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

4. Comments and priorities for supply-side aspects of the ERC

Supply-side related issues and proposals for the ERC were discussed at a specific workshop on 17 June (attended by 41 participants) and as part of the workshop with the Scottish Nature Finance Pioneers (SNFP) on 12 June (attended by 43 participants). Supply was also covered in individual responses from several stakeholders and in the Citizen Space Survey.

Supply-side aspects are concerned with what landowners and land managers require from the ERC in order to promote and enable their participation in Scottish nature / biodiversity markets.

This chapter summarises the main issues raised in terms of: (a) what land managers require to enable their participation; (b) the types of project, land management activities and land / farming systems likely to be best suited to the ERC; and (c) an analysis of risks and opportunities associated with proposed ERC eligibility criteria.

The choices and priorities outlined in this chapter on supply are closely related to the question of what the strategic intent / purpose and strategic use case for the ERC should be (see section 2.1), recognising that the ERC won’t be able to address every use case or biodiversity policy priority. So, whilst all the issues and ideas raised in the Engagement Phase below are noted, not all of them will be taken forward in the final stages of the ERC project.

4.1 What land managers require from the ERC

The following points were identified that could help to shape an ERC proposition that works well for land managers:

• Future agricultural support / financial risk: some stakeholders commented on the importance of ERC being consistent with future agricultural support, especially in terms of the area-based schemes (e.g. BPS, LFASS) that are likely to be well-aligned to ERC relevant farm types (see section 4.2). There was an interest in being able to fully evaluate the potential opportunity costs associated with implementing an ERC project (e.g. if this excluded the land manager from some public schemes) and managing upfront financial risk (e.g. support with project development costs, transition finance);
• Clarity on all key aspects of ERC design / function: several stakeholders sought clarity on how the ERC would be designed / function to help inform business planning and decision-making, including issues relating to stacking, metrics, MRV processes / costs and rules on blending with public finance (see above also). Clarity on metrics was considered particularly important, allowing land managers to have a clear understanding of the outcome sought, what is being measured and therefore what land management interventions could be adopted to deliver significant uplift (and associated credit issuance / revenue);
• Flexibility and project size: related to the two points above, several stakeholders made a general point about the need for ERC to be flexible to suit different contexts (financial, business, farm type, habitats, size of project etc). Several stakeholders emphasised that the ERC should support smaller projects as well, either separately or via collaboration / aggregation mechanisms (see section 4.3.2 also);
• Fairness, transparency and ease of use: many stakeholders suggested that land managers will value a “level playing field” and confidence that the system is fair and easy to use, particularly in terms of the metric(s) used and the associated data collection for baselining and ongoing MRV, proportionate processes and straightforward documentation and reporting requirements;
• Known bottlenecks / challenges: one landowning public body stakeholder highlighted the importance of learning from known challenges with WCC / PC, notably in terms of existing barriers related to validation and verification costs and known bottlenecks with functioning of the Codes (e.g. limited capacity of third-party auditors leading to delays); and
• Stewardship credit: stakeholders were interested in the concept of a stewardship or conservation credit that would support the ongoing “good” management of a project or landholding that was able to demonstrate an appropriately set “high” baseline of ecosystem condition. This was seen as providing a helpful option to those land managers who have already committed to strategic nature restoration, often for many decades.

Land manager preference related priorities for next stage of ERC project

• Flexibility to suit different contexts: clarify strategic purpose of the ERC and the main use case(s) it will address (section 2.1). Consider the range of different supply-side contexts and use cases ERC will / won’t be able to support and communicate these clearly to stakeholders;
• Blended finance: consider blended finance options for ERC with future agricultural support (see section 6.2), including in relation to additionality considerations (see section 3.4); and
• Stewardship credit: consider options for this type of credit under the ERC (e.g. acceptable baseline ecosystem condition score, extent of likely interest on the supply and demand side).

4.2 Types of activity and land / farming system best suited to the ERC

4.2.1 Land management activity of most relevance to the ERC

Stakeholders highlighted the following types of land management activity that should be supported under the ERC:

• Alignment with other related initiatives: some stakeholders suggested that ERC eligible activities should be well-aligned with activities supported by other relevant land and nature related policies and initiatives (e.g. Muirburn Code, OECMs / Nature30);
• Flexible and wide-ranging: there was interest in the ERC providing flexible support for a wide-range of land management activities (closely related to flexibility issues covered at section 4.1). However, likely refinements to the scope of the ERC are such that some activities and projects may be less feasible under the Code (e.g. small projects for single habitats or species). Some stakeholders accepted that a single code, metric etc is unlikely to be able to accommodate every possible land management context and approach; and
• Known beneficial actions: one stakeholder highlighted how a useful starting point would be land management / restoration actions that are known to deliver meaningful uplift. Similarly to the above, some of these actions may not be feasible under the ERC.

