Guidance on Nature-based Finance Opportunities for Land Managers in Scotland

Agricultural tenants are a vital part of the Scottish agricultural and rural economy and are central to the fabric of Scottish rural society. The Scottish Government recognises that tenants have an important role to play in the future of the rural economy. In particular, they can make a vital contribution to climate change adaption and mitigation, and restore nature while maintaining high standards of food production from Scotland’s farmland.

Relevance of nature-based finance

Tenant farmers are likely to have the knowledge and skills to identify and deliver environmental enhancements that could attract new revenue. They may be approached directly by buyers of ecosystem services, or by their landlords. As a result, it is vital that effective relationships and lines of communication are established from the outset.

In the first instance, nature-based finance is likely to take the form of new sources of income alongside public sector grants and subsidies. For example, existing customers in the food supply chain may be seeking net zero (📖). Tenant farmers will be concerned to ensure the future success and resilience of their businesses. New income streams can be a vital part of this.

For many tenant farmers, the continuing production of food will be a priority. This may require new approaches to farm business management, as well as investment in artificial structures (such as those used in managing livestock slurry) and digital technology (such as that used in the delivery of nutrients to crops). There is an opportunity to integrate investment in natural features into investment in these technologies.

Key considerations

New opportunities for nature-based finance must be considered in the light of existing tenancy agreements and the law underlying them. In cases where a tenant wishes to pursue an idea for revenue diversification, it will be very important to consider carefully the implications for the landlord. This will mean that the case for participation in a new initiative can be presented to the landlord with a deep understanding of the landlord’s own position and likely concerns.

Landlords may initiate discussions with tenants about new ideas for revenue and investment on or near their farms. Tenants in this situation should ensure they understand fully the obligations and rights they have under their existing tenancy agreements. The best outcomes for both parties, the farm itself, the environment and the local community are most likely to be achieved by working openly in a spirit of partnership and shared outcomes. There may be other parties with a close interest in the farm as well. Examples include owners of sporting rights, employees, beneficiaries of rights of way (such as utility companies), local conservation or amenity groups or recreational users. The interests of these other parties should also be considered at the earliest possible stage.

Obligations associated with Government funding support also need to be kept. Once a new system of government agri-environmental support in Scotland has been finalised, the balance between public and private income sources is likely to become clearer.  Specific parts of this guidance deal with tenancy requirements, business impact and collaborative working. There are also Explanations of tax implications and contractual considerations. These provide further starting points for a tenant considering new opportunities in nature-based finance.

Suggested next steps in the guidance – visit the Checklist and Case studies.

Crofting (📖) is an important form of land tenure in Scotland. Over 15,000 individual crofters are involved in the stewardship of 500,000 hectares of crofting land in Scotland, using it for agricultural and other purposes. Many estates in the Highlands & Islands have crofts and the landowner receives rent from the crofters. Typically, buildings, fences, drains and roads are provided by the crofter. There are over 21,000 crofts ranging in size from 0.5 hectares to more than 50 hectares. Crofters and others sometimes jointly hold a right to allow their livestock to graze on land. Sites where this occurs are known as common grazings (📖). There are over 1,000 common grazings in Scotland.

Relevance of nature-based finance

As an integral part of Scottish rural society, crofters play an important role in stewardship of the environment of the Highlands and Islands. Their local knowledge and skills, together with the extensive common grazings that they are involved with, makes them well-placed to play a central role in the pursuit of nature-based finance. Specific opportunities include assisting organisations seeking to fulfil net zero commitments (📖) and the offsite provision of new habitat associated with the process of permitting new built development (such as housing or transport infrastructure).

Nature-based finance may also be an important opportunity to reinforce the overall financial position of a crofter by providing new opportunities for off-croft work in the local economy. Many of the nature-based finance opportunities and challenges of crofters will be comparable with tenant farmers. However, unlike tenant farmers, crofters have extensive rights in relation to planting and harvesting of woodland. This provides an opportunity through the Woodland Carbon Code.

Given the location of many crofts in areas of peatland, it is likely that graziers may have the opportunity to work with landowners on peatland restoration projects, secured through finance for carbon credits (📖).

Key considerations

Existing crofting law and crofters’ rights and responsibilities will be very important in considering new income opportunities associated with the restoration of natural features.

While crofters may be invited to participate in new schemes, some initiatives designed to attract new income may come from crofters themselves. The scale of investment in relation to the size of crofts means that projects are likely to bring together many different people.

The best outcomes for all parties, the environment and local communities are most likely to be achieved by working openly in a spirit of positive partnership and shared outcomes. Any new income-generating activity must be compatible with that of other crofters within a landscape. Where formal Grazings Committees are in operation, these will have a vital role in the development of new proposals. They could be involved in initiating peatland restoration works. It will also be useful to maintain close relationships with the Crofting Commission, the Scottish Crofting Federation and other organisations interested in crofting.

Specific parts of this guidance deal with crofting and grazing rights and responsibilities, tenancy requirements, business impact and collaborative working. Sections on taxation, structural and contractual considerations are also useful starting points for crofters considering new opportunities in nature-based finance.

Crofters should consider the need for landlord’s consent for habitat restoration projects designed to attract nature-based finance. This might usefully be included in discussions about other aspects of a proposal, including the commercial aspects.

Suggested next steps in the guidance – visit the Checklist and Case studies.

Community-based organisations provide a way in which rural communities as a whole can benefit directly from new sources of income, opportunities for employment and an improved natural environment. Their involvement in nature-based finance is an important part of the just transition (📖) to net zero (📖). The opportunity is also significant from the perspective of the area of land owned or managed by communities. For instance, the members of Community Land Scotland look after 225,000 hectares of land. The case study in this guidance for the Assynt Foundation illustrates the emerging opportunity of community-based landowners to attract new sources of private finance.

Relevance of nature-based finance

At the start of their consideration of nature-based finance, it is particularly important that community-based landowners consider the relationship between their strategic objectives and new opportunities for the sale of ecosystem services (📖). In particular, nature-based finance may involve allocating land to long-term uses that may limit other options in perpetuity, or require new skills. An example is the planting of woodland. Infrastructure for renewable energy projects may not be compatible with some types of environmental restoration.

Community-based landowners may be attractive to investors interested in social as well as environmental outcomes. Nonetheless, landowners with charitable objectives will need to consider potential reputational risks associated with new external sources of income and investment.

Key considerations

When considering nature-based finance, community landowners should start with a simple appraisal of their existing natural capital assets (📖). This can be as simple as a sketch plan of the property with the key land cover types and environmental features highlighted. This provides an opportunity for dialogue within the local community, ensuring that those who know the land best can share their insight. External support, including through partnerships with research and educational establishments, may help with this process.

Relationships with other organisations involved in the local community should be uppermost in the early consideration of nature-based finance opportunities. This includes local authorities and other enterprises; care must be taken in identifying them, engaging them and understanding their needs, interests and capabilities.

Natural capital finance opportunities may bring particular opportunities to progress a wide range of community objectives. These include support for new livelihoods and enterprises, such as those arising through the management of woodland and tourism.

Most of the general guidance on the consideration of the business case and the relationships with other stakeholders will be as relevant to community landowners as to other land occupiers and managers.

Suggested next steps in the guidance – visit the Checklist and Case studies.

Charitable organisations own and manage land for many different reasons, including education, care for the historic environment, and nature conservation. The fact that they must work for public benefit means that some will be particularly well-placed to take advantage of nature-based finance opportunities.

Relevance of nature-based finance

Charity landowners are well-placed to attract nature-based finance because of their focus on long-term outcomes for people and the environment. There may be reputational benefits to those providing finance or investment based on environmental outcomes.

