Ecosystem Restoration Code (ERC): engagement phase results and analysis

3. Comments and priorities for a high-integrity ERC

Integrity related issues and proposals for the ERC were discussed at a specific workshop on 22 May (attended by 22 participants) and as part of the workshop with the Scottish Nature Finance Pioneers (SNFP) on 12 June (attended by 43 participants). Integrity was also covered in individual responses from several stakeholders. This chapter summarises the main issues raised in relation to five key aspects of integrity for nature / biodiversity markets.

3.1 Key factors / principles for a high-integrity ERC

Work on the ERC is informed by several sets of high-level principles for high-integrity nature markets^[4]. Drawing on these, the integrity and SNFP workshops asked participants about what key factors / principles should be considered for a high-integrity ERC. The following themes were identified:

• Alignment with UKG and SG high-integrity principles: seeking close alignment with the BSI Nature Investment Standards programme and the SG’s principles for responsible investment in natural capital was welcomed by stakeholders. This was generally seen as a comprehensive approach;
• Transparency: the importance of transparency was discussed in general and specifically in relation to the ERC’s approach to measurement, data and analysis (this should be “open access”). One professional body / association stakeholder suggested that this could be via a full external peer review of all aspects of ERC governance, measurement, crediting etc;
• Measurement: as well as a transparent approach to measurement, stakeholders sought reassurance that the ERC’s metrics were fit-for-purpose (e.g. detectability at measuring uplift) and well correlated to the outcomes being sought by SG and claimed by investors and buyers of credits;
• Systems approach, adaptive management and durability: there was interest in ensuring that the proposed ecosystem approach for the ERC incorporates consideration of aquatic ecosystems and system-wide / cumulative effects. The need for adaptive management, supported by relevant monitoring, reporting and verification (MRV) was also discussed in this context, including its relationship with project and outcome durability (see section 3.3) and the potential impacts of climate change on projects;
• Compliance and enforcement: some stakeholders emphasised the importance of tying ERC to a relevant compliance regime (for integrity and demand), including the need for enforcement as well and the question of who / which organisation would provide this (e.g. the role of statutory environmental and local authorities);
• Community benefits and engagement: some stakeholders questioned how the ERC was being linked to principles of community engagement and benefit and who was leading this aspect of work under the ERC; and
• Competent persons: one stakeholder raised the principle of competent persons / individuals, for data and MRV related aspects but also in terms of design standards for ERC supported nature / biodiversity projects and ongoing adaptive management.

High-integrity principle related priorities for next stage of the ERC project

• Transparency of measurement approaches: develop relevant technical documentation in line with BSI Flex 701 and 702 setting out the approach to measurement / metrics for use in ERC; and
• Adaptive management: consider how the ERC, its metric framework and MRV can support an adaptive management approach to projects delivered under the Code (e.g. including project delivery and management standards alongside standards for project design, metrics, MRV etc).

3.2 Metrics and measurement

SG presentations during the engagement phase workshops emphasised the background to the ERC project in terms of the joint SG-NatureScot-SEPA CivTech challenge with CreditNature (2023-2024). This sought to develop a workable option for a voluntary nature / biodiversity credit for Scotland. Therefore, the starting proposition for the ERC was that it would use CreditNature’s metric framework NARIA^[5], whilst seeking to adopt a metric “agnostic” approach to allow for the consideration and use of different metrics in the future.

NARIA and the ERC’s approach to metrics and measurement was the focus of much discussion across the workshops. A common theme was a need for greater clarity and transparency around NARIA but also more fundamental questions of what the ERC is for, what specific aspects of SG biodiversity policy (including SBS outcomes) it relates to, what specific use case(s) it can / should address and how the choice of metric(s) influences all these factors (see section 2.1 also).