4.2.2 Land / farming systems of most relevance to the ERC

Stakeholders identified some clear examples of land / farming systems that would likely to be a good fit for the ERC. These included: (a) land with low inputs and low productive value (especially food); (b) conservation focussed systems and projects – e.g. rainforest restoration and expansion, projects in National Parks; and (c) specific examples of farm / estate types (e.g. conservation farming, rewilding estates).

Conversely, examples were also provided of where ERC may not work, or where this was uncertain:

• Aquatic ecosystems: stakeholders were unsure the extent to which NARIA can be applied to aquatic ecosystems, including linear features associated with rivers and burns (e.g. riparian woodland / scrub, functional floodplains). An identified challenge with aquatic ecosystems for NARIA and the ERC was that the impact / uplift often may not be proximate to where the intervention takes place (i.e. somewhere else within the hydrological system);
• Intensive arable systems: MRV costs under NARIA versus uplift and credit issuance / revenues was identified as a potential issue for arable systems where the costs of ERC related process may not justify the benefits, because of constraints on the extent and type of land management interventions possible in this context (i.e. to ensure that productivity is maintained); and
• Herbivore carrying capacity: some stakeholders were uncertain how NARIA and the ERC might relate to conventional approaches to deer control in Scotland (i.e. in terms of how NARIA regards deer as part of the guild of large-bodied herbivores that help sustain ecosystem function when numbers are within carrying capacity). The effect of conventional deer control by land managers on deer numbers / impacts, in the context of their functioning as part of a “guild”, was considered uncertain.

Some suggestions to overcoming the challenges above included: (a) further context specific (i.e. habitat, ecosystem, land system) testing and modelling of NARIA to better understand metric sensitivity and the possibility of delivering uplift in more constrained land systems; and (b) case studies and other forms of evidence to inspire confidence and uptake amongst land managers.

Land management activity related priorities for next stage of ERC project

• Relevant land management activities: clarify strategic purpose of the ERC and the main use case(s) it will address (section 2.1). Identify beneficial / proven ecological land management activities that are a good fit with the ERC’s clarified scope. Identify where these align well with related land and nature policies / initiatives, to support further prioritisation; and
• Relevant land / farming systems: clarify strategic purpose of the ERC and the main use case(s) it will address (section 2.1). Identify land / farming systems and habitat contexts that are likely to be less relevant to the ERC.

4.3 Proposed ERC eligibility criteria – risks and opportunities

The supply-side workshop evaluated eight proposed eligibility criteria for the ERC (for use in determining project eligibility under the Code). The minimum size threshold criterion was also mentioned extensively in individual stakeholder responses to the ERC Engagement Paper and survey. The risks and opportunities associated with each of these criteria identified in the stakeholder engagement are outlined in the sub-sections below, as well as suggestions for improving the criteria.

4.3.1 Projects shall be over 200ha in size

Many stakeholders identified risks with this criterion, especially in terms of discouraging participation amongst smaller land managers and their prospective projects. Examples given included many smaller farms, crofters and common grazings, urban / peri-urban land, riparian woodland projects and smaller pockets of degraded public land that could benefit from this type of investment. The point was made that the biodiversity benefit from many smaller sites has the potential to make a significant cumulative contribution to SG’s biodiversity goals, albeit these would need to be strategically planned where possible.

Several stakeholders identified specific risks to SG policy delivery, notably how steering the ERC towards larger projects and sites may be at odds with SG land reform policy. This is because larger estates with more land available for nature restoration projects >200ha would be most likely to participate and benefit from the ERC. One professional membership / association stakeholder also challenged the suggestion that “large” projects of this scale were actually required for an ecosystem approach, in line with the SBS.

Fewer opportunities were identified, notably: (a) the focus on scale supporting ambitious objectives for ecological restoration; and (b) the possibility of future OECM projects and landholdings benefitting from a stewardship / conservation credit to help fund the ongoing sustainable management of landholdings in better condition.