At the start of their consideration of nature-based finance, it is important that charitable landowners review the likely relationship with the charitable purpose registered with the charity regulators, as well as any restrictions associated with their status as a registered charity. Reputational risks associated with certain sources of private finance (such as those with particular commercial interests) should also be considered. It is therefore vital that charities assess what natural capital assets they already have, how they would like to see them managed and what they do (and do not) want in the long and short term. This will all need to be judged against the overarching purpose and objectives of the charity.

Key considerations

Charitable landowners should ensure that they have a good understanding of the existing natural capital assets (📖) present within the land and water for which they have responsibility. This can be as simple as a sketch plan of the property with the key land cover types and environmental features highlighted. This provides an opportunity for dialogue within the local community, ensuring that those who know the land best can share their insight. External support may be required for this, including through the production of natural capital accounts.

Relationships with other stakeholders will need to be uppermost in the early consideration of nature-based finance opportunities. Care must be taken in identifying them, engaging them and understanding their concerns and ambitions.

Charities should consider carefully whether any new activity that attracts nature-based finance is supportive of the organisation’s existing purpose and objectives. For example, they must evaluate whether activities to attract new sources of income constitute trading activity by the charity and whether it is set up to deal with this. A new subsidiary company might be needed for this purpose, or there may be one already in existence that can be used. Specialist advice may be needed on this aspect.

Most of the general guidance on the consideration of the business case, relationships with other stakeholders and the implications for capital value (in view of charity responsibilities to maintain assets) will be as relevant to charities as to other land managers.

Suggested next steps in the guidance – visit the Checklist and Case studies.

Relevance of nature-based finance

Diverse opportunities may be available to private landowners and farmers. It is therefore vital, in order to identify which to pursue, that you know what natural capital assets you already have, how you would like to see them managed and what you do (and do not) want in the long and short term for the future of your landholding.

Key considerations

Start with a simple appraisal of your existing natural capital assets (📖) . This can be as simple as a sketch plan of your property with the key land cover types and environmental features highlighted. External advice may be helpful at this stage, and some of the links elsewhere in this guidance will help you to get started under your own initiative or with the help of an adviser.

It will also be useful to make a list of who else needs to be involved. Consider, for example:
Do you have tenants or other occupiers of your land?

• Do other people have rights over your land like mineral or sporting rights?
• Is the land under any existing obligations as debt security or similar commitments?
• Is your land owned in trust and, if so, who are the trustees and the beneficiaries? If ownership is in trust, landowners should make sure that they are familiar with the terms of the trust concerning what is and isn’t allowed to take place on the property. (These terms are normally contained in the trust deed.)
• Is the land is already subject to environmental requirements, e.g. agreements on protected sites (and requirements to seek consent), or conditions of payments through public schemes like agri-environment schemes?

It is also important to determine whether the land is already subject to environmental requirements, e.g. agreements on protected sites (and requirements to seek consent), or conditions of payments through public schemes like agri-environment schemes. 

Taxation status is important to most private landowners and farmers, in particular regarding Inheritance Tax. Income Tax must be considered too. Forestry and farming are both treated in specific ways for Income Tax purposes, and it could be important to evaluate the ‘fit’ of any new enterprises with existing arrangements.

Business impacts can be appraised using budgets. Staffing, machinery and investment implications might also need to be considered in the longer term. These reviews might also highlight other areas of the business which might benefit from review and different approaches.

In the longer term, the extent of future commitments and the risk associated with them must also be balanced. This will extend to consideration of the outlook for asset values.

Suggested next steps in the guidance – visit the Checklist and Case Studies.

The Wyre Natural Flood Management Project is located in a small river catchment in the Forest of Bowland in Lancashire, England. This location has suffered increased flooding in recent years. The project is an example of how land managers in a river catchment can come together to attract payments for the ecosystem service of flood risk reduction.

Its aim was to develop a new commercial business model to accelerate landscape and nature recovery which could attract private financing and innovative contracting structures to supplement public funding and address flood risk. The Project has involved The Rivers Trust, The Wyre Rivers Trust, Environment Agency, United Utilities, Triodos Bank UK, Cooperative Insurance and Flood Re.

Over two years the Project has developed a delivery plan of natural flood management actions over 70 hectares and across six to ten properties. More than 1,000 targeted measures on the farms over three years will act to store floodwater and prevent peak flow. These include leaky dams (placement of woody material in watercourses), earth bunds (small embankments), ponds, tree planting, kested hedgerows (planting hedgerows on small embankments) and the rewetting of peat. Some of these actions are being delivered and maintained by farmers and some by The Rivers Trust.

The costs involved in the Project are estimated to be £1.5 million of capital expenditure, and £50,000 a year in running costs.

In order to cover the costs and pay the farmers for the interventions and maintenance, the Project identified beneficiaries of the interventions and approached them to see if they would be prepared to pay for those benefits. These beneficiaries include the insurance sector, utilities, developers, the local authority and the Environment Agency.

the Project identified beneficiaries of the interventions and approached them to see if they
would be prepared to pay for those benefits.

While flood risk reduction is the primary ecosystem service being delivered, the Project is also delivering others: carbon sequestration resulting from woodland planting; water quality improvements from reduced nutrient run-off; and biodiversity gain from the planting of hay meadows and grasslands. These will attract different buyers to those of natural flood management such as businesses and third sector organisations.

In order to assure buyers of natural flood management of the efficacy of the flood interventions, hydrological modelling has been applied. For buyers of carbon sequestration, the Project is verifying credits through the Woodland Carbon Code, for nutrient reduction it is using a tool called ‘Replenish’, and for biodiversity net gain, Defra’s biodiversity net gain metric.

Given the number of stakeholders and complexity of contracts, the project established a not-for-profit Special Purpose Vehicle (a type of legal entity). Known as the Wyre Catchment Community Interest Company, it will act as the legal entity through which capital will flow and will assume the financial risk.

The Wyre Catchment Community Interest Company is seeking £850,000 of financial investment to go alongside a £526,000 grant from the Woodland Trust via the Northern Forests Grow Back Greener programme (supported by HM Government’s Nature for Climate Fund for England). The money will be raised in the form of a nine-year loan.

The Assynt Foundation is a community-owned charity that is selling peatland carbon credits from its land in the Highlands. This is part of a broader strategy to generate revenues that will facilitate further investment in natural capital assets and pay for regeneration and community investment.

Summary of the key steps from the Checklist.

• Natural capital assessment: The evidence base has been generated primarily through the Coigach & Assynt Living Landscape Programme. This included a High-Value Habitat survey in 2020, a joint venture between Scottish Wildlife Trust, the Assynt Foundation and NatureScot.
• Identifying what can be sold: a peatland restoration feasibility was commissioned a study to identify, assess, and map areas of potential peatland restoration. As part of this, potential restoration work was costed.
• Identifying potential buyers: these are expected to be commercial buyers of carbon credits.
• Valuing new finance: to be explored once initial carbon credits have been sold. 

In 2005 the Assynt Foundation was formed following the purchase of two adjoining sporting estates in the Northwest Highlands - one of which has a significant portion designated as a Site of Special Scientific Interest (SSSI).

One of the Foundation’s core objectives is ecological restoration of nearly 18,000 hectares which it has been carrying out over the last 16 years.

More recently the Foundation began to take a broader natural capital approach – looking to understand what environmental restoration could be funded through the sale of ecosystem services. Peatland restoration was identified as an opportunity given the amount of eroding peatland on the land.