3.2.1 Metric related risks and opportunities for market-integrity

The following market integrity related risks / concerns associated with the use of NARIA as the metric framework for ERC were raised by participants:

• Transparency and peer review: stakeholders expressed a need to better understand the fundamentals of NARIA and queried whether it had been peer reviewed for application in the context of Scottish ecosystems;
• Metric agnosticism: stakeholders queried the metric “agnosticism” of the ERC, what scope there would be to incorporate metrics other than NARIA and what purpose this would serve (e.g. in terms of supporting wider use cases). There were also queries about the relationship between the ERC and the Woodland Carbon and Peatland Code (WCC and PC) biodiversity bundling project, which has proposed to use the Operation Wallace “basket of metrics” approach. Stakeholders asked if NARIA could be used for explicit bundling of nature / biodiversity with WCC and PC projects;
• Strategic delivery: several stakeholders queried the strategic fit of the ERC in terms of its role supporting delivery of SG’s stated biodiversity objectives and priorities (see section 2.1 also). A distinction was made between ERC rules and standards (i.e. market governance) and metrics, whereby metrics alone are not necessarily sufficient to incentivise delivery of the right type of projects / activity to support SG biodiversity policy priorities;
• Metric governance: several stakeholders queried the approach to how the use of different metrics under the ERC would be governed. Such governance would have both policy and technical dimensions. For example, whether a given metric could help direct ERC projects to support SG biodiversity policies (policy) and questions related to reference sites / benchmarking and who is responsible for determining theoretical and attainable maxima in a given site / ecosystem context (technical); and
• Unintended consequences: the risk of unintended consequences from poor metric choice and design was raised by several stakeholders. A key example given was projects adopting a “race to the bottom” mentality and favouring habitats or interventions that would deliver an easier / quicker uplift, rather than a strong focus on strategic biodiversity priorities.

3.2.2 Metric related risks and opportunities for supply-side access

Participants were also asked to consider metric related risks and opportunities for supply-side access (i.e. whether the proposed use of NARIA might hinder or support ERC engagement by land managers). The following were identified:

• Metric scope / applicability: the applicability of NARIA to certain habitats (aquatic ecosystems), land systems (intensive agriculture) and other dispersed / linear features (e.g. nature networks) was questioned by some stakeholders;
• Detectability of change: linked to the 200ha minimum project size, several stakeholders queried whether NARIA was “fine-grained” enough to detect ecosystem condition change associated with smaller scale interventions that some land managers may have an interest in, especially where these are associated with aquatic ecosystems (see above);
• Different metrics for different scales: one natural capital company stakeholder suggested that the ERC might consider different “entry points” for projects with different objectives and scales, potentially opening up access to smaller landholdings and projects. The Operation Wallacea “basket of metrics” approach was suggested as an option for small sites, potentially providing greater change detection at this scale and with the option of selecting metrics that could suit Protected Area management (e.g. linked to notified features);
• Costs of MRV and metric design features: the use of standardised metrics within the ERC (NARIA or something else) was regarded as a positive in terms of driving efficiencies and reducing the costs of MRV methodologies to projects and land managers. One stakeholder queried whether delivery of management interventions could be measured as an alternative to outcomes, due to issues with lag time and detectability of change in ecosystem restoration projects; and
• Alignment with biodiversity policy: ensuring that metrics are aligned with key SG biodiversity policy initiatives (e.g. 30x30, nature networks) was seen as an opportunity for projects / land managers by demonstrating the contribution of the investment and credits towards policy outcomes, potentially increasing the value / utility of the credits.

3.2.3 Suggestions for how the ERC should approach metrics

Two specific suggestions were made to improve the application of NARIA as a metric in the ERC: (1) ensuring a comprehensive metric scope, including measurement of relevant ecosystem services and pressures acting on ecosystems, projects etc; and (2) ensuring that the metric is a good fit for Scottish biodiversity policy objectives and priorities (i.e. in recognition that NARIA has been certified by Accounting for Nature^[6] for a broader territorial scope than just Scotland).