Several suggestions were made for improving this eligibility criterion, including:

• Many stakeholders mentioned the need to better understand the rationale for the 200ha minimum size and potentially reducing (e.g. to 100ha) or even removing this, or letting the market or other commercial factors determine what the minimum project size should be;
• Related to the above, providing flexibility at the margins (i.e. for projects that don’t quite meet the agreed minimum size threshold);
• Providing a different eligibility criterion for smaller projects (e.g. based on a different outcome that must be achieved); and
• Alternative size metrics for certain types of projects (e.g. metres of intervention for riparian projects).

4.3.2 Projects may comprise smaller landholdings

This proposed criterion provides an ERC entry point for smaller landholdings <200ha where these are: (a) contiguous; and (b) can demonstrate aligned ecological land management objectives across the landholdings forming the project. In general, this criterion received a more balanced assessment than the 200ha minimum project size, with stakeholders identifying a mix of risks and opportunities, albeit these would be highly context specific (e.g. dependent on existing relationships between participating land managers).

A key risk identified is the known challenge of developing viable cross-ownership boundary land management collaborations, mainly because of the complexity and resource / time commitment required. Several academic stakeholders highlighted the need for a collaboration mechanism / option to support the development of these types of partnership project.

Two stakeholders identified a related risk in terms of the specific application of collaborative land management to nature credit markets – i.e. how to determine an equitable split of risk / reward across participating landholdings of different sizes and the need for complex legal and revenue pay structures to support this.

In terms of opportunities, the existing provision for “group projects” in the WCC and PC was highlighted as a useful example of where this type of collaboration approach is working already. Several stakeholders identified different approaches to clustering projects that wouldn’t require contiguity and have the potential to be equally coherent in ecological terms, including:

• Based on “reasonable proximity” only;
• Landholdings that are hydrologically connected within the same catchments / sub-catchments;
• Projects made up of smaller (not necessarily contiguous) land parcels within multiple landholdings; and / or
• Landholdings that contribute “stepping stones”, for example within nature networks.

4.3.3 Projects shall restore ecosystem condition for at least 10 years

This proposed criterion effectively dictates the minimum duration for ERC projects. As 10 years is relatively short when compared to the WCC (40 years minimum), PC (30 years minimum) and BNG (at least 30 years), a few stakeholders regarded this as a potential opportunity in terms of increased accessibility and attractiveness for land managers who do not want to commit to longer timeframes.

However, the short project duration was also highlighted as a key risk by many stakeholders as this: (a) was not considered long enough to deliver durable improvements in ecosystem condition; (b) would raise integrity concerns about the durability of the credit and associated uplift (see section 3.3 also); and (c) is misaligned with time commitments for other SG policy initiatives (e.g. OECMs / Nature30) and existing nature market codes and standards (see above).

The following suggestions were made to improve this criterion:

• If the 10-year minimum is adopted, ensuring high-integrity MRV for the project duration (e.g. more frequent verification events to capture emerging project risks / problems supporting an adaptive management approach);
• Aligning minimum project duration with related SG policy initiatives (e.g. 25 years as per OECMs / Nature30 projects) or science-based timescales for delivering outcomes in specific ecosystems; and / or
• Providing a “tiered” framework to support projects that cannot commit to longer timeframes (e.g. adopting more stringent measures for ensuring durability for shorter duration projects – see section 3.3).

4.3.4 Projects shall adopt an ecosystem approach

The full wording of this criterion relates to a requirement for projects to: (a) adopt an ecosystem approach; and (b) commit to a related programme of land management activity that can deliver measurable improvements in ecosystem condition. Many stakeholders supported this criterion as it represents the direction of travel and the “right way to go” (in terms of national / international biodiversity policy) and is likely to support more holistic and longer lasting benefits for ecosystem health.

However, there were also several risks identified, notably:

• Measurement and MRV more generally for ecosystem condition is costly and may deter some land managers from participating (see section 4.1 also);
• The ecosystem approach focus may deter certain categories of land manager including those needing more support to engage, who are looking to deliver specific biodiversity outcomes or with a more “traditional” mindset;
• As an eligibility criterion this may be harder to measure and audit in project registration and validation processes; and
• One stakeholder commented that the ecosystem approach framing is actually misaligned with SG biodiversity objectives, which may lead to confusion.

In terms of suggestions to improve this criterion, stakeholders suggested: (a) ensuring conceptual alignment with related SG and NatureScot biodiversity policy / measurement initiatives (e.g. Delivering Healthy Ecosystems); and (b) developing guidance in the Code to further explain what this criterion means / requires in practice, for audit purposes.

