Ecosystem Restoration Code: engagement paper

5. Alignment of the ERC with SG policy

This chapter addresses the overarching question: how can the Ecosystem Restoration Code (ERC) be aligned with relevant SG policy (including funding) and existing nature markets and standards? The development of the ERC must be taken forward in alignment with relevant SG policy(biodiversity, climate change, agricultural reform, just transition etc) so that opportunities to enhance policy delivery are taken and negative impacts are avoided.

5.1 Potential for ERC to support SG objectives

Any interventions led by SG to shape or influence nature markets must pay close attention to how those markets can support relevant SG objectives. However, Governments must also play a key role in shaping effective nature market opportunities for investors and buyers of nature credits (e.g. coordination of public subsidies, potential de-risking for investors). In effect, this means SG has a dual role: (a) steering nature markets towards public objectives; whilst (b) ensuring that markets have the right level of accessibility and attractiveness to private interests on both the supply (Chapter 3) and demand (Chapter 4) sides.

5.1.1 Support for the SG biodiversity framework

The strategic intent of the ERC is to provide a high-integrity market mechanism for channelling additional responsible private investment into nature restoration / biodiversity projects. This is closely aligned with the vision and the objectives of the Scottish Biodiversity Strategy (SBS) and the Scottish Biodiversity Delivery Plan 2024-2030. A compatibility analysis of the strategic intent of the ERC and the 22 outcomes from the SBS is included at Annex B. Particular points to note include:

• The intention is for the ERC to be applicable to multiple habitat and land system contexts. This is broadly supportive of the SBS’s integrated cross-ecosystem approach, although marine ecosystems are not currently in scope of the ERC.
• ERC is most relevant to four of the SBS’s six objectives to 2030. Objectives to accelerate restoration and invest in nature are particularly relevant.
• The SBS lists five key lessons from the implementation of Scotland’s first SBS in 2004, three of which are actively addressed via the design of the ERC: (a) working more strategically and at scale; (b) focussing on ecosystem health; and (c) investment / blending public and private funding.
• The compatibility analysis of the ERC with SBS outcomes (Annex B) shows clear areas of support against 18 of 22 SBS outcomes. No areas of conflict were identified. Two outcomes have positive but uncertain support and two outcomes have no identified link with ERC. Particular points to note include:
• Marine ecosystems are not currently in scope of ERC thus there is no identified relationship with SBS marine outcomes;
• Smaller scale urban NbS projects are unlikely to be in scope of ERC. Nature networks in peri-urban locations could potentially be in scope, subject to ERC size and other eligibility criteria being met;
• The more open-ended ecosystem approach focus of the ERC may be less suited to traditional protected area and individual species conservation management;
• Integrated catchment management type actions (e.g. riparian planting, peatland restoration, creation of floodplain wetlands, ponds, wader scrapes etc) are all potentially in scope of ERC. This means that the ERC is likely to be supportive of all SBS river, loch and wetland outcomes; and
• The ERC is likely to be strongly supportive of SBS woodland management and soil health outcomes as SBS framing of these outcomes is very closely aligned to activities that might be delivered under the ERC (e.g. focus on improvements to woodland diversity / structure, measures to reduce pressures on soils).

5.1.2 Support for other SG land use transformation policies

Healthy biodiverse ecosystems are a key NbS for addressing and mitigating the impact of climate change. Projects and investments delivered under the ERC are likely to offer positive multiple benefits for climate and nature, supporting the increased uptake of NbS as specified in the SG’s Climate Change Plan (CCP) update^[79]. In particular, the broad applicability of ERC to many of Scotland’s terrestrial habitats and land system contexts has the potential to support sustainable land management practices that can: (a) increase above and below ground carbon sequestration across a wide range of habitats and vegetation / soil types^[80]; and (b) reduce emissions from land (e.g. via improved soil management).

Box 6: SG commitments to align future agricultural support with natural capital private investment opportunities^[81]

• Land managers will be permitted to enter the same land area into both Agriculture Reform Programme agreements and PC or WCC schemes, provided there is no double funding of activities and carbon market additionality rules are met; and
• Flexibility will be built into the Agriculture Reform Programme’s framework, allowing for the incorporation of new private investment mechanisms as they emerge.

