, extreme weather, climate change, adjacent land effects, geological risks etc.

The challenge for a nature or biodiversity outcome focused code is in understanding what the ‘end outcome’ is and how long a project needs to be in place for to maintain a potentially open-ended outcome. ‘Time to restoration’ will depend on factors such as the type of ecosystem, its baseline condition, the management interventions put in place to aid restoration, the costs of maintenance and the sustainability of their funding and external factors influencing the success of restoration, such as those listed above (e.g. climate change, surrounding land management activities). It will also depend on the choice of metric(s) for assessing restoration success. Taking an ecosystem approach for example, species are likely to recover much faster than some of the abiotic characteristics (e.g. soil nutrient levels).

Defining permanence in an Ecosystem Restoration Code

There have been meta-analyses undertaken to ascertain recovery rates from restoration projects for different types of ecosystems under different baseline levels of degradation which might be useful for understanding permanence requirements for different ecosystems. For example, one study found recovery rate ranged between 1% and 10% per year across a range of ecosystem types (tidal wetland, marine, freshwater wetland, river, lake, grassland and forest). Of these forest ecosystems had the slowest recovery rate (mean less than 2% per year) and tidal wetlands the fastest (mean ~4% per year). Assuming a constant rate of recovery, a heavily degraded forest ecosystem could take a minimum of 50 years to recover. But it is worth noting that there will be biodiversity benefits realised before this full recovery is achieved^[34].

Considering this the definition of permanence will likely vary for different ecosystem types and will be dependent on which metrics are used to assess restoration success. It may also be worth considering whether full restoration related to achieving a reference condition against whatever metric is chosen or whether a certain percentage of the reference condition is deemed appropriate (e.g. due to the non-linear nature of ecosystem recovery). A good parallel to draw from on this are the classifications used in river basin management planning which classifies rivers into Bad, Poor, Moderate, Good and High ecological status. Although a High status represents rivers close to reference values across all of the metrics used, the target is for rivers to achieve a Good or better classification. An alternative to the use of reference condition (or sites) is to use a 0-100 metric scale where a metric score of 100 represents an “attainable maximum”. Permanence or durability of outcome could be represented as no decrease in the metric score.

2.2.3 Quantification of units

According to current versions of BSI Flex 701 and 702, the ERC must ensure that:

• Biodiversity units are measured robustly and transparently;
• Irreplaceable habitats are protected from any negative impacts;
• Biodiversity / ecosystem condition gains are assessed using a quantitative metric that reflects key ecosystem characteristics;
• Its metric is published and independently tested by organisations different from its developers;
• It reinforces the mitigation hierarchy by prioritising impact avoidance and focusing development on areas with lower biodiversity;
• For insetting, offsetting, or compensation, the metric ensures a like-for-like or better approach, assigning greater value to areas with higher biodiversity;
• Measurements are based on a baseline established at the project’s start, with gains determined through an evidence-based counterfactual;
• If negative impacts occur to achieve greater gains, the baseline must reflect pre-impact conditions;
• Consistent survey methods and metrics are used throughout the project for both baseline and post-project assessments; and
• Ecosystem services (e.g. carbon, water) are assessed separately from and in addition to biodiversity outcomes.

In addition to the BSI standards, consideration should also be given to:

• Affordability: the burden of data collection and assessment needs to be proportionate to the credit;
• Uncertainty: uncertainty in data and metrics must be quantified and confidence communicated as part of the code; and
• Reversals: once nature-based projects have been accredited, there is a need for monitoring to ensure that they are maintained to the required standards.

2.2.4 BSI principles relating to Monitoring, Reporting and Verification

BSI Flex 701 and 702 contain several principles that relate to monitoring, reporting and verification (MRV) in nature and biodiversity markets. According to current versions of these standards, the ERC must ensure that:

• Validated and verified units: sellers supply units that are validated and verified, with the supply area being surveyed at appropriate intervals (minimum every 5 years) to confirm biodiversity gains;
• Appropriate claims: claims based on purchased units are commensurate with the measurement used to quantify the units;
• Single counting of outcomes: environmental outcomes from actions to supply units in nature markets are only counted once;
• Transparent registry functions: a registry records and stores all details related to the quantification, generation, trading, and storage of units. This includes information on the biodiversity baseline, gains, location, metrics, survey details, and the organisation responsible for validation and verification; and
• Interoperability of information: the registry used for the ERC should maintain consistent data standards to enable monitoring of risks (e.g. double-counting) across different nature markets. This interoperability might be facilitated through a meta-registry or coordinated suite of registries with harmonised minimum standards and data requirements.

Box 5: Baselining and additionality risks in “avoided-loss” markets

Evidence from current avoided-loss offsetting markets show that genuine additional positive environment outcomes are not being delivered due to opportunistic baselines that exaggerate counterfactual threats^[35]. To avoid this, commentators suggest that credits should be issued based on ex-post robustly evaluated impacts using satellite-data, though this is seldom used in practice.

