Ecosystem Restoration Code: engagement paper

3. What do landowners and managers require from the ERC?

This chapter addresses the overarching question: What do land managers and landowners require from the Ecosystem Restoration Code to encourage and enable them to participate in these markets (i.e. supplying nature restoration projects)? A successful ERC that increases responsible private investment flowing into nature restoration projects is predicated on a supply of high-integrity projects to the Code. This in turn will require interest and a willingness to participate from the diversity of Scotland’s farmers and land managers, including tenant farmers, smallholders, crofters and new entrants.

Land manager participation in the ERC will require a mechanism that is sufficiently attractive and accessible and well-aligned with other aspects of SG policy and public funding for land use and NbS (see Chapter 5). This chapter describes potentially eligible land in Scotland for the ERC and some of the main factors that might determine land manager engagement with the new Code.

3.1 Supply-side requirements for 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^[40]. This principle also applies to the ERC. There are several generic factors that are likely to determine whether farmers and land managers are willing to engage with the ERC, including:

• Straightforward processes: ERC will need to provide standard processes for project development and ongoing management and MRV;
• Clarity on metrics and credits: clear guidance on metrics used in ERC and how this will influence the types of land management interventions that will be eligible or impactful will be required, as will clarity on what ecosystem service credits can be bundled and / or stacked with ERC nature credits (see section 2.4 also);
• Collaboration processes / rules: by number, a large majority of landholdings in Scotland are under 200 hectares (ha) in size^[41] and wouldn’t be eligible for ERC in terms of the minimum project size threshold as currently envisaged (200 ha). This means that the ERC will require effective processes to facilitate cross-ownership boundary collaboration and project aggregation, and / or a more flexible approach to minimum project size;
• Policy and funding alignment: alignment of public and private incentives via policy and public funding will be required to ensure that private finance under the ERC can work with and add value to public funding, including via blended finance approaches (see Chapter 5); and
• Ecosystem condition and biodiversity as a material risk: the sustainability of supply chains used by industry (e.g. food and drink corporates) is directly linked to the actions of farmers and land managers within that supply chain. Where possible, the ERC should provide a mechanism to boost industry investment in supply chain resilience, working directly with the land managers therein (see section 4.1).

3.2 Land in Scotland that is potentially eligible for the ERC

The strategic intent of the ERC is to provide a high-integrity market mechanism that can help channel responsible private investment into nature restoration and biodiversity projects, encompassing habitat and land system contexts that are not covered by the SG supported Woodland Carbon and Peatland Codes (Chapter 1).

A key policy purpose of the ERC is to support delivery of the Scottish Biodiversity Strategy (Chapter 5), which necessitates that the ERC adopts an ecosystem approach (section 1.3.3). In practice, this means ERC projects that can encompass whole ecosystems as “functional units”, this being an appropriate spatial scale for working to restore ecosystem processes and improve ecosystem condition overall.

These working parameters effectively define land that is more / less eligible for ERC, in terms of minimum project size and the existing habitat and land system context.

3.2.1 Current draft ERC eligibility criteria

The working draft ERC from the CivTech project with CreditNature (section 1.3.1) establishes several proposed eligibility criteria. These are an initial starting point for determining land that is likely to be suitable / not suitable for projects under the ERC, and will be subject to change. The proposed criteria include:

• Projects must be 200 hectares (ha) or over in size;
• Projects may comprise several smaller landholdings (e.g. multiple landholdings <200 ha in size) but these must be contiguous with one another and be able to demonstrate complementary land management and ecological objectives. Examples might include farm clusters or landscape scale nature restoration projects;
• Eligible projects must restore ecosystem condition for a minimum project duration of 10 years;
• Projects must adopt an ecosystem approach and commit to land management activities that will lead to measurable improvements in ecosystem condition. Currently no minimum uplift in ecosystem condition is specified (although a minimum uplift of 10 points on CreditNature’s 0-100 Ecosystem Condition Index scale is likely to be required for projects to be investable);
• The land management plan for the project (referred to as the “Ecosystem Restoration Plan”) may include nature restoration and conservation activities as well as wider land management. The goal is to improve ecosystem condition, the interventions to achieve this are non-prescriptive;
• Significant and intentional degradation to land and ecosystems in the project area must not have taken place within the last 5 years;
• Landowners, tenants or their legal representatives must evidence freehold or leasehold rights for the project area for the length of the project duration; and
• If the project area is leased, the tenant must obtain written consent from the landowner, ensuring the obligation for Project delivery transfers to the landowner if the lease ends early. The owner must agree to take over the obligations and ensure these are transferred to any new lease agreements.