NatureScot supported the Foundation in carrying out a peatland restoration feasibility study and a programme of projects have been identified that will restore hundreds of hectares of peatland.

Grants through Peatland Action (a Scottish Government grant funding programme) have provided 90% of the costs of the capital works required on the peatland. While the work requires specialist contractors, there are a growing number of such organisations in the Highlands as a result of increased uptake in peatland restoration schemes. Typically these contractors require monthly payments as they are small businesses.

There is also a recognition that carbon credits are an important revenue source. The Foundation is now working with Forest Carbon Ltd. (a developer of projects delivering woodland and peatland carbon credits) as it goes through the verification process that will enable the Foundation to generate and sell peatland carbon credits through the Peatland Code. If successful, and depending on price terms, the Foundation will be able to generate significant and transformative income for this community owned charity from the credits.

The revenue from the first sale is expected to go back into funding more peatland restoration projects but also other work such as native woodland restoration and improvements to specific flora as well as being allocated to other charitable objectives. Some future credits generated may be retained in order to create a reserve future income for the Foundation by selling them at a later date.

The Foundation has also considered other means of generating revenues, such as through renewable energy. However, the SSSI designation (including the provision of habitat for species such as golden eagles) together with the remote location, has led to this being ruled out as an option. Environmentally-based tourism, however, offers an opportunity that the Foundation is considering – particularly in light of greater numbers of visitors drawn to the area to walk the North Coast 500 long-distance path. The only other key revenue generated from the land is from deer management.

#Glossary

Carbon credits and environmentally-focused tourism enabled Trees for Life to receive a loan from Triodos Bank for its land regeneration ambitions.  This case study illustrates how a charitable landowner can attract finance from a mix of sources, providing benefits to a local community.

Summary of the key steps from the Checklist.

• Natural capital assessment: Over the last 12 years, Trees for Life has developed a broad understanding of the ecological value of the land under its care.
• Identifying what can be sold: After considering a range of services that could be sold, the initial focus was identified as carbon credits generated through woodland planting.
• Identifying potential buyers: Trees for life has considered carefully the likely buyers of carbon credits registered through the Woodland Carbon Code.
• Valuing new finance: Trees for Life undertook a scoping study to gauge what realistic levels of income and profitability could be in order to define the budget.

Trees for Life is a small charity in the highlands of Scotland focused on rewilding (📖) (including tree planting) and community support and development. While Trees for Life is a charity, it offers several examples of how revenues can be generated - and finance attracted - for nature-positive land use change. It also exemplifies first-mover advantage.

Trees for Life acquired 4,000 hectares of land at Dundreggan in 2009. This site is situated near Loch Ness in Glen Moriston. In its early years, the charity struggled to reach the running costs of the tree nursery, volunteering program, centre and land management. Native trees for planting cost from £0.35p to £0.80p per tree, depending on species and sapling height. Rarer species were in the region of £1.50. Planting costs using hand mounding vary from location to location but tend to be around £0.85 per tree.

Various revenue streams were considered by Trees for Life to pay for the costs including running a caravan park and the introduction of hydro or wind energy.

The charity then explored the sale of carbon credits and now uses the Woodland Carbon Code for selling carbon sequestered at Dundreggan through natural regeneration. A high carbon price of more than £30 (Pending Issuance Unit price) has been achieved because of the broader outcomes of rewilding, biodiversity and restoration of land. The charity’s intention is to transfer £10 per tonne from each sale to local community organisations to spend on projects that relate to the land and nature. 

Now Trees for Life is developing a new rewilding centre at the site to generate revenues that will rely on visitors and tourism. The charity is well-placed to attract visitors. Dundreggan, for example, is on the main road from Inverness to the Isle of Skye, and Trees for Life has many followers attracted to its nature-related ambitions. 

The centre is a £6 million project and Trees for Life undertook a scoping study to gauge what realistic levels of income and profitability could be in order to define the budget.

A consultancy firm was engaged that used an algorithm to determine which paid-for experiences and accommodations could be included to attract the required level of visitors to be able to project suitable incomes. Based on the study, the size of the project was increased by £2 million. Costs have been further inflated by the combined effects of Brexit and the Covid-19 Pandemic on materials prices, leaving a significant gap to bridge.

To pay for the project, traditional grant funding was available for some charitable activities at the centre, and 10% of the funding has been from Trees for Life’s own money from its carbon credit activities. The major source of funding however is via Triodos’ crowdfunding platform as a loan with a 10-year pay-back period. The crowdfunding was launched with a £2 million target on the 13^th September 2021 and closed less than 48 hours later with the target achieved and an average investment of £4,800.

Early involvement in carbon credits has also enabled the charity to develop a small for-profit carbon credit advisory business using the skills it has gained in its own journey to advise landowners in the Highlands who are wishing to transform their land.

This case study shows the potential for the restoration of leasehold land to be supported by revenues generated from educational events and environmentally-based tourism. Public sector grants, a repayable loan and private income have enabled a business to grow and provide local employment opportunities.

The Shieling Project, founded by Sam Harrison, involves the lease of four hectares of land in Inverness-shire. With grants and a loan from Social Investment Scotland (a charity offering support to social enterprises), he has been able to restore the abandoned house and buildings, restore natural habitat, introduce restorative agricultural practices and create an outdoor learning centre with a business model that generates revenues from educational courses and tourism. Harrison is now exploring alternative revenue generation models such as carbon credits, new courses (such as butchery) and restorative agriculture advisory services.

The Shieling Project, a social enterprise, began leasing the land in 2015. Initiating his vision of a self-sufficient enterprise underpinned by restorative agricultural practices, Harrison excluded the deer from the four hectares that had been abandoned since 1968 to allow natural regeneration of woodland to occur and planted over 4,000 trees.

With the loan from Social Investment Scotland, Harrison was able to develop the Shieling Project in earnest, investing in the restoration of the buildings and introducing a herd of Shetland cattle that help rewild the land with their rotational grazing while producing beef for visitors and manure for crops. Grants from the SSE Highland Sustainable Development Fund, Highland LEADER and others have further supported the restoration of hay fields and traditional cereal crops that support the cattle and pigs, and basket willow is grown next to a stream on the land that is then cropped for crafting.

Harrison works with local authorities and schools, and students, tourists and families pay to visit and stay on the land, learning traditional farming methods by doing and crafting, but also playing a role in building and restoring the eco-friendly barns and accommodation. The land supports 36 overnight guests and is entirely self-sufficient using a biomass boiler and solar panels for energy.

The restorative and traditional farming methods employed by Harrison have improved the biodiversity on the land. For instance, yellowhammers (Emberiza citrinella) have returned. In addition, due to the labour-intensive nature of the work, the project has created jobs for the community.  Prior to the Covid-19 Pandemic, the four hectares provided work for 14 employees, and Harrison hopes to get back up to 12 employees by the end of 2022.

Year-on-year for five years in a row, the Project has doubled revenue and visitors can number as many as 800 a year. Before the Covid-19 Pandemic, the project brought in £120,000 in net income. Harrison’s aim is to increase that net income to £250,000. 

Harrison says a challenge has been finding investment that will pay for capital expenditure. Most grants prefer to pay for salaries or specific projects which don’t create sustainable long-term revenue generation, he says. To supplement revenues from visitors, Harrison is hoping to assess opportunities to sell ecosystem services such as carbon credits derived from interventions on the land. This will be dependent on cost of assessment but also demonstrating former baselines of carbon and additionality. He is also being approached by other land managers to learn about the role of grazing animals in rewilding that could develop into an advisory business in the future. 

This case study shows the opportunity of peatland restoration to deliver carbon revenue and a wide range of additional benefits.

