Scotland's Growing Natural Capital Markets

Learning Points

• Investment readiness and development costs
  • Significant upfront investment is required to reach a stage where projects can meaningfully engage with investors
  • Project development costs increase with scale but are essential for creating investable propositions
  • FIRNS funding was crucial in supporting detailed financial modelling and investor engagement
• Buyer and investor preferences
  • Pre-2050 carbon credits can be attractive to some, although not to all, depending on the timeframe of their commitments.
  • Woodland carbon is preferred over peatland credits due to focus on removing carbon rather than preventing emissions and clearer measurement
  • Co-benefits enhance appeal and can lead to price premium but may not be of the scale to cover project costs without grant support
  • Direct engagement with end buyers can be more effective than working through intermediaries, especially for larger scale projects like Achnacarry where costs are reduced. However, it is important to note they can also play a useful role in aggregations, connectivity and taking on some elements of risk.
• Grant funding certainty
  • Uncertainty around forestry grant levels makes it difficult to define the investment gap and develop business cases
  • Current grant structures can work against landscape-scale projects as rates reduce for larger areas
  • Blended finance remains essential - even with private investment, many projects still require grant support to be viable, especially to support early development and baselining.
• Project delivery risks
  • Variable timelines for statutory approvals create uncertainty around carbon credit delivery dates
  • Projects need to balance maintaining sufficient risk buffers against making attractive investment returns
  • Insurance products are limited and expensive, focused more on buyers than project developers
  • Managing community and stakeholder relationships requires significant time and resource
• Business model development
  • Simpler structures like direct offtake agreements can be preferable to more complex Special Purpose Vehicle (SPV) arrangements although there can be use cases and advantages for both.
  • Models need to carefully balance investor certainty with realistic delivery capabilities
  • The timing of carbon credit verification and sales significantly impacts financial viability
  • Scale brings both opportunities and challenges for investment structures

Demand: What Would Help

Drawing from FIRNS project feedback and market analysis, the following priorities would help accelerate private investment in nature restoration:

Market Framework and Standards

• Provide clear policy guidance on carbon and biodiversity credits, for example, by working SBTI requirements to clarify the role of different credit types, such as Peatland, providing guidance to buyers, and clarifying and ideally mandating Biodiversity net Gain mechanisms in Scotland.
• Support the development of standardised contracts and approaches to reduce transaction costs (as is being supported by a current FIRNS project)
• Consider mechanisms like price floors, offtake agreements or outcome-linked payments, such as contributing to maintenance costs, to increase market confidence and earlier buyer commitment

Grant and Planning Reform

• Provide greater clarity on available grant funding levels to enable business planning
• Streamline approval processes for larger landscape-scale projects
• Review grant structures that currently discourage larger projects
• Create more predictable timelines for statutory consent

Project Development Support

• Maintain support for early-stage project development to bridge the investment readiness gap
• Help projects engage effectively with buyers and investors
• Enable projects to gather robust baseline data and demonstrate outcomes

These targeted interventions would help address key barriers while maintaining environmental integrity and supporting the development of high-integrity natural capital markets in Scotland.

The Pipeline of Natural Capital Projects in Scotland

Overview of Natural Capital Opportunities in Scotland

Scotland's unique landscapes and environmental assets hold great potential for nature-based solutions, from peatland restoration to woodland creation and marine conservation. The development of a robust project pipeline is crucial to realising this potential and attracting consistent private investment to support Scotland's climate and biodiversity goals. 

While market demand for ecosystem services increases, developing a pipeline of projects that can service this demand is crucial to market establishment. The nature and scale of buyer requirements directly influence which projects can progress to investment readiness, with implications for geographic distribution, project size, and development timelines.