Metric related priorities for next stage of the ERC project

• Strategic intent / use case and metrics: clarify strategic purpose of the ERC and the main use case(s) it will address (section 2.1). Ensure final choice of metric(s) for ERC supports this and is well aligned to related SG policy goals whilst minimising risks of unintended consequences;
• Metric governance: consider potential need for additional metrics in the future to support different strategic purposes and use cases of the ERC. Consider governance needs for the adoption of new metrics under the ERC and how these will be related to any newly defined purposes, use cases, outcomes etc of the ERC;
• Metric scope / applicability and detectability: clarify strategic purpose of the ERC and the main use case(s) it will address (section 2.1). Consider / review the applicability of NARIA to relevant habitat and land system contexts (e.g. small sites, single habitat / species projects, small interventions, intensive agriculture). Reflect this in deliberations on strategic purpose / use case for ERC and consider the need for additional metrics, now or in the future; and
• Metric and MRV costs: consider the project development and ongoing costs associated with baselining and MRV under NARIA (and any other metrics) and how these balance against potential revenues from nature credit sales, under different habitat / land system scenarios.

3.3 Durability of outcomes

The principle of ensuring that the additional environmental outcomes represented by nature credits are durable / long lasting is captured within the BSI Nature Investment Standards programme. The ERC Engagement Paper outlined a range of possible approaches for ensuring durability of outcomes in nature markets as well as potential challenges with defining this, given issues with variable recovery rates across different ecosystems etc.

3.3.1 Durability related risks and opportunities for market-integrity

Participants identified the following durability related risks and opportunities for market integrity:

• Definition and framing of durability: stakeholders discussed the trade-offs and risks of different approaches to defining and framing durability. The BSI approach of aligning durability to “at least the lifetime of the credit” was seen as potentially quite weak, whereas the fixed duration of 30 years used in English BNG markets was potentially seen as too onerous;
• Alignment of durability requirements across public and private finance: one stakeholder suggested using the approach to durability adopted for public support / investment in nature restoration in private nature markets as well (e.g. the time period projects / landowners are required to maintain the project for as a condition of receiving the grant); and
• Risks to durability: several stakeholders highlighted delivery risks to durability, notably in terms of climate change impacts (e.g. whether species would be present or absent in the future) and the need / absence of a legal framework to ensure the durability of outcomes.

3.3.2 Durability related risks and opportunities for supply-side access

The main durability related risk to supply-side access identified was the need to strike the “right” balance between market integrity and market access. Establishing a lengthy minimum project duration over which activities and outcomes would need to be maintained (e.g. 30 years as with BNG and PC) was seen as potentially too onerous and off-putting to prospective supply-side market participants. Conversely the BSI approach was seen as potentially weak and too low a bar (section 3.3.1).

3.3.3 Suggestions for how the ERC should approach durability

The ERC Engagement Paper describes the complex challenge of ensuring durability in nature / biodiversity markets (see section 3.3.1 above also). Stakeholders reflected on this and identified the following critical factors to consider:

• Outcomes: how to define the nature restoration outcomes being sought and the timescales for achieving these, including in relation to reference states, theoretical / attainable maxima and how this differs by ecosystem type;
• Flexibility: the need for the ERC to support / enable an adaptive management approach to project delivery;
• Mechanisms: the need for specific mechanisms to assure and underpin the durability of outcomes; and
• Standards and governance: how to incorporate all these aspects into a high-integrity market mechanism such as the ERC. For example, the extent to which the Code will standardise and assure the approach to project delivery under the ERC (planning / design, implementation, monitoring etc) alongside market specific aspects (e.g. measuring uplift, issuance of credits).

In response to these challenges, several stakeholders highlighted potential ERC design features and mechanisms that could support outcome durability: (a) contractual obligations over a defined timeframe (e.g. conservation covenants); (b) prescribed minimum intervention levels; (c) clear rules on whether ex-ante credit sales would be permitted; (d) holding back a portion of credits for sale over a longer time period to incentivise longer-term maintenance; and (e) the concept of variable risk buffers to help account for uncertainty in restoration outcomes and timings (e.g. for ecosystems or interventions that are less well understood).

