Ecosystem Restoration Code: engagement paper

4. What do investors and buyers require from the ERC?

This chapter addresses the overarching question: what do investors and buyers of nature / biodiversity credits require from the Ecosystem Restoration Code (ERC) to encourage and enable them to participate in these markets (i.e. investing in nature restoration projects and buying nature credits)? A successful ERC is predicated on the availability of entities willing to purchase high-integrity nature credits. This chapter describes possible sources of demand for nature credits and identifies ways the ERC might be developed to best meet this demand.

4.1 Demand drivers and use cases of nature / biodiversity credits

Demand for voluntary nature / biodiversity credits is currently uncertain (see section 4.2). Despite this, it is possible to speculate about potential use cases for these credits, including in relation to what is known about demand drivers and how these might influence buyer motivations. What is clear however is that with uncertain demand, a range of high-integrity use cases for credits will likely be required, covering various buyer motivations / objectives^[51].

4.1.1 International demand drivers of nature / biodiversity credits

Use cases and demand for voluntary biodiversity credits amongst multinational corporations and financial institutions (FIs) in particular have potential to be driven by three key global frameworks^[52]:

• Kunming-Montreal Global Biodiversity Framework (GBF): private actors may seek to align their contributions via voluntary biodiversity credits to national level articulations of GBF targets (e.g. Target 3 on 30x30)^[53];
• Taskforce on Nature Related Financial Disclosures (TNFD): voluntary framework for the disclosure of material nature-related risks and opportunities. Its “double materiality” approach requires disclosure of nature related risks and impacts which can increase the incentive to buy biodiversity credits to demonstrate the mitigation of risks and positive impacts on nature^[54]; and
• Guidance from the Science Based Targets Network (SBTN): voluntary guidance for nature-related target setting, requiring action across all parts of the mitigation hierarchy. Commentators suggest that voluntary biodiversity credits could be used to address the final two steps of the SBTN mitigation hierarchy – restore / regenerate and transform^[55].

The global frameworks above, along with other demand drivers (e.g. regulatory requirements to compensate for direct local impacts on biodiversity, non-disclosure related supply chain risk mitigation) establish use cases for voluntary and compliance based nature / biodiversity credits. However, it is important to note that voluntary approaches can also be driven by regulation (e.g. compliance-based disclosures under a possible future mandatory TNFD could drive the voluntary purchase of credits by a corporate to demonstrate their positive impacts on nature).

Source: IAPB Framework for high-integrity biodiversity credits (2024)

The IAPB Framework sets out three key use cases of biodiversity credits organised by motivation and whether they are voluntary or compliance based (see Figure 2). The two primarily voluntary use cases from IAPB (use cases 1 and 3) are broadly aligned with the two “strategic use cases” of voluntary biodiversity credits identified in Pollination’s 2024 report on the State of voluntary biodiversity credit markets.

4.1.2 Use case 1 – Evidence-based contributions / corporate disclosures

Nature / biodiversity credits can be used to make positive contributions to biodiversity, outside of the areas of the buyer’s direct (e.g. operations) and indirect (e.g. value chain) impacts. These could be aligned with national or global biodiversity goals. Compared to simply funding projects (with public, private or philanthropic funding), a biodiversity credit methodology underpins precise and robust claims for the outcomes achieved (e.g. for disclosure of positive impacts under TNFD)^[56].

Possible motivations for corporates and FIs to purchase credits under this use case may include^[57][58]:

• To meet and evidence their own sustainability goals;
• To improve their environmental, social and governance (ESG) ratings, brand reputation and employee retention;
• To demonstrate the management of nature related risks and delivery of positive impacts for nature as part of voluntary (or potentially future mandatory) disclosure frameworks (TNFD, SBTN) and / or policies (e.g. the EU Corporate Sustainability Report Directive or CSRD^[59][60]);
• To demonstrate their contribution to global and national biodiversity targets (e.g. 30x30) as part of or beyond their own sustainability goals; and
• To offer products and services that allow their customers to “buy” nature improvements (via a nature / biodiversity credit) as an additional attribute of their products.