Summary from the Checklist.

• Natural capital assessment: The condition of the peatland was assessed using the Peatland Code Protocol.
• Identifying what can be sold: The peatland was in deteriorating condition.  Its restoration with the aid of grant funding provided an opportunity to sell peatland carbon code credits to reflect the reduction in emissions which would be achieved by a successful restoration programme.
• Identifying potential buyers: the opportunity was promoted through the Peatland Carbon Code Registry and directly to potential purchasers via a new company, Caledonian Climate Ltd
• Valuing new finance: Other than grant funding external sources of finance were not explored for this work.  Had they been explored it is believed the project would have been judged on conventional commercial lending terms, including the availability of security.

Lochrosque Estate’s peatland restoration programme in the west Highlands covers an area of 251 hectares. In addition to biodiversity and social benefits, the project has reduced carbon emissions and the Estate is selling peatland carbon credits through the Peatland Code.

As with many Highlands estates, Lochrosque has significant areas of peatland, some of which has been degraded from decades of erosion and over-grazing. This has left deep exposed peat bogs with poor biodiversity and increasing soil erosion.

In accordance with the land management objectives of the wider estate, Lochrosque embarked on a multi-year peatland restoration programme in 2018, funded through the Scottish government Peatland Action Programme and supported by in-kind contributions from the landowner. The main area of restoration lies above the village of Achnasheen on the A832 in Ross-shire. 

The programme has required the creation of more than 8,000 timber and peat dams. A total of 251 hectares have been restored to date. With 158,246 metres of reprofiling work, erosion of peat banks on the site caused by wind, rain and heat has been halted and allowed vegetation to regenerate, and although only part of the way through the ten year restoration, other biodiversity benefits have already occurred. For example, raising the water table through restoration has allowed sphagnum moss to continue its bog-building work, and bog pools are now teeming with life. Greenshank and golden plover have also returned (chick mortality has reduced due to restoration efforts).

With regards to the climate mitigation (📖) benefit, the peatland restoration has provided 87,103 tonnes carbon dioxide equivalent (tCO2e) in emissions avoidance over 100 years. This equates to 3.47 tCO2e per hectare per year. All of this emissions reduction is attributable to the restoration as peatland would otherwise continue to emit greenhouse gases for the next 100 years. This has been estimated to be the equivalent of 1,528 hectares of forestry cover. Carbon credits are now being offered to offsite purchasers through the Peatland Code. The current listing can be found here. One buyer is a producer of cycle safety gear that wishes to become carbon neutral.

The following additional benefits have arisen from the project:

• Employment for specialist peat restoration contractors including training and skills development opportunities;
• Improved water flow to a hydro-generation plant has increased electrical output and reduced maintenance requirements because intake screens do not need to be cleared of eroding peat deposits as frequently;
• Improved water flow and quality to in intake of Scottish Water used for the production of drinking water.

Caledonian Climate and others are now establishing the data to underpin the sale of the hydrological benefits of the scheme.

Green finance means any method of financing or investment activity where money is put to work to ensure an improved environmental outcome. Government and business commitments to reach net zero, alongside greater collective awareness about the importance of environmental protection and restoration, has led to the growth of green finance in recent years. It encompasses financial products such as:

• commercial loans
• community municipal bonds or investments (📖)
• environmental impact bonds (📖)
• corporate or sovereign bonds
• project finance
• public equity (stocks and shares)
• investment funds
• pension funds
• direct investments by companies
• private equity (📖) and venture capital (📖)
• mortgages
• credit trading
• savings products
• crowdfunding  (📖)
• philanthropic capital and grants, and
• public sector finance

Green finance can result in a range of environmental outcomes. This covers:

• Climate mitigation (📖), such as through improved energy efficiency and reduced greenhouse gas emissions through technologies such as wind power and heat pumps for buildings.
• Climate adaptation (📖) , such as in reducing flood risk through built or natural structures.
• Sustainable agricultural practices and the restoration of biodiversity. 

Nature-based finance is gaining recognition as an important aspect of green finance. This term describes finance or investment that directly goes into the protection and restoration of natural features such as waterbodies, woodland and peatland. Typically, finance for the protection and restoration of natural features has come from the public sector or philanthropy. For example, in 2020, the Scottish Government announced £250 million of funding over ten years for peatland restoration, with a target of restoring 250,000 hectares of degraded peatland by 2030. In recent years, biodiversity loss, coupled with increased recognition of nature’s role in climate mitigation and adaptation, has shone a light on the need to attract private finance. Analysis of the difference between available finance and funding requirements provides the context for this¹. For instance, the shortfall for protecting and restoring biodiversity in Scotland over the next ten years has been estimated to be in the region of £8 billion. Similarly, the requirement for climate mitigation using the natural environment (such as in flood risk reduction) over the coming decade is thought to be in the region of £9 billion.

Unlike public finance or grants, private finance requires a financial return. Markets for environmental services are the basis for the flow of private finance into the natural environment. They connect the buyers of services arising from land, water and nature with those who can supply those services. These markets involve financial transactions that are sometimes referred to as payments for ecosystem services (📖).  As shown in the following figure, a wide range of investors, investment funds and investment structures may be involved in nature-based finance.

¹ GFI, eftec, Rayment Consulting, 2021, The Finance Gap for UK Nat

Nature-based finance framework

The availability of private finance may be conditional on social or environmental outcomes. Reliable measurement and verification of these outcomes will be important to investors. While the UK Woodland Carbon Code and Peatland Code now have widespread recognition as industry standards for the purchase of carbon credits, the requirements of investors for the data to provide them with the assurance that investments in natural features are delivering the desired outcomes are expected to become clearer in future years.

In some cases, private, philanthropic and public finance may be designed to work together in order to achieve better outcomes than if these sources of finance were kept separate. This is known as blended finance, and is yet to be secured for Scotland. Public finance may have a role in reducing the risk of early investments, or guaranteeing a minimum price for ecosystem services such as carbon credits.

Example: A water company is facing increased costs of dealing with polluted water. Rather than building an expensive water treatment plant, the water company can pay for farmers upstream to plant cover crops and reduce nitrate leaching, thereby reducing pollution. In this case the water company is the buyer (and investor) of ecosystem services and the farmer is the seller. (See the explanation of nutrient trading in the Glossary.)

The revenue stream generated can, in turn, attract loans or investments that can pay for upfront capital expenditure.

Example: A landowner can introduce several natural flood management (📖) interventions that will reduce flooding in a local town and therefore reduce costs for public bodies responsible for managing flood risk, as well as those involved in reinsurance for flood risk. The local authority may offer to pay the landowner a price for the maintenance of interventions, but the landowner needs the upfront funding to pay for the capital expenditure. Under this hypothetical scenario, a bank could provide a loan to the landowner with the understanding that the revenue generated from the local authority payments will enable the landowner to make the repayments. See also the Wyre Natural Flood Management Case Study.

Nature-based provides opportunities to Scottish land managers to receive incomes through identifying buyers for continuing environmentally-sound practices, improved sustainable land management practices or larger nature-positive land use change. The following table provides examples of the relationship between natural capital (📖) assets, the ecosystem services (📖)  they provide and potential buyers. In some cases, service provision may require environmental improvements or a change in land use practices. In the case of the provision of crops, livestock and timber, it may be possible to attract a premium price if they make a particular contribution to environmental restoration.

The Case studies provided within this guidance demonstrate how land managers are reacting to these opportunities and how they are developing projects.

Financing ecosystem service provision

The following is an explanation of the ecosystem services that are likely to be the basis for new markets, or the basis for the purchase of land based on its natural capital value (potential to provide ecosystem services).