One stakeholder suggested that the ERC could establish the principle of durability (e.g. a defined duration over which interventions / outcomes should be maintained) but without specifying the mechanism that would assure this. Effectively leaving this for the project to decide and for ERC governance to adjudicate on whether this is appropriate given the project’s objectives, context etc.

Durability related priorities for next stage of the ERC project

• Overall approach to durability: clarify strategic purpose of the ERC and the main use case(s) it will address (section 2.1). Consider / review different overall approaches to durability in the ERC, notably in terms of whether this will: (a) be ecosystem specific; (b) define restoration outcomes and timescales for projects; and (c) capture these aspects in specific ERC project delivery standards; and
• Mechanisms for durability: identify, assess and prioritise mechanisms that could be used in the ERC to help ensure the durability of outcomes delivered under the Code. Consider whether one mechanism is sufficient, or if various mechanisms may be required to suit different contexts.

3.4 Additionality

Two specific additionality tests for the ERC were presented in the Engagement Paper and discussed at the integrity and SNFP workshops. Drawing inspiration from the Peatland Code (PC), these were a legal compliance and financial feasibility test.

3.4.1 Additionality related risks and opportunities for market-integrity

Participants identified the following additionality related risks and opportunities for market integrity:

• Support for the proposed tests: some stakeholders commented that the proposed additionality tests seem appropriate, proportionate and simple to follow / straightforward;
• Challenges with financial tests of additionality (FTAs): various risks and challenges were identified with the effective implementation of FTAs. As the aspiration is for the ERC to be broadly “intervention agnostic”, this may be problematic as project specific capital and maintenance costs could be hard to validate without industry or local standards (for costs). The proposed split between non-nature credit and nature credit related finance (60:40) was also seen as being potentially arbitrary and hard to justify;
• What the tests are applied to / implications for multiple tests: clarity was sought on what the proposed additionality tests would be applied to and the potential implications of this in terms of the sequencing of multiple tests. There was a preference for applying additionality tests to the project itself, rather than the credits the project would issue. This approach may also help to address potential legal additionality issues – i.e. if the tests are being applied to credits and the project itself is subject to a legal agreement then some or all credits in a potential stacking scenario could fail legal additionality tests as the outcomes they are associated with are being delivered under a legal requirement; and
• Wider legal additionality test challenges: some stakeholders identified a potential risk / challenge with legal tests whereby a legal obligation may be closely adjacent but not directly related to nature restoration (e.g. cultural heritage / historic sites, tourism). In this case a portion of the nature restoration outcomes could be delivered via a related legal obligation.

3.4.2 Additionality related risks and opportunities for supply-side access

Similarly to supply-side access risk for durability (see section 3.3.2) the main risk for additionality identified by stakeholders was the need to strike the “right” balance between market integrity and accessibility. In particular, an “aggressively” set FTA that seeks to maximise the crowding-in of private finance could stymie a nascent market by limiting access to public funding and blended finance and the potential de-risking benefit of this for project finance. Stakeholders also commented that including a particularly aggressive FTA for the ERC could be counterproductive by making it less competitive than existing nature markets (e.g. WCC and PC), potentially limiting uptake and the contribution to SG policy goals sought.

3.4.3 Suggestions for how the ERC should approach additionality

Stakeholders suggested including a clearer / more evidence-based justification for the inclusion of an FTA with the ERC, especially in terms of the non-nature credit vs nature credit finance related split used and how this may impact uptake of the Code. Further work and scenario testing on the impact of additionality tests on stacking and bundling options for the ERC was also recommended.

Additionality related priorities for next stage of the ERC project

• Selecting additionality tests: review evidence on FTA performance (especially where project costs are uncertain / not standardised) and assess options for different FTAs. Consider if an FTA should be included for ERC and / or whether other options may be more appropriate for the context; and
• Alignment with other codes / standards: with reference to minimum standards in BSI Flex 701 and Flex 702, consider the impact of ERC additionality tests (especially any FTA) on project viability, market accessibility and potential undue competition with other nature market codes and standards.