A 2024 report from Pollination on the State of voluntary biodiversity credit markets^[61] defines four different biodiversity credit “archetypes” and links these to GBF targets and elements of the SBTN’s action framework that they can help deliver (Figure 3). The regeneration and stewardship archetypes are likely to be most relevant to the Scottish context and the new ERC. These are voluntary biodiversity credit schemes that intend to achieve either an improvement (regeneration) or maintenance (stewardship) in ecological value over time from a measured or modelled baseline. These concepts would likely work well with a voluntary Code that uses baseline assessments and ongoing MRV of ecosystem condition metrics. The opportunity for voluntary stewardship credits, or at least crediting for projects starting with a high(er) ecosystem condition baseline, may be particularly attractive by opening up markets to projects and landholdings that have existing good land management practices, albeit where improvement in ecosystem condition is still possible. This could include woodland restoration (rather than creation which is supported by the WCC) for priority woodland habitats such as Atlantic Rainforest and Caledonian Pinewood.

There are various risks associated with this use case and set of associated motivations. Principal amongst these include the absence of widely adopted market norms, governance and oversight as to how corporates and FIs can use nature / biodiversity credits to make claims about the related nature positive outcomes the credits evidence (e.g. guidance on how to measure biodiversity impacts across the value chain, a framework for how credits apply across the full mitigation hierarchy). The guidance from TNFD and SBTN is helpful but without standardisation (e.g. via a mandatory TNFD) this is unlikely to be mainstreamed.

This risk may be compounded by the potential proliferation of nature / biodiversity codes and standards and associated metric frameworks^[62]. In effect, a lack of standardised guidance on claims combined with many possible credit products that measure different aspects of nature / biodiversity may hinder the establishment of clear use cases for nature credits across the mitigation hierarchy in disclosure regimes (see Figure 3).

Source: Pollination State of voluntary biodiversity credit markets report (2024)

To help capitalise on this potential use case / motivation and mitigate the associated risks, the new ERC for Scotland should:

• Ensure it adopts and demonstrates all principles of high-integrity nature markets (see Chapter 2);
• Be easily understood, communicated and recognised by corporates, FIs and other end-users of credits, including those operating beyond Scotland;
• Demonstrate clear compatibility with relevant disclosure regimes (e.g. TNFD, SBTN, CSRD), including targeting specific credit “archetypes” that are likely to be most relevant to voluntary action under these regimes and the requirements of SG biodiversity policy (e.g. regeneration and stewardship type credits);
• Be aligned with emerging principles for legitimate use of nature / biodiversity credits (especially EU guidance); and
• Aim for a comprehensive scope – providing a holistic view of impacts on nature / biodiversity and wider ecosystem services that resonate with the public and align with corporate values and targets (e.g. water, carbon).

4.1.3 Use case 2 – Regulatory demand (local compensation / offsetting)

In some jurisdictions (e.g. England), biodiversity credits can be used to provide measurable maintenance and restoration outcomes that result from actions to compensate for significant, unavoidable residual negative impacts on biodiversity from development activities. This is commonly referred to as “offsetting”, however the IAPB qualifies this by using the term “local compensation” to provide for the adoption of strict conditions / limitations in use^[63]. In this context the use of biodiversity credits must follow the mitigation hierarchy to first avoid, then minimise, restore, and only then compensate for residual negative impacts – as a last resort. IAPB strongly endorse the view that biodiversity credits for compensation must be based on local-to-local and like-for-like ecological equivalence, achieving no net loss as a minimum.

The compensation / offsetting use case often stems from regulatory demand in compliance markets (see Figure 2), a key example being the UK Government’s statutory biodiversity net gain (BNG) legislation applicable in England. The attraction of compliance markets for biodiversity is that the source of demand is built in. In English BNG, this is because every grant of planning permission is deemed to have met the “biodiversity gain condition”. This is at least a 10% increase in biodiversity value (relative to the pre-development baseline of the onsite habitat) that can be achieved via: (a) onsite biodiversity gains; (b) registered offsite biodiversity gains; or (c) statutory biodiversity credits^[64].

Within such a compliance market, investors can use information about the sources and drivers of demand to evaluate local credit market supply-demand dynamics and direct investment to land, land managers and projects suitable for biodiversity enhancement^[65]. These projects then provide BNG habitat banks which can supply registered offsite Biodiversity Units, where this is required, to meet demand as per BNG delivery option (b) above. The Environment Bank is a good example of a company working broadly to this business model^[66].