The pipeline of natural capital projects in Scotland is currently characterised by high interest from investors and buyers but varying levels of development and investment. Analysis from the Investment Ready Nature Scotland (IRNS) and FIRNS programmes indicates that many projects are in the early to mid-stages of development, with the highest concentration of activity focused on developing business cases and financial models. It is worth noting that FIRNS has focused on supporting innovation projects and emerging revenue streams and provided less support to more established carbon projects; therefore, this analysis is not representative of the Scottish market overall.

Landscape and Ecosystem Projects

The FIRNS programme has supported projects across Scotland's key ecosystems, reflecting the diverse opportunities for nature restoration:

Peatland (2 projects, 6% of FIRNS portfolio)

• Scotland has over 2 million hectares of peatlands
• Approximately 75% are in degraded condition, emitting rather than storing carbon
• Represents 20% of Scotland's land area with restoration potential of up to 600,000 hectares: Peatland ACTION – restoring Scotland’s peatlands

Woodland (5 projects, 14% of FIRNS portfolio)

• Current woodland cover is 18% compared to European average of 38%
• Potential for native woodland expansion of up to 3.9 million hectares in upland areas
• Could deliver carbon removal of 6.96 million tons CO2 annually

Freshwater (9 projects, 26% of FIRNS portfolio)

• Over 125,000 km of rivers and streams
• Approximately 220 lochs designated as Sites of Special Scientific Interest
• Significant opportunities for natural flood management and water quality improvement

Marine & Coastal (4 projects, 11% of FIRNS portfolio)

• Over 18,000 km of coastline
• 462,000 square kilometres of sea area
• Extensive restoration potential in saltmarsh, seagrass and kelp forests

Agricultural (4 projects, 11% of FIRNS portfolio)

• Agricultural land covers approximately 75% of Scotland
• Significant opportunities for integrated land management and nature-friendly farming

Urban (3 projects, 9% of FIRNS portfolio)

• Over 80% of Scotland's population lives in urban areas
• Growing focus on green infrastructure and nature-based solutions for climate resilience

Market Infrastructure Development (8 projects,23% of the portfolio)

These projects focus on developing crucial market infrastructure, which in many cases, can attract investment and scale internationally:

• Development of new standards and codes
• Creation of aggregation mechanisms
• Establishment of trading platforms
• Community benefit frameworks
• Legal and contractual templates

This split between place-based landscape projects (77%) and market infrastructure (23%) reflects the dual need to develop both investable projects and the supporting mechanisms that enable market development and support investment. 

Geographic Distribution

The geographic spread of projects demonstrates nationwide potential for nature restoration, with activities ranging from Shetland, down to Edinburgh and the Solway Firth. 

However, there are notable variations in pipeline maturity across regions, often correlating with existing capacity and expertise in natural capital project development. Rural and more remote areas, in particular, face distinct challenges in developing projects to investment readiness and connecting with buyers, although they often hold some of the greatest potential for nature restoration.

List of FIRNS Round 1 and 2 Projects

Market and Investment Readiness

1. Community Benefits Certification Mark for UK Natural Capital Projects, made by the nature finance certification alliance