Crops and livestock 

• Changes to sustainable, restorative or regenerative farming methods can command a higher price from buyers who are keen to see environmentally positive activities within their supply chains, or from consumers who are willing pay more for products that support habitat restoration.

Carbon credits (storage credits and avoidance credits) 

• A carbon credit represents either the permanent removal of a tonne of carbon dioxide equivalent (CO2e) from the atmosphere, or the avoidance of one tonne of CO2e being emitted in the first place. An example of natural emissions avoidance is the restoration of peatlands, which release large volumes of greenhouse gases when they are in a degraded state. The price of carbon varies greatly depending on the quality and narrative of a project and on the buyer. The carbon credit market will also have price fluctuations as with other markets. Quality assurance standards such as Woodland Carbon Code and Peatland Code, and associated registers, provide transparency and a level of assurance and verification to buyers of carbon credits. They provide a means to match buyers with projects. Care is needed when judging the potential costs, benefits, timings and risks of carbon transactions.

Natural flood management 

• Natural flood management such as use of woody debris and damming of water courses to slow the flow of water (including through the introduction of beavers), or re-meandering water courses or woodland or crop planting can alleviate flood and therefore reduce costs of flood damage in surrounding areas. See the Wyre Natural Flood Management case study.

Water quality improvement 

• Interventions such as cover crops and the reduction of nutrient use can improve local water quality for which utilities may be prepared to pay.

Tourism and opportunities for education and recreation 

• Land can be used to provide education or recreation opportunities for paying visitors. In conjunction with environmentally positive interventions such as rewilding or restorative farming methods, this land use change can have both a social and environmental impact. The Shieling Project case study is one example. Tourism businesses based on the qualities of the Scottish landscape may look for ways to invest to create positive impact for nature, including using voluntary visitor payback (📖) schemes. Organisations seeking supporting the growth of tourism may look to invest in the restoration of nature based on the enhanced business opportunities.

Timber 

• As with food crops and livestock, timber produced in accordance with best practice, and the use of continuous cover forestry, can attract a higher price that traditional timber. The timber industry and retailers of products that use wood are expected to be under increasing pressure to ensure that their supply chains are associated with positive environmental and social outcomes. This may incentivise the creation of woodland planned and managed for multiple benefits, where biodiversity and recreation are balanced with the production of timber and the associated long-term removal of carbon from the atmosphere. Agro-forestry will also play a part in meeting demand for some aspects of local timber markets.

Biodiversity 

• Rewilding (📖) and regenerative farming projects that increase biodiversity can attract payments for ecosystem services from wildlife charities or businesses through their corporate responsibility commitments. The achievement of positive outcomes for biodiversity through built development is under consideration as part of the development of the National Planning Framework for Scotland.

Stacking and bundling

In some cases, several different ecosystem services can be sold at the same time. For example, with appropriate design and management, planting woodland on a property or improving soil health may provide carbon sequestration, water retention and water quality improvements. This is known as bundling (📖) . Projects that are designed in way that provides additional benefits like biodiversity may attract a higher price for carbon credits. In other cases, a land owner may sell a set of ecosystem services from the same parcel of land, but each is sold separately. This is known as stacking (📖) .

The role of aggregation

Large investors such as institutional investors often seek investment opportunities that are relatively large in size and scale. This is because it is not an efficient use of resources to deploy teams to assess small projects. They typically need to put between £20 million up to in excess of £500 million to work. As such, they are difficult to attract unless several large landowners work together on a large-scale project.

There are, however, smaller investors or buyers that will look for projects that require between £1 million and £20 million in investment. Collaboration between farmers or communities across a catchment or landscape can help aggregate multiple smaller projects into a large-scale programme. This is the basis for the Landscape Enterprise Networks scheme, in which groups of businesses determine their dependencies – through value chains – on land, water and nature in a particular geographical area. They then collaborate to procure relevant ecosystem services from land managers in the area, ensuring this is done in an equitable, transparent and locally-accountable way. A Landscape Enterprise Networks scheme is currently being developed in South West Scotland.

Landscape Enterprise Networks (adapted from the Landscape Enterprise Networks website).

• Step 1 - Network opportunity analysis

A process for understanding which businesses in a region have most at stake in a healthy and resilient landscape, which natural capital assets in a landscape underpin that performance, and where there are common interests among businesses in the same assets. The objective here is not to develop a comprehensive understanding, but rather to identify the most promising starting point for a Landscape Enterprise Network.

• Step 2 – Building a collaborative value chain

This step focuses on building a first ‘anchor’ value chain,  working with those representing ‘demand side’ interests to define a common specification for services they require. Land managers who represent the ‘supply side’ are then enabled to define their service proposition. A deal is then brokered between buyers and sellers, often through an intermediary (known as a ‘supply aggregator’).

• Step 3 - Growing and formalising the regional network

Once Step 2 has generated momentum and interest, the ‘anchor’ value chain can be extended by attracting more customers and suppliers. Additional value chains can be identified. A governance structure is then created within the geographical area to manage and broker trades in an equitable, transparent, and locally-accountable manner.

The potential for project aggregation should not, however, preclude the opportunity of much smaller-scale projects founded on a close relationship between land managers and the rural communities that they belong to. In particular, this can ensure that projects are developed in partnership and that benefits (such as through employment) are retained locally.  The scope to formulate and sustain commercial arrangements within the farming sector and other rural businesses should also be considered

A simple Checklist within this guidance provides an overview of the key considerations regarding nature-based finance opportunities. The following provides a more detailed set of prompts for land managers in their consideration of how it might relate to their organisation.

The land I look after 

• How is the land I am responsible for used at present?
• Is the environmental condition of this land improving or declining, and how do I make this judgement?
• Who is benefiting from the current condition of the land? 
• In principle, what environmental outcomes could I deliver more of in the future?
• Who would potentially pay for these environmental outcomes?

My business at present 

• What are my long-term objectives?
• Who will determine any changes to my business? Are they amenable to delivering more environmental outcomes?
• Who are the buyers of environmental outcomes who have an interest in the land I am responsible for?

Scoping new plans 

• What impact would the delivery of more environmental outcomes have on my business as a whole?
• Do I need a new business plan, or does the existing one suffice?
• Could I work with others, including managers of neighbouring land, in order to increase the scale?
• How might I work with rural communities on and around the land I look after?
• What permissions or changes to existing agreements would be required?
• How might I demonstrate the environmental outcomes of a new project? How much would this cost?

Making new plans 

• What skills and experience are needed to make new plans? How much will this cost?
• Who is going to pay for which environmental outcome? What income can I generate?
• What are the implications for my existing business?
• What data, standards and metrics will be required in order for new agreements to be made? How much will these cost?
• Who should I present my new plans to?
• What upfront capital may be required, and how much would this cost?
• What are the implications for taxation and capital value?

Develop contracts 

• Who is the contract with?
• How long is the contract for?
• What is the payments schedule and how is this connected with the measurement and verification of outcomes? 
• What is the capacity for variation of the agreement or termination?
• What are the implications for the sale of the land, or the tenancy?
• What are your responsibilities at the end of the agreement?
• What happens if the terms of the contract are breached?

One of the first considerations for many landowners considering nature-based finance will be the impact of this on the long-term capital value of their land. At present, this is an area of uncertainty due to the absence of case history.

Participation in nature-based finance initiatives may have a positive or negative impact on land value (or no impact at all).