4.3.5 Nature restoration and wider land management activities

The full wording of this criterion provides flexibility for projects to propose a land management plan that may include: (a) nature restoration and conservation activities; as well as (b) wider land management. The intention is to facilitate projects that can improve ecosystem condition in a non-prescriptive manner.

In general, this proposed criterion was well supported by stakeholders as it was seen as providing opportunities for diversified nature restoration activities alongside more conventional productive land management (e.g. farming, crofting, forestry). However, there was some uncertainty / concern about: (a) precisely what is meant by the term “wider land management”; and (b) that the ecosystem approach focus is not diluted (e.g. by permitting a focus on single species conservation).

The following suggestions were made to improve this criterion:

• Ensuring that the ERC and this eligibility criterion in particular are fully aligned with related SG policy initiatives (e.g. OECMs / Nature30, the Muirburn Code, land reform); and
• Further clarifying the goals of the ERC in terms of its ability to support multifunctional nature restoration and production (and multiple benefits across these dimensions) and how this translates to project eligibility criteria.

4.3.6 No intentional degradation within the last 5 years

The full wording of this proposed criterion is significant and intentional degradation to land and ecosystems within the project area must not have taken place within the last 5 years. Whilst there was general support for this criterion, stakeholders also expressed a nuanced view of potential risks.

A small number of stakeholders felt that 5 years was too short a timeframe and that any further reduction could lead to misuse of the ERC. Conversely one stakeholder felt that any increases to this timescale could reduce the viability of the ERC (i.e. by excluding restorable habitats that were degraded unintentionally). This risk would be subject to further detail on the definition and interpretation of the criterion.

One landowning public body stakeholder also identified a potential unintended consequence of this criterion. Currently there is no market mechanism for forest-to-bog restoration (neither WCC nor PC support this activity). ERC was seen as a potential mechanism for this though there was concern that previous planting of commercial tree species could be construed as “intentional degradation”.

The following suggestions were made to improve this criterion:

• If retained, the criterion should be supported by clear and measurable / auditable definitions of what counts as “significant” and “intentional” and for what types of degradation; and
• Careful consideration of how the criterion aligns with related aspects of SG land use policy (e.g. agriculture, forestry) in terms of the definition of degradation above.

4.3.7 Freehold or leasehold rights for the project area

The full wording of this criterion is landowners, tenants or their legal representatives must evidence freehold or leasehold rights for the project area for the length of the project duration. This criterion was not discussed extensively at the supply workshop, although some potential risks and issues were identified.

The issue of equitable sharing of risk and reward between landlords and tenants, and how to manage this, was identified, drawing on experience from the voluntary carbon market. Crofters in particular and agricultural / farming tenants more generally were identified as groups that may be disproportionally affected by this (e.g. crofters may be tenants or landlords, the 10-year minimum project duration may be off-putting – see section 4.3.3).

The following suggestions were made to improve this criterion:

• The role of stewardship / conservation credits was seen as potentially important for the viability of the ERC as putting an area of a tenanted property “to nature credits” could devalue the income potential for the next tenant and give them an ongoing maintenance liability (depending on the timescales of the project and credit issuance); and
• Robust, equitable models for sharing risk and reward between tenants and landlords must be developed as a prerequisite to an effective ERC.

4.3.8 Mechanism for transferring obligations where project area is leased

The full wording of this criterion is 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 landowner must agree to take over the obligations and ensure these are transferred to any new lease agreements.

Stakeholders tended to identify more risks than opportunities associated with this criterion. In particular, a mechanism for ensuring a balance of responsibilities, risk and reward was seen as unclear and the process of developing such a mechanism challenging in terms of legal issues (e.g. from a financial responsibility perspective). All of these risks were considered particularly acute in a crofting and common grazings context.

One opportunity was identified in terms of the durability of projects and outcomes whereby the proposed mechanism would pass on responsibility for the project to the next tenant. This was seen as a particular strength in terms of the potential for the ERC to support related SG policy initiatives, such as OECMs / Nature30 projects.

The following suggestions were made to improve this criterion:

• Ensuring that clear mechanisms are available for sharing risks and management responsibility and for determining the split of credit ownership between landowner and tenant(s), should this scenario arise (e.g. agreed 50:50 split, use of a “joint and several liability contract”).

ERC eligibility criteria related priorities for next stage of ERC project

• Review and amend proposed eligibility criteria: review all risks, opportunities and suggestions for improving the criteria identified by stakeholders. Refine the proposed eligibility criteria to improve their functioning as an overall system for determining project eligibility, in line with the revised strategic intent / purpose for the ERC. Consider the need to remove, merge or add new criteria.