2. Improved governance mechanisms for whole-farm and farm cluster natural capital project implementation

3. Solway Coast and Marine Project

4. Annan Riparian Restoration Network

5. Edinburgh New Gardens - Urban Nature Restoration Investment Scheme

6. Project L•AND

7. Buyer-seller contracts for carbon and other nature markets

8. Dreel Burn Investment Readiness

9. Financing Natural Flood Management for communities and wildlife of the Eddleston Water

10. Arkaig Natural Capital: Regenerative Investment in West Lochaber

11. Leven Landscape Enterprise Network (LENs)

12. Joint venture for Scaleable Community Benefits from Rewilding

13. Loch Lomond and the Trossachs National Park nature Finance Platform

14. Biodiversity crediting for woodlands, peatlands and other ecosystems

15. Flow Country Green Finance Initiative

16. Make Rewilding Your Business (MRYB)

17. Saving Scotland’s Rainforest with Natural Capital Finance

Development Phase

18. Scottish nature Impact Fund Feasibility Study

19. It’s in our Nature: Place Powered Futures

20. Advancing the UK Saltmarsh Code in Scotland

21. Unlocking the restoration of degraded peatland on crofting and common grazing land

22. Enabling Markets for Marine Natural Capital

23. Planning the Financial Future for Wild Strathfillan

24. Central Scotland Green Network Routemap to Green Finance Mobilisation

25. River Catchment Restoration Pilot at Alladale Wilderness Reserve

26. Braes of Alyth: Wild Cores and Corridors

27. Developing a sustainable Scottish source to sea, green finance model

28. The Knoydart Credit - A Partnership of Nature and Community

FIRNS Investment Readiness Progress

FIRNS projects used the Green Finance Institute's Investment Readiness Toolkit to track their progress towards investment readiness. The toolkit breaks down the project development process into eight progressive stages, from initial project scoping to establishing legal contracts and closing investments.

Development Phase projects as expected mostly covered the early stages of the toolkit:

• Initial Project Scoping
• Identifying and Working with Sellers
• Baselining and Estimating Ecosystem Services
• Identifying and Working with Buyers
• Developing Business Cases and Financial Models

Common challenges were reported across all stages; the most significant challenge was identifying and working with buyers, particularly around securing buying intent. Projects also reported challenges with community engagement, particularly defining specific community benefits, and with business case development, cashflow projections and selling strategies - a key pilar of the FIRNS programme and Community of Practice was supporting projects with these challenges.

Market and Investment Readiness projects are typically working across the later stages of the toolkit:

• Developing Business Cases and Financial Models
• Developing Governance Structures
• Identifying and Working with Investors
• Establishing Legal Contracts and Closing

These projects report fewer major delays overall but continue to face challenges around buyer and seller engagement and developing robust business cases. In contrast to Development Phase projects, they report more positive progress on community engagement but highlight new challenges around investor engagement, particularly identification and approach strategies.

This analysis indicates that while projects are making progress along the investment readiness journey, significant support is still needed to help projects transition through the later stages of development towards investment readiness. The data suggests that many projects are earlier in their investment readiness journey than initially anticipated at the outset of the FIRNS programme.

Perspectives from FIRNS Projects

The FIRNS Community of Practice provides valuable insights into what's working and what isn't in developing Scotland's natural capital projects. Based on our November 2024 event discussions and survey data, clear patterns are emerging.

Key Challenges in Pipeline Project Development

Survey data from FIRNS projects highlighted several significant barriers to scaling projects, with funding uncertainty being the most frequently cited challenge (mentioned by 9 respondents). Policy and regulatory uncertainty was identified as the second most common barrier, followed by capacity issues and market mechanism challenges.

The main barriers identified were:

• Funding Uncertainty: Projects report difficulties in securing early-stage development funding and uncertainty around blended finance approaches
• Policy and Regulatory Framework: Lack of clarity on future agricultural payments and nature markets regulation
• Market Development: Limited buyer demand and uncertainty around emerging markets
• Capacity and Coordination: Limited expertise and resources, particularly in rural areas
• Baseline Data: Challenges in collecting and verifying 'decision-grade' data
• Community and Landowner Engagement: Complex stakeholder relationships and benefit sharing arrangements

Progress on Scaling Projects

Feedback from FIRNS projects has highlighted that while there is significant potential for scaling projects, several factors are limiting progress:

• Landowner Hesitancy: Many landowners are adopting a "wait and see" approach due to ongoing agricultural reforms and broader market developments. There are concerns that future government grants may cover similar activities, or that current actions could negatively impact future revenue streams.
• Investment Readiness: Many projects require longer timescales than anticipated to reach investment readiness, with challenges around developing business cases and engaging buyers.
• Market Maturity: The early stage of markets beyond woodland and peatland carbon and variability in forecasted future carbon prices creates uncertainty around future revenue streams.