3.2.2 Impacts of ERC metrics on land management activities supported

The ERC is intended to be an outcome driven Code, meaning that interventions to deliver an uplift in ecosystem condition are non-prescriptive. However, the metrics of ecosystem condition used will clearly dictate the types of land management that have the strongest potential to deliver uplift.

The intention is that the ERC will be metric and platform “agnostic”. This will help to provide future flexibility for the Code to encompass multiple high-integrity use cases aligned with SG goals for biodiversity, climate and land use (see section 4.1). At present however, following on from the successful CivTech project with CreditNature (see section 1.3.1), the intention is to use CreditNature’s digital Platform, NARIA^[42] metrics framework and accredited Ecosystem Condition Index^[43] (ECI).

NARIA is comprised of four separate metrics representing different aspects of ecosystem function / process, aligned with the ecosystem approach. Scores under these metrics are then combined to calculate the ECI. The separate metrics are:

• Natural processes of dispersal: indicator describing the presence or absence of manmade barriers (e.g. fences, walls, roads) to the dispersal of organisms across landscapes. This is important for supporting processes such as seed and nutrient dispersal, repopulation and natural disturbance. This indicator can be improved by removing barriers that most commonly affect species and reducing land use intensity;
• Natural disturbance: describes the spatial complexity (variability, intermixing) of habitats and vegetation communities at the landscape scale. Higher scores represent landscapes with complex vegetation patterns, that can arise from animal and other natural / geophysical disturbance processes. This indicator can be improved by restorative land management that leads to “patchiness” and diversity in the vegetation communities across the landscape and / or reduces areas of monoculture, including those caused by invasive non-native species (INNS);
• Trophic cascades: large-bodied herbivores and predators play a keystone role in trophic cascades^[44] and food web complexity. Reintroducing large-bodied herbivores (e.g. heritage cattle) over greater ranges on a landholding can provide an effective means of accelerating the recovery of ecosystem function and complexity. This indicator measures the functional effects and diversity of large-herbivores across a landscape, including assessment of “natural” ratios and ecosystem carrying capacity between species / functions. This indicator can be improved by reducing highly domesticated breeds whilst adding breeds that can support nature restoration efforts (e.g. heritage cattle, ponies); and
• Niche occupancy: using bird trait diversity as a proxy, this indicator describes the role played by the myriad of smaller species in an ecosystem to create complex and diverse biotic and abiotic processes and structures that contribute to ecosystem integrity. Higher scores indicate that many avian niche spaces are “occupied”, supporting a wide variety of birds and indicating high biodiversity. This indicator can be improved by increasing the variety and complexity of habitats, food sources and biodiversity at all spatial scales within the project.

3.2.3 Size of Scottish landholdings vs ERC minimum project size

At present, to facilitate an ecosystem approach to the ERC (see section 1.3.3), it is anticipated that the minimum area for projects under the ERC is 200ha. A project could also be made up of several smaller landholdings with contiguous borders (see section 3.2.1). Therefore, the size of landholdings in Scotland will be a key factor determining what land may be in scope of the ERC and therefore the potential supply of projects.

Table 1 below shows the number, area and average (mean) area of landholdings in Scotland by landholding area size band (noting that these are landholdings in scope of the June Agricultural Census^[45] only). This shows that:

• By number, the large majority (90%) of landholdings are under 200ha; and
• Conversely, only around a fifth (22%) of the total area of landholdings is made up of landholdings under 200ha in size.

In terms of the ERC therefore, this means that the many smaller landholdings that make up the majority of landholdings (by number) in Scotland would not be eligible for the ERC. For these landholdings, participation in the ERC would need to be via aggregation with contiguous neighbours sharing similar ecological land management objectives to achieve the (current) minimum 200ha project size.

Conversely, only 9% of landholdings make up around four fifths (78%) of the total area of landholdings (around 4,000,000 hectares) with an average holding size of around 960ha. While all these holdings would be eligible for the ERC (in terms of minimum size) and may represent a significant opportunity for nature restoration, it will be crucial to ensure alignment with SG land reform policy^[46] and related principles and goals from the SG Natural Capital Market Framework^[47] (e.g. Principle 2 on engagement / collaboration and Principle 3 on community / shared benefits).