There are also known challenges and risks with BNG including: (a) the National Audit Office (NAO) has raised concerns about compliance and enforcement under BNG, questioning whether local authorities will have the capacity and expertise to fulfil these duties effectively^[67]; and (b) the (UK) Parliamentary Office of Science and Technology (POST) has highlighted concerns from academics that BNG will not lead to sufficient habitat creation in areas of strategic conservation importance^[68]. Other potential issues with BNG type approaches, in terms of their potential effectiveness supporting delivery of SG biodiversity policy, are outlined at section 5.1.5 below.

4.1.4 Use case 3 – Supply chain insetting / risk mitigation

Voluntary and compliance supply chain insetting involves proactive investment within supply chains to enhance biodiversity-related productivity. The use of biodiversity credits as insetting refers to an approach where companies or organisations proactively invest in biodiversity within their supply chains and in the places where these are located, for example to address nature-related impacts and dependencies and to ensure continued business productivity and resilience^[69].

This use case is potentially attractive for the ERC as it may be driven by immediate business needs. However, it is dependent on:

• Economic sectors with sufficient supply chain exposure in Scotland (e.g. food and drink corporates);
• Long-term planning by industry and recognition of their dependency on natural capital; and
• Investment in nature / biodiversity credits being seen as an appropriate and helpful means of achieving these business goals. This is in comparison to paying land managers directly for delivering interventions or achieving outcomes, similar to a Payment for Ecosystem Services (PES) approach^[70].

Investments as part of supply chain insetting could offer an immediate source of voluntary demand for ERC nature credits. However, the extent to which companies invest in securing the resilience of their Scottish supply chains, currently or potentially in the future, remains unquantified. Additionally, it is unclear whether an ERC would help scale up and enhance these efforts, or if corporates would use other means of achieving these goals (e.g. direct PES type investment, via Landscape Enterprise Networks).

To help capitalise on this potential use case / motivation and mitigate the associated risks, development of the ERC should consider:

• How the design of the Code and platform can give buyers the ability to choose from specific locations, habitat types and ecosystem services; and
• Understand what companies investing in securing their supply chains would need from an ERC and from independently verified high-integrity nature / biodiversity credits.

4.2 Potential demand for nature / biodiversity credits

Commentators have suggested that uncertain demand is the biggest challenge for the development of biodiversity markets – without strong and consistent demand for credits, these markets will struggle to take shape or endure^[71]. In general, large corporates are assumed to be the primary buyers of nature credits, with some commentators suggesting that European headquartered corporates offer the greatest potential source of demand^[72].

Theoretically, these corporates could voluntarily buy nature credits. For example, a 2023 insight report from the World Economic Forum (WEF) estimates that, with effective progress on governance, global demand for voluntary biodiversity credits could reach USD 2 Billion in 2030 and USD 69 billion by 2050^[73].

However, uncertainty remains about the extent to which voluntary demand for nature / biodiversity credits will be forthcoming. In October 2024 Bloomberg NEF estimated that less than USD 1 million of biodiversity credits have been purchased^[74]. This may be because:

• Businesses have not yet established the value proposition for nature / biodiversity credits^[75];
• Market governance and infrastructure has not been sufficiently developed to address integrity concerns already seen in the voluntary carbon and regulated biodiversity offset markets^[76]; and
• In 2023, the WEF believed businesses were taking a “wait and see” approach to biodiversity credit markets^[77].

ERC has the potential to address market stakeholder concern about insufficient market governance and infrastructure, in that the ERC will be developed and designed to adopt all relevant integrity principles for nature markets (see Chapter 2).

4.2.1 Potential characteristics of demand

A Biodiversity Credit Alliance (BCA) issue paper from 2023 summarises key results from a biodiversity credit demand survey in Q3 of that year^[78]. These data helpfully characterise some key potential characteristics of demand for nature / biodiversity credits, including:

• The top three motivations for corporates to purchase biodiversity credits were: (a) to support action on corporate nature targets; (b) desire to contribute to global biodiversity targets (e.g. 30x30); and (c) expectation of formal recognition of biodiversity credits by regulators. The least popular motivation was an expectation of making a profit by reselling credits later. Also, pressure from stakeholders and shareholders was not a major motivation;
• The top three factors that influenced biodiversity credit purchase decision-making were: (a) validation of credits by well-known / reputable third parties; (b) verified ecological impact in terms of the quantity and quality of biodiversity improvement underpinning the credit; and (c) the track record of the project developers on the ground. Interestingly, the least critical factor was the proximity of the project area to the company’s operations / suppliers. The ability to stack biodiversity credits with carbon credits was also seen as a less critical factor.