3.5 Stacking and bundling

ERC engagement phase workshops and the Engagement Paper discussed concepts and some options / models for stacking and bundling for the ERC.

3.5.1 Stacking related risks and opportunities for market-integrity

Participants identified the following stacking / bundling related risks and opportunities for market integrity:

• Nervousness around stacking: in general, participants in the two workshops where stacking and bundling were discussed in detail^[7] expressed concern about the possible risks associated with stacking. High-integrity stacking was seen as hard to achieve (e.g. due to greater risks of double counting). One participant also commented that stacking may be at odds with the ecosystem approach, because it optimises markets towards delivery of specific ecosystem services rather than ecosystem integrity;
• Bundling preferred: because of the above, explicit bundling (whereby one credit type is generated but one or more co-benefits are “explicitly” identified / measured) was generally seen as a preferable option for the ERC in terms of achieving high-integrity. Bundling was also seen as a more straightforward approach and having good potential to support SG policy goals if key related SG policy objectives and outcomes can be reflected in the bundle; and
• Blended finance and policy alignment: ERC blending / stacking with public funding (e.g. agri-environment payments) was discussed as a potential risk in terms of policy alignment. Notably whether an attractive “stacked” public-private option could result in leakage of productive activity (i.e. whereby an nature restoration focussed project offers a better net benefit than the production focussed alternative).

3.5.2 Bundling related risks and opportunities for supply-side access

There was some discussion about the lack of data on the costs and benefits of stacking vs bundling. Notably the question of whether the price uplift of an explicitly bundled credit (see above) would outweigh the additional MRV costs associated with measuring other benefits in the explicit bundle. If bundling is taken forward as the preferred option for the ERC, this question of project economics could be key to both supply and demand-side interest (e.g. if robust evidence on wider co-benefits is needed to justify the investment).

3.5.3 Suggestions for how the ERC should approach stacking / bundling

In addition to expressing a preference for bundling (section 3.5.1), stakeholders identified several other steps for improving the ERC’s approach to stacking and bundling:

• Clarify the scope / purpose: participants expressed a need for further clarity and evidence on stacking / bundling options for ERC and what the problem is that these potential solutions are trying to address (e.g. economic efficiency, outcomes for nature, outcomes for specific ecosystem services). Currently there is a lack of data on costs and benefits to help answer these questions;
• Support for a flexible / experimental approach: some participants suggested alternative approaches to stacking that should be considered for the ERC (e.g. “temporal” stacking) and an interest in keeping rules on stacking more open / flexible (e.g. to be tested on a project-by-project basis rather than setting a definitive rule);
• Alignment with related codes and standards: consideration of the joint WCC / PC biodiversity bundling project was suggested, in terms of the approach / rationale adopted (i.e. favouring bundling) and also the specific question of how ERC bundling or stacking with WCC / PC should be approached. Close consultation with related Codes was advised to ensure consistency, alignment and an appropriate level of competition; and
• Transparent approach: regardless of whether stacking or bundling is adopted for the ERC stakeholders favour a highly transparent approach so the credits in the stack or co-benefits in the bundle, and the rules that have determined their inclusion, are clear.

Stacking / bundling related priorities for next stage of the ERC project

• Outcomes from bundling and stacking: clarify the possible outcomes that bundling and stacking can contribute to (e.g. optimising nature markets for economic efficiency / optimal allocation of resources, specific ecosystem services, ecosystem integrity etc), the evidence base for these and which outcome(s) is a priority for SG, PINC and the ERC;
• Bundling vs stacking: further consideration of potential risks, benefits, trade-offs and unintended consequences of favouring one option over another, especially in terms of the different outcomes sought (see above); and
• Further engagement: specific targeted engagement with demand and supply-side stakeholders to test out bundling / stacking propositions and how significant these would be for market attractiveness.