2.3 Other relevant BSI Principles for consideration by the ERC

Other BSI principles will also be of relevance to the development of the ERC. These include:

• Proportionate local community engagement and benefit: ERC must require transparent engagement with local communities regarding the initiatives and benefits derived from natural capital projects (NB: details of BSI Flex 705 are forthcoming);
• Market ease of access: establishment of processes that enable access of market stakeholders, especially farmers and other land managers;
• Ensure transparency: ERC must require market participants to make all material information—such as unit supply, trading details, and survey results comparing biodiversity / ecosystem condition outcomes to baselines—publicly available (unless commercially confidential;
• Set clear governance standards: the Code must clearly state the governance status and processes of market participants and the market standard itself, ensuring stakeholders are informed;
• Disclose timing of information: the code must make the timing of all disclosed information transparent to stakeholders;
• Require competent delivery: mandate that all requirements and assessments be carried out by qualified individuals and organizations;
• Promote openness to innovation: the code must facilitate the adoption of new technologies and methods for measuring biodiversity and ecosystem condition changes, provided these new approaches allow for reliable comparisons between baseline and post-intervention states;
• Recognise multiple benefits of nature: ERC should acknowledge that ecosystems provide various benefits (including climate resilience) and ensure that the same biodiversity enhancement is not sold more than once;
• Prevent unintended consequences: the Code must ensure that actions to supply units avoid causing negative environmental impacts, support natural ecosystem recovery, and do not reduce populations of protected species. The code should also require plans that address broader pressures such as land use change, climate change, and pollution; and
• Protect integrity of stacking: ERC must only permit the sale of multiple unit types from the same supply area (i.e. stacking) if each unit's additionality is robustly measured and verified.

2.4 Stacking and bundling

Ecosystem services from nature-based activities can be either bundled into a single credit or stacked as multiple credits. In the UK, bundling is the default, with stacking permitted only under specific conditions.

Figure 1 below illustrates current key options for high-integrity bundling and stacking drawn from international literature and practice. These are:

• Implicit / explicit bundles: only one credit is issued, though co-benefits exist. Explicit bundles clearly identify and may measure / quantify these benefits;
• Multi-credit bundles: multiple credits are generated but must be sold together;
• Linked stacks: credits can be sold separately in multiple transactions, though subsequent purchases incur a discount and / or other credits in the stack must be retired (i.e. accounting for different credits is linked and rules are applied at point of sale to ensure additionality and reduce risk of double-counting); and
• True stacking: each credit is sold and paid for separately, however, this is rare due to policy, additionality, and transaction challenges.

Source: Beetles in a pay stack: Stacking and bundling in biodiversity credit markets (McCarthy and Sarsfield, 2024)^[36]

Earlier unpublished work from CreditNature^[37] highlights three different potential models for stacking and bundling under the ERC:

• Model 1 (stacking): separates ERC nature credits from other ecosystem service (ES) credits (e.g. carbon), offering multiple revenue streams but introducing complexity and risks such as double counting. Notably, the ERC nature credit is distinct from other ES credits as improvements to underlying ecosystem condition driven by ERC underpin the integrity and robustness of other ES credits;
• Model 2 (bundling): integrates ecosystem services within a single ERC nature credit, simplifying governance and reducing double counting, though measurement and valuation challenges remain; and
• Model 3 (nesting): credits are sold separately from different parts of a project site, clarifying market segmentation but risking conflicting management and measurement practices across boundaries. Ecosystem condition baseline and uplift would be measured across the whole site (using NARIA) but nature credits would only be issued from the parts of the site that are not issuing credits associated with other ES (e.g. woodland carbon). However, NARIA metrics would be used to describe ecosystem condition uplift as part of an explicit bundle with other ES.

Potential benefits of these approaches include promoting a holistic management strategy, enabling diversified revenue streams and better alignment with buyer needs (e.g. nature / biodiversity and other ecosystem services). Potential risks include double counting, market confusion and challenges aligning different ecosystem services (e.g., carbon vs. biodiversity). The following measures can be taken to help reduce these risks:

• The adoption of clear mechanisms to prevent double-counting;
• Transparency in credit accounting;
• When offsetting, use like-for-like and ensure the same ecosystem services are counted on both the supply and demand side; and
• Emerging markets (especially voluntary) should aim for simplicity – adding stacking and more complex bundling options (e.g. multi-credit bundles) may add unnecessary layers of complexity at the start.

Also, to avoid double-counting, stacking should only be possible where additionality tests are passed (e.g. legal, financial). Financial additionality must be met for each nature market scheme / credit used. For example, if funding under one nature market credit is insufficient to make a project viable, but funding under two would be sufficient, the project would pass the financial additionality test for both credit types. However, if use of credits from one nature market would make the project viable, the second credit type would not pass the financial additionality test.

In the US, performance-based credit release schedules exemplify a high-integrity approach to the management of some of these risks^[38].

2.5 The role of technology supporting MRV efficiency gains

Data collection for baselining and ongoing MRV in nature markets can be costly and may act as a barrier to entry (i.e. where the costs of data collection and assessment throughout the lifetime of the project can be prohibitive, such as for smaller projects or projects that may deliver smaller levels of uplift and thus lower revenues).

However, there are various current and emerging technologies that may help to reduce the costs of data acquisition and therefore the costs associated with baselining and MRV^[39]. Development of the ERC should consider the applicability of these methods to the ecosystem metrics being used, and the extent to which novel methods can be deployed in a standardised manner, supporting high-integrity.

Novel data collection methods with potential applicability in nature / biodiversity markets include:

• Satellite remote sensing;
• Unoccupied aerial vehicles and sensors (i.e. drones);
• Camera trapping;
• Metabarcoding / eDNA; and
• Passive acoustic monitoring.

Annex A includes further details of these technologies and their relative strengths and weaknesses.