• Shorter-term (up to five year) commitments with flexible terms for renegotiation or withdrawal are likely to have a smaller impact on the capital value of land in the long term.
• Longer-term (longer than ten years) commitments represent a higher risk for current and future owners and their impact may be discounted accordingly in an asset valuation. This is particularly the case where the changes to land are irreversible (such as with planting of woodland) and/or locked in by contractual commitments. There is no clear evidence on what the amount, if any, of that discount might be. It could also be argued that a generous income with a strong covenant (broadly the financial security of the payer) on appropriate terms should enhance the value of rural assets. 

Ideally, payment terms would include provisions for reviews at regular intervals, perhaps also linked to the Consumer Price Index or some other index of inflation. Readily accessible and economical methods of dispute resolution would also be an important consideration in assessing the impact of these terms.

The emergence of a new category of private purchaser of land, based on natural capital is a feature of the market for larger Scottish estates in recent years. In some cases, this involves corporates with interests in the value of land for the provision of carbon sequestration, as well as other Environmental, Social and Governance (sustainability) responsibilities. This is a factor in the volatile market for land. Restoration of land to enhance its natural capital value can be expected to cause increases in land value.

In December 2021 The Scottish Land Commission commissioned research into this area. A report is expected in Spring 2022.

Think carefully about contractual considerations before approaching your lawyer and other rural professional consultants for advice.  This will enable you to get the most from them at the best price.  You may need to seek advice on the practical contractual implications from a rural surveyor or farm business consultant as well as legal and financial advice from your lawyer and accountant.  Agreements may take any one or more of a number of forms, for example, a short and simple written contract signed by two parties, a licence or lease to occupy land or even a legal deed.

The following list suggests some considerations and issues which it will be best to think through from the very start of any proposal.

Parties involved 

Who will be the parties to the contract and in what capacity can they make a contract between themselves? Typically this might be a landowner and/or occupier who is selling natural benefits or services from the land, and the purchaser.  Be aware that others with an interest in the land may also need to be a party to a contract. Examples include:

• Lenders who hold security over the land
• Holders of leases and beneficiaries of other rights, such as sporting rights
• Owners of mineral rights

Others may need to be consulted and closely involved, included in the main contract, or have separate side contracts of their own.  Examples here might be tenants and other occupiers, beneficiaries of trusts and temporary occupiers – graziers, contract or share farmers for example.  In some situations, other authorities may also need to be a party to the agreement, for example, a local planning authority where a Planning Obligation (Section 75 Agreement) may apply.

Type of agreement 

In addition to the Section 75 agreements mentioned above; other agreements may take the form of a simple agreement while some may need to be created by deed.  Some agreements may take the form of a lease or licence to occupy the land.  Advice on the options and best solution will be needed.  A clear understanding of the objective of the agreement, and what is trying to be achieved, will be essential to determine the best type of agreement.

The land and property 

This will need to be defined preferably with the use of a descriptive schedule and a well-drawn plan at a useful and recognisable scale.  Specific sites may need to be identified within a larger landholding, and the plan may need to show additional features such as access routes, vehicle parking and servicing areas, storage areas, planned boundaries and other features depending on the agreement.  Early thought is needed to specify the type of plan(s) required to make sure they will be ready in time, including the need for more detailed larger-scale insets.

Services to be provided 

The services to be provided should be defined as precisely and carefully as possible.  Most land managers will want to define the services to be provided as narrowly as possible to leave scope for the negotiation of new opportunities in future for example carbon sequestration in timber.  It can therefore be helpful to say what is not included as well as what is included provided this does not unwittingly exclude other possibilities which have not been foreseen yet.  Many further considerations will flow once the services have been defined.

Access arrangements 

What site access do the parties need?  What type of vehicles will be allowed on-site, where can they be parked, can they be left on site overnight or longer, is notice needed before entering the site, needs of other users with regard to notice, should there be permitted hours for access with no or emergency only access outside these hours?  Arrangements for animals on-site and their welfare, in particular, domestic and agricultural animals including dogs?  Associated rights, such as those required to install and visit monitoring equipment?  Maximum size of visiting parties?

Wider publicity including photography 

Aspirations for wider publicity?  How will these be addressed?  Is a policy on photography and filming on site needed?

Risk assessments, health and safety 

The extent to which risk assessments must be prepared, maintained and shared, and by whom.  Key issues and responsibilities for health and safety on-site including signage.

Security 

What site security is necessary?  Locked gates?  Security ID for personnel on-site?  Signing in (and out) arrangements for sensitive sites?  Emergency contact details and arrangements? Consideration should be given to the Scottish Outdoor Access Code.

Signage 

What signs, if any, are required or will be permitted, and how will their design and location be agreed upon? The siting and design of signs may be particularly sensitive in some locations. For example, there may be concerns about the impact of signage on access arrangements under the Scottish Outdoor Access Code.

Relationship with and reservations concerning other agreements or schemes affecting the same site 

At the very least the existence of other agreements or schemes should be recorded.  You may need to go further by repeating restrictions and obligations which arise from other agreements and schemes in the form of undertakings between the parties.

Use of power and other resources like water 

For example, access to electrical outlets and charging arrangements if any.  Use of powered appliances on-site including hand tools like strimmers.  Arrangements for fuel and lubricants to be brought on to the site as to types, quantities and storage

Waste storage and removal 

What waste might arise on the site?  How will it be collected, kept safe, stored and disposed of?  Licensing requirements?

Duration 

How long is the agreement intended to last?  What needs to happen before and at the end of the term if any party wishes to extend the agreement?

Freedom of disposal and change of parties 

Is the agreement intended to bind future owners and interests with regard to either the site manager/owner/other occupiers and interests or the purchaser in the event that undertakings need to be transferred from one organisation to another one?

Records, information and data 

What records should be kept, and on what terms are these available between the parties?  Security and legal considerations around digital data; how long should records be retained?

Financial terms 

These may need to cover annual payments, their occasional review or indexation, as well as the nature and timing of capital expenditure.  For capital expenditure, it may be necessary to specify how the agreement will be reached on the technical specification of works to be undertaken, and the basis on which approval may be given.  Consider payments for professional advice and other incidental expenses too (for example registration costs in some cases).

Review arrangements 

What needs to be reviewed and when?  What arrangements need to be made to initiate a review, record and monitor the outcomes?  How will the need for a review outside the ordinary review cycle be managed?  Who has a right to be involved in a review and on what terms?  What happens if the parties cannot agree on the outcome of a review?

Break clauses and termination 

Will it be possible to terminate the agreement early and what rules will apply to this, eg notice periods, penalty clauses, removal of equipment, reinstatement?

Disputes and their resolution 

• How do parties want any difficult or irreconcilable differences to be resolved?  Do they want an approach that might invoke successive steps, for example, mediation before arbitration.  If the parties are unable to agree on the name of a mediator or arbitrator how will they settle this question (for example the Dispute Resolution Service of the Royal Institution of Chartered Surveyors can appoint a suitably qualified professional arbitrator or mediator in appropriate cases).

Introduction of new uses and change of site use 

• Do restrictions or notification requirements need to be included?  If so how will these be dealt with in terms of notification, timing and resolution?  For example, proposals to plant trees on the boundary of a small area of meadowland.

Compensation 

• It may be useful to consider situations in which a right to compensation may arise.  For example where significant capital investment has been made which, on early termination, for example, may mean that expenditure has been abortive or the property has benefitted from significant improvements.

Liability and insurance 

• What public and other liabilities are being taken on by the parties?  Public and employer liability is likely to be important considerations.  Does the agreement have knock-on effects on other insurance requirements, for example, storm, fire and flood?  What insurance will be required as an obligation of the agreement, and on what terms regarding minimum cover, arrangement and renewal?