SG’s Agricultural Reform Route Map sets out how we will transform how we support farming and food production in Scotland to become a global leader in sustainable and regenerative agriculture^[82]. The intention is to ensure that tenant farmers, smallholders, crofters, new entrants and land managers are given equal opportunity to support the SG’s Vision for Agriculture^[83]. The broad habitat and land system scope of the ERC means that there are clear alignment opportunities to explore with future agricultural support, notably as land that is eligible for ERC is also likely to be eligible for support under at least one of the four tiers of the future agricultural support package beyond 2025. The commitments set out in the Natural Capital Market Framework to aligning future agricultural support with private investment opportunities (Box 6) provide a useful basis for developing these opportunities further, including in relation to blended finance options with the ERC (section 5.2.1).

5.1.3 Support for SG economic policy

SG’s economic strategy – the National Strategy for Economic Transformation (NSET) – includes a specific goal of using economic development to rebuild Scotland’s natural capital, as a vital pillar of our transition to a wellbeing economy^[84]. This includes the commitment to developing a market for responsible investment in natural capital that can support the delivery of SG environmental objectives (e.g. for climate and biodiversity) whilst also supporting economic opportunities, including boosting local employment and supply chain capacity (e.g. contractors).

The ERC is well placed to support these goals of the NSET, complementing the existing SG supported carbon codes, by providing a market mechanism for other habitats and land system contexts. Existing SG research has shown how investment in natural capital can significantly boost economic impacts (FTE jobs, GVA) at local^[85] and regional^[86] levels. The ERC has potential to help support this goal further.

5.1.4 Support for SG community benefits from natural capital policy

The SG’s Principles for Responsible Investment in Natural Capital^[87] and Natural Capital Market Framework^[88] include a specific requirement that investment should deliver public, private and community benefit. This is framed as an equitable sharing of benefits between public, private and community interests, supporting a just transition and aligned with a Community Wealth Building approach. The Scottish Land Commission (SLC) have also published good-practice guidance on delivering community benefits from land^[89] and the recently adopted BSI Flex 701 Nature Markets Overarching Principles and Framework includes a principle on transparent and proportionate engagement with local communities^[90].

It is anticipated that the ERC will be fully aligned with relevant policy and principles on community engagement and benefits, including relevant provisions in forthcoming BSI standards on biodiversity benefits (Flex 702) and community engagement and benefits (Flex 705).

5.1.5 Balancing public and private objectives for nature markets

The primary goal for SG in intervening in nature / biodiversity markets in Scotland is to develop a high-integrity market mechanism that: (a) is aligned with our principles for responsible investment in natural capital; and (b) can support increased delivery of the SBS vision and outcomes alongside public investment in NbS and the other levers SG has it its disposal. To achieve goal (b) new markets must provide sufficient return and be accessible to investors, buyers and land managers e.g. in terms of:

• How well aligned potential new sources of private finance are with existing land-based enterprises and related public payment / support regimes;
• What the costs of entry / participation are (e.g. baselines / feasibility studies, registration, MRV); and
• The cost and utility value of the nature / biodiversity credits being issued.

The SBS’s vision and its 22 strategic outcomes are framed at the ecosystem level and the Scottish Biodiversity Delivery Plan 2024-2030 specifies a programme of large-scale ecosystem restoration. This is appropriate and important given the known benefits for biodiversity of improvements in ecosystem function and health. This means that projects delivered under the ERC will also need to adopt an ecosystem approach, working at sufficient scale to encompass whole ecosystems as “functional units” and driving tangible improvements in the restoration of ecosystem processes and overall condition (see sections 1.3.1 and 3.2.2).

This aim and approach required for SBS appears to differ from what is emerging as practice in offsite delivery of BNG. Experience to date shows that BNG projects tend to be small scale^[91] (e.g. 20-30 ha) and its use of metric scores may act to drive a project focus on habitats that are easy to create and rapidly maturing, rather than the range of habitat creation needed for the overarching nature restoration strategy^[92]of the SBS.

Even with effective coordination at the landscape scale across ownership boundaries, it is anticipated that smaller scale, more piecemeal delivery of BNG type projects would likely be insufficient for achieving the ecosystem scale ambitions of the SBS. However, the attraction and accessibility of BNG to land managers (e.g. because projects can be undertaken at more manageable scales) is significant. The potential risks and benefits of a compensation / offsetting type use case for the ERC are outlined at section 4.1.3.