3.2.4 ERC constraints and opportunities for different farming systems

Different farming systems in Scotland represent different constraints and opportunities in terms of potential nature restoration action delivered under the ERC. These are driven by:

• Landholding size: as per Table 1 and section 3.2.3, a large majority (90%) of Scottish landholdings are smaller than 200ha and would be ineligible for the ERC in terms of the proposed current minimum project size; and
• Action required to improve ecosystem condition: land management intervention as part of an ERC project would need to improve at least one but ideally all of the NARIA indicators in order to deliver an uplift in ecosystem condition (see section 3.2.2). In general, this will require some reduction in land use intensity and an increase in vegetation diversity and spatial complexity at the landscape scale. Further consideration is required on minimum intervention / ecosystem condition uplift levels, to ensure the financial and ecological viability of ERC projects (see section 3.2.1).

In general, more intensive farming systems such as arable and lowland livestock and dairy farms may face more constraints in terms of their scope and potential to support ecological land management interventions that can deliver improvements against the NARIA indicators. Possible interventions would likely include actions that reduce land use intensity, such as arable margins, conservation headlands, beetlebanks, farm wetlands and ponds, small woodlands and shelterbelts.

Many of these interventions may already be options under the current system of SG agricultural support (e.g. conservation headlands^[48]) or may be requirements for arable enterprises of certain size and composition (e.g. Ecological Focus Areas^[49]). This presents potential opportunities for blended finance with ERC (see section 5.2.1) or potential risks in terms of legal additionality tests (see section 2.2.1), where certain activities are mandated.

For these more intensive systems, careful consideration will need to be given as to the cost-benefit of ERC projects in terms of: (a) the costs of project registration, development, baselining, ongoing MRV etc; vs (b) the potential benefits / nature credit yield that may be physically possible if opportunities for ecological land management are marginal only. Careful consideration will also need to be given to alignment with current and future agricultural support (see Chapter 5) to ensure value for money public expenditure and high-integrity nature finance (e.g. not paying for the same activity or outcome twice).

Conversely, more extensive systems (e.g. hill farming, crofting) may offer more opportunities to deliver improvements against multiple NARIA indicators. However, a challenge here may be smaller landholding size, particularly for crofting.

3.3 Potential land manager engagement with the ERC

The Engagement Phase of the ERC project will seek to fully explore potential engagement with the ERC by Scottish land managers. In advance of this however it is possible to speculate on how land managers may engage, based on existing evidence, including the engagement phase results from the Natural Capital Market Framework project^[50] and CreditNature’s experiences with land managers thus far.

Source: SG June Agricultural Census (2024)

The following types of land managers may be more likely to engage with the ERC:

• Early adopters: landowners and managers with existing environmental interests (e.g., organic farmers, conservation-minded estates, community groups / landowners) are likely to be early adopters;
• Those with existing restoration projects: land managers already involved in restoration projects (e.g. peatland restoration, woodland creation) will likely be interested in understanding how the Code can support their work;
• Land managers facing environmental challenges: facing issues like soil erosion, flooding, or declining biodiversity may see the Code as a potential solution and seek guidance; and
• Larger landholdings: larger estates and agricultural businesses may have more resources and staff to dedicate to understanding the ERC and the potential opportunities it presents to their businesses.

Table 2 below sets out a range of factors that may encourage or hinder land management engagement with the ERC.

Encourage engagement:

• Strong financial incentives: clear and accessible funding mechanisms;
• Simplified regulations / market rules: streamlining existing regulations and reducing administrative burdens;
• Effective communication and outreach: targeted campaigns to raise awareness and provide clear information about the Code;
• Technical support and training: access to expertise, tools, and training for land managers;
• Successful early adopter stories: showcasing the benefits of the Code through successful case studies;
• 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: e.g. Deer Management Groups (DMGs), common grazings, Regional Land Use Partnerships (RLUPs), National Parks, landscape-scale collaborations including with public land estates and voluntary / community partnerships;
• Guidance on the creation of commercial agreements; and
• Ability to participate while providing appropriate protection for the interests of landlords.

Hinder engagement

• Lack of clear financial incentives: insufficient funding and / or overly complex processes for registration, validation, MRV etc;
• Confusing or overly complex regulations and market rules: burdensome regulations that deter land managers from participating;
• Limited access to information and support: lack of clear guidance, technical expertise, and support for project implementation; and
• Perceived risks and uncertainties: concerns about potential risks, such as market volatility or changing regulations and market rules.