Planning and other status 

• It may be important to note the planning or other status of the land in question.  The parties may also wish to exchange commitments that the agreement is not intended to change the status of the land as agricultural land for the purposes of the Inheritance Tax Acts for example.

Registration 

• Are any registrations needed and how will these be dealt with, for example, peatland or woodland carbon code?

Right to pursue remedies

• An area for specialised legal advice, but if one party wishes to pursue a legal remedy concerning the site against a third party: to what extent is the other party obliged to join forces with this?  Similar thought may be needed regarding defence against legal actions by third parties.

Other terms and covenants 

• Other terms and covenants may be required depending on the nature and duration of the agreement.  This will be for your lawyer to advise you with help from your other professional advisers.  This note has mainly been concerned with practical points that you should think about during discussions and negotiations, and before committing yourself legally and contractually.

The above list should be seen as no more than a starting point and it should be kept under close review in the light of individual circumstances.

The tax status of rural land can be an important issue in longer-term estate planning. It has important implications for nature-based finance, which can affect the capital value of land. The consequences of nature-based finance for taxation are an emerging topic for all parts of the UK. This guidance will be revised as greater clarity is gained through case history.

Inheritance Tax

For most private landowners Inheritance Tax (IHT) is a significant long-term concern. The rate of tax is 40%. When applied to the capital value of an estate earning 1% or less on its capital value, the financial implications of IHT may be significant (this could result in a need to divert returns for 40 or more years to pay the IHT bill on the death of the owner, leaving no surplus for reinvestment or personal drawings from the business unless assets are sold to pay the tax.) This illustrates the importance of several key reliefs from IHT, notably Agricultural Property Relief (APR) and Business Property Relief (BPR). There are also some reliefs of lesser importance, including Heritage Property Relief and Woodlands Relief. The effect of APR and BPR is to reduce significantly or remove altogether the liability for IHT. Nevertheless, there are strict rules which must be satisfied in order to qualify for either relief. Careful assessment of eligibility for APR and BPR (as well as the other lesser reliefs) will be an important step in assessing nature-based finance opportunities.

Capital Gains Tax

Capital Gains Tax (CGT) only arises on lifetime disposal of estate assets, and not on death. The tax applies to gifts as well as sales of estate assets. Very few reliefs and exemptions are specific to rural assets, but two more general reliefs which are pertinent to them are Rollover and Holdover Reliefs. Rollover Relief is the colloquial name for Relief for the Replacement of Business Assets. This allows a business owner (including a farmer) to defer CGT on a sale of the business if the proceeds are reinvested in another business within a period of four years. Holdover Relief, more properly known as Gifts Relief, works in a similar way for gifts of certain assets including business assets and agricultural land, whether in-hand or let. 

A change in the status of land may therefore add to potential CGT liabilities, and this will have to be evaluated in the longer-term consideration of nature-based finance opportunities.

In practice, one of the more intractable problems in rural estate planning is the relationship between IHT and CGT. A key consideration is whether it is better to let assets transfer on death where CGT does not arise but there is the threat of IHT, or whether it is better to crystalise gains over a lifetime and accept a CGT liability in the hope of averting or reducing the IHT liability.

Value Added Tax (VAT)

The VAT status of rural land will vary with its use and occupation. Land which is rented out to tenants, for example, is exempt from VAT unless the owner has opted to charge VAT on rents. VAT exemption means that the VAT on various input costs cannot be recovered. Most farmers however will have registered for VAT, allowing them to recover the VAT on the cost of their inputs. A change in management may involve a change in VAT status, the loss of eligibility for VAT meaning that many costs of estate management will be increased by the amount of VAT.

The VAT status of nature-based finance payments themselves will also need to be considered, as to whether they are chargeable (and if so at what rate), exempt or ‘outside the scope’ of VAT.

Some nature-based finance opportunities may require changes to the structure of a rural business or charity. They may involve an increase in the volume of financial transactions.  These changes should also prompt a reconsideration of the land manager’s VAT position.

Markets in environmental services underpin many aspects of nature-based finance. In order for these to operate effectively and efficiently, the following are required.

Data

Data provide confidence that land management activities are providing the environmental outcomes that underpin nature-based finance. Measurement of environmental outcomes may be expressed per pound spent, per hectare restored and/or in relation to landscape scale nature recovery targets.

While some data may result from routine environmental monitoring, it is likely that additional data will need to be collected for the purposes of a nature-based finance project. This presents a limitation on smaller land managers who don’t have access to this. For this reason, there is currently interest in the use of data technologies to improve the cost-effectiveness and accuracy of data. This includes the use of remote sensing, drones and artificial intelligence. An example of this approach to monitoring is found at Bunloit Rewilding, a habitat restoration initiative financed through investment crowdfunding (📖).

Landowners in Scotland may wish to partner with research establishments in order to secure data.

Public data portals may provide sufficient information in order to identify opportunities for nature-based finance within a landscape area. See Scotland’s Environment Web portal.

Standards

These ensure that available data are used appropriately in the measurement of environmental services. They are also required to set out the type and level of monitoring that is necessary in order to assess the performance of a project over time. Standards that consider community engagement are emergent, but their application in the UK is untested. An example is the Climate, Community & Biodiversity (CCB) Programme of Verra, an international quality assurance support organisation.

Accreditation

Accreditation is about ensuring that all participants in nature-based finance can have confidence that standards are being upheld. This may include official certification, which enables the credits offered by landowners to be created and traded.

Quality assurance standards

Two quality assurance standards are available to UK landowners to demonstrate the climate benefits of specific projects. Both have a track record of providing assurance to projects that have attracted new finance. These encourage a consistent approach to projects seeking to offer to mitigate climate change. Both provide confidence to customers seeking to meet net zero targets.

Woodland Carbon Code

The Woodland Carbon Code is the quality assurance standard for woodland creation projects in the UK. Launched in 2011, it enables landowners to offer independently verified carbon units for sale. The UK Woodland Carbon Code Secretariat is provided by Scottish Forestry, on behalf of the Forestry Commission in England, the Welsh Government, the Scottish Government and the Northern Ireland Forest Service. In 2020, the UK Land Carbon Registry was launched. This is a joint registry for Woodland Carbon Code and Peatland Code projects.

The Woodland Carbon Code is endorsed by The International Carbon Reduction and Offset Alliance, the global umbrella body for carbon reduction and offset providers in the voluntary carbon market. 

The web pages of the Woodland Carbon Code Secretariat provide more detail. The Trees for Life case study within this guide provides an example of the use of the Woodland Carbon Code.

Peatland Code

The Peatland Code is the voluntary certification standard for peatland restoration projects within the UK and is issued by the IUCN UK Peatland Programme (IUCN is an international nature conservation organisation). When landowners with an eligible, degraded peatland restore their peatland and follow this standard, they will receive carbon units, which can be sold to fund the restoration and management costs. The Peatland Code provides assurances to voluntary carbon market buyers that the greenhouse gas benefits being sold can be trusted. To provide assurance to buyers, Peatland Code projects and their benefits in terms of greenhouse gas emissions are validated and verified by an independent certification body. Projects registered with the code must monitor the carbon benefits of their work over a minimum of 30 years.

Peatland restoration does not only result in a reduction of greenhouse gas emissions but also improves other ecosystem services for example an increase in water quality, biodiversity and a reduction of flood risk. These benefits are currently bundled in with the, more easily quantifiable, carbon units, and therefore peatland carbon units are likely to sell for a higher price than some other carbon units.