5.2 Compatibility of ERC with other sources of finance

Annex C presents a high-level comparative analysis between the ERC, WCC and PC of potential opportunities for: (a) bundling / stacking; (b) blended finance; and (c) habitat contexts supported. The intention is to highlight the range of potential interactions of the ERC across public and private sources of finance and habitat and land system contexts.

A specific purpose has been to scope out potential avenues for blending private finance via the ERC with public payment / support schemes (see section 5.2.1). This will require the development of an appropriate high-integrity financial additionality test for the ERC (see section 2.2.1).

The analysis in Annex C highlights the following:

• As currently envisaged, the ERC is an integrated, outcome focussed Code with action on the ground driven by metrics of ecosystem condition. This means that ERC is effectively “intervention agnostic”. That is, many possible combinations of land management intervention will be possible across different combinations of habitats. This principle strongly influences the analysis in Annex C;
• In contrast, WCC and PC generate high-integrity, independently verified carbon credits from woodland creation and peatland restoration respectively. That is, they are habitat specific and interventions will be relatively prescriptive (e.g. good-practice silviculture in terms of spacing, stocking, species choice etc for woodland creation projects);
• ERC could potentially be stacked / bundled with both WCC and PC as ERC projects may encompass land suitable for woodland creation and peatland restoration (as well as other habitat creation / restoration opportunities). Conversely WCC and PC are restricted to these areas of suitable land and only have a one-way potential stacking / bundling opportunity with ERC;
• Because ERC supports many possible land management interventions, the type of activity delivered under ERC will potentially be relevant / applicable to all public payment / support schemes listed in Annex C. Subject to financial additionality tests and scheme specific rules, blending of private finance from ERC may therefore be possible with all these schemes; and
• Similarly, the integrated cross-habitat approach of the ERC means it has potential to support five of the eight broad habitat categories considered in Annex C. Crucially this could involve supporting action to restore these habitats (e.g. semi-natural grasslands, heathland, floodplains) as part of the ERC project. Conversely WCC could support woodland creation projects on other habitats (e.g. semi-natural grassland, enclosed farmland) where this is aligned with relevant policy and regulatory frameworks – this is a different approach to the ERC though which could take action to restore the underlying habitat. None of the market mechanisms are relevant to marine and the relevance to coastal margin habitats is uncertain. WCC and PC projects could be relevant to the urban broad habitat (e.g. restoration of raised bogs in peri-urban locations) whereas minimum eligible project size for ERC will likely preclude urban projects.

5.2.1 Potential blended finance options for the ERC

As discussed above, there may be opportunities to blend private finance via the ERC with all SG payment / support schemes for land use and NbS projects:

• Future agricultural support package beyond 2025;
• Nature Restoration Fund (NRF);
• Peatland ACTION; and
• Forestry Grant Scheme (FGS).

The policy intent of pursuing these blended finance options would be to maximise the value of public spending and support increased ecosystem restoration and land use delivery by “crowding-in” responsible private investment. This could mean delivering more activity (e.g. hectares of habitat restoration) and / or more or better environmental outcomes (e.g. improvements in ecosystem condition, carbon storage) with the same or less public expenditure^[93].

These are potential blended finance options only at present and will require further consideration with relevant SG policy officials. However, there are helpful precedents of blended finance for natural capital via WCC / FGS and PC / Peatland ACTION. The commitments to align future agricultural support with private investment in natural capital (see Box 6) also provide helpful principles from which to build.

5.3 Unintended consequences and risks of the ERC

Several potential unintended consequences and risks of the ERC have been identified at this stage. These are:

• ERC could unduly compete with other nature market codes and standards, including the SG supported carbon codes. This could occur, for example, if a blended or stacked ERC carbon product proves more attractive to buyers than WCC / PC carbon even if bundled with biodiversity^[94];
• Undue competition could also occur with other codes and standards that are not currently SG backed / or BSI assured (e.g. Wilder Carbon^[95]);
• The more open-ended ecosystem approach focus of the ERC may be less suited to traditional protected area and individual species conservation management, where the goal is to protect and maintain specific habitats, species assemblages or communities. Therefore, the ERC may not be appropriate as a means of channelling investment into protected areas, given the potential for uncertain impacts on notified features; and
• An effective, well-functioning nature / biodiversity market facilitated by the ERC would create more incentives for private investment in natural capital in Scotland. Increasing responsible investment in natural capital is a goal of the SG’s Natural Capital Market Framework but this needs to be managed carefully to ensure effective community engagement and benefit.