In 2020, the UK Land Carbon Registry was launched. This is a joint registry for Woodland Carbon Code and Peatland Code projects. All steps of both codes happen on this registry as well as the issue of carbon units. This gives a very transparent process and minimises the risk of double claiming carbon units.

The Peatland Code webpages of the UK National Committee of IUCN provide more detail. The Lochrosque Estate case study within this guidance is an example of the use of the Peatland Code.

Codes in development

Further carbon codes are under development within the UK, including a saltmarsh code (for coastal wetland), a hedgerow carbon code and a Farm Soil Carbon Code. It is expected that these will be profiled in this guidance as they become available.

It is prudent to check on ownership and rights before implementing land management projects prompted by nature-based finance. This is particularly the case where they involve land-use changes and the involvement of new organisations.

A new project may be initiated by a landowner in occupation of their own land, a tenant farmer, a crofter, a landlord or some other owners of rights in land.

A good starting point is simply to identify who has legal or other rights in the land in question, and the extent of those rights.  Some rights have already been mentioned, but others might include sporting or mineral rights.  There may also be other reservations or protected rights under earlier transfers like Real Burdens (use restrictions).

Some rights may arise for reasons that are not immediately obvious, for example planning obligations under Section 75 agreements, old forestry dedications, stewardship or other scheme agreements.

New opportunities and the question of ownership and control

It will not always be obvious who ‘owns’ some of the rights that may give rise to new nature-based finance opportunities.  The right to payments for emissions reductions through peatland restoration schemes on land within a farm tenancy is an example.  Are these payments rightfully to the tenants or the landlords?  There is currently no clear-cut answer to questions like these.  Opportunities like selling ecosystem services were not in anybody’s mind when agricultural tenancy law was last updated, let alone when most tenancy agreements were prepared. 

A cooperative approach is likely to lead to the best and quickest outcomes in many cases, for example sharing benefits between landlord and tenant equally.  This won’t always be the right answer but will generally be an equitable starting point, depending on who is going to contribute what and at what cost.

Wider responsibilities

Land ownership and occupation is a privilege that brings with it wider responsibilities for the stewardship of the land itself, and to the wider community.  This includes the local community, particular interest groups and organisations, practical issues like a liaison with Deer Management Groups and a wider social, environmental and economic role within Scottish society as a whole.  It is helpful to identify the relevant stakeholders and consider how best to work with them in balancing their various interests and aspirations.

The Scottish Land Rights and Responsibilities Statement, The Scottish Land Commission protocol on community engagement and the Scottish Outdoor Access Code are all important considerations in relation to the pursuit of nature-based finance by land managers.

Additionality

The requirement for an action that is being purchased through an ecosystem market to be over and above what would have happened without this finance. The website of the Woodland Carbon Code provides detailed guidance on the criteria for additionality.

Agroforestry

An approach to land management that involves the integration of tree planting with crop and livestock farming.

Bundling

The measurement and accreditation of multiple services provided by an action to improve environmental quality, followed by the sale of the package as a single unit.

Carbon codes

Agreed ways of working that are designed to provide reassurance to buyers of carbon credits that what they are paying for is reliable and conforms to best practice. See the summary of the Woodland Carbon Code and Peatland Code within the explanation of Data, Standards and Accreditation.

Carbon credits

A carbon credit represents either the permanent removal of a tonne of carbon dioxide equivalent (CO2e) from the atmosphere, or the avoidance of one tonne of CO2e being emitted in the first place. (Carbon dioxide equivalents is a way of expressing the combined effect of different greenhouse gases in one measure.)  An example of natural emissions avoidance is the restoration of peatlands, which release large volumes of greenhouse gases when they are in a degraded state. The UK is one of only a few parts of the world with domestic carbon standards in place for woodland creation and peatland restoration that create verified credits that give assurance to buyers.

Carbon trading

The trading of carbon credits.

Climate adaptation

The process of adjusting to the actual or expected effects of climate change.

Climate mitigation

Actions that reduce the rate of climate change, either through prevention of the emission of greenhouse gases to the atmosphere, or the removal of those gases from the atmosphere.

Community municipal investments or bonds

A type of financial instrument typically issued by local government organisations enabling them to raise low-cost finance from residents or other individuals to support a project with defined environmental or social objectives. Examples of projects include greenspace or solar farm development. The vehicle also enables the issuer or borrower to engage residents about local issues. For buyers, community municipal investments are a means of investing as little as £5 in a green or social project in a community with an attractive return.  

Crowdfunding

A means of raising finance for a project from a large number of people typically contributing small amounts each. These people may be private individuals (known as civic crowdfunding) or organisations. In some cases, the finance provided may simply be a donation. In other cases, crowdfunding participants invest on the basis of an agreed return, such as shares in a business.

Ecosystem services

The direct and indirect contributions of the natural environment to people’s wellbeing.

Environmental impact bonds

Investments based on a ‘pay for outcomes’ model, whereby upfront capital is provided paid back through the delivery of positive environmental outcomes to one or several buyers. Environmental impact bonds are equivalent in design with social impact bonds, for which there is already experience in Scotland and other parts of the UK.

Green finance

Any method of financing or investment activity where money is put to work to ensure an improved environmental outcome.

Impact investing

Investments made with the intention of generating positive, measurable social and environmental impact alongside a financial return.

Just transition

The process of reaching net zero and a climate resilient economy in ways that are fair and address inequality and injustice.

Natural capital

The habitats and ecosystems that provide social, environmental and economic benefits to people.

Natural capital approach

The stewardship of land, water and nature in accordance with a holistic understanding of the social, environmental and economic benefits to people.

Natural flood management

The intentional use of natural features such as vegetation or landform to slow the flow of water from land in order to reduce flood risk.

Nature-based finance

The part of green finance that specifically finances or invests in improvements to the natural environment.

Nature-based solutions

The use of natural features and natural processes to help resolve an economic or societal challenge, at the same time providing other benefits such as for biodiversity. An example is the use of the strategic planting of woodland to reduce flood risk.

Net zero

The situation in which the greenhouse gases emissions attributable to a country, a locality, a group of people, or an organisation, are balanced by the permanent removal of an equivalent amount from the atmosphere.

Nutrient trading

The sale and purchase of nutrient reduction credits in order to meet the local and regional water quality goals. These credits are typically actions that reduce nutrient loss from farmland, such as the placement of vegetation to protect water courses or the planting of cover crops.

Payments for ecosystem services

Schemes through which the beneficiaries, or users, of ecosystem services provide payment to the stewards, or providers of those services.

Project developer

Individuals, organisations, or businesses involved in the design and implementation of projects to support environmental restoration.

Regenerative agriculture

Ways of producing food on farms that lead to progressive improvements in the condition of land, water and nature. It includes practices such as rotational grazing, mixed crop rotation, cover cropping, and integration of food production into activities such as peatland restoration and tree planting.

Rewilding

A term used to refer to large-scale restoration of native natural habitat with a view to minimal management input by people. The term is sometimes used in reference to the re-establishment of populations of animal and plant species that are considered by nature conservationists to be representative of ‘optimal’ ecological condition.

Stacking

The measurement and accreditation of multiple services provided by an action to improve environmental quality, followed by the sale of each service individually (to one or more buyers).

Venture capital

A form of private equity and type of finance that investors provide to new or small businesses in order help them get started. Given the early stage of the business, it can be high risk and, therefore, investors require higher returns.

Visitor payback

Schemes whereby visitors to an area are encouraged and enabled to make voluntary financial contribution to the stewardship of the environment that they are benefiting from. Also known as visitor giving, the revenue goes directly into causes that support the upkeep of the landscape.