Aggregation Approaches

Project participants have revealed a growing interest in aggregation models to help achieve scale, with several approaches being tested:

• Geographic clustering of smaller projects
• Collaborative approaches through Regional Land Use Partnerships
• Development of standardised approaches to reduce transaction costs
• Creation of investment platforms to pool projects
• Implementation of Landscape Enterprise Networks (LENS), which connect businesses dependent on the same landscape assets with land managers who can deliver improvements through coordinated investments based on shared commercial interests

However, projects noted that aggregation brings its own challenges around governance, benefit sharing, and maintaining local engagement.

Landowner Engagement

Feedback highlighted the complexity of landowner engagement, with several key themes emerging:

• Importance of including public, private and community sectors (rated 10/10 in importance by survey respondents)
• Value of standardised approaches to measuring social impact (rated 10/10)
• Need for long-term certainty in legislation (rated 9/10)

Supporting Pipeline Development

Survey responses indicated strong support for additional mechanisms to support pipeline development:

• High value placed on the FIRNS Community of Practice for knowledge sharing (rated 8/10)
• Interest in a 'nature accelerator' providing further support (rated 7/10)
• Mixed views on the value of a centralised project catalogue (rated 6/10)

These perspectives highlight both the significant potential for scaling Scotland's natural capital project pipeline and the need for continued support to overcome current barriers. The strong emphasis on legislative certainty and standardised approaches suggests that policy framework development can play catalytic role in future pipeline growth.

The Fisheries Management Scotland Case Study

The Fisheries Management Scotland case demonstrates innovative approaches to pipeline development at catchment scale. It showcases how aggregation can address scale challenges while highlighting the complexities of coordinating multiple stakeholders and interventions.

Project Pipeline: Learning Points

The FIRNS programme has generated valuable insights about developing Scotland's natural capital project pipeline. Key learnings fall into several themes:

Project Development

• Project development timelines are often longer than anticipated, particularly for early-stage engagement and baseline assessments
• There's a need to balance scientific rigour with practical implementation - "good enough" approaches using proxy measures may be more viable than complex scientific analysis
• Specialist expertise is essential but expensive, creating barriers particularly for smaller projects
• Early demonstration of practical benefits helps maintain stakeholder momentum while developing broader plans

Market Development

• Pure nature markets are unlikely to generate sufficient investment alone, especially in the short term - blended funding approaches are typically needed
• Regional approaches linking nature markets to wider economic opportunities show promise
• Standardisation of approaches (like monitoring frameworks) across diverse projects remains challenging

Community and Landowner Engagement

• Local knowledge is invaluable for identifying practical interventions
• Building trust takes time but is essential for project success
• Community benefits need to be clearly defined and delivered early
• Landowners need clarity on implications for agricultural payments and tax treatment

Project Pipeline: What Would Help

Improving the pipeline of investable projects requires addressing key barriers through:

Aggregation and Scale

• Support regional partnerships and landscape-scale initiatives to achieve investable scale
• Enable project clustering through Regional Land Use Partnerships
• Develop standardised approaches to reduce transaction costs
• Create collaborative platforms to pool smaller projects

Process and Guidance Support

• Provide clear frameworks for project development
• Create template contracts and reporting frameworks
• Develop efficient processes for statutory approvals
• Offer practical tools and how-to guides

Funding and Support

• Offer flexible early-stage funding for project development
• Support baseline assessments and capacity building
• Enable access to specialist expertise
• Maintain knowledge-sharing platforms like the FIRNS Community of Practice

Multi-faceted support and ongoing collaboration between the public sector, project developers, investors, and communities are essential to cultivate a strong pipeline of high-quality, investable projects aligned with Scotland's nature restoration and community benefit goals.

Business Models 

The pipeline challenges identified - from scale requirements to development timelines - fundamentally shape how business models must be structured to achieve success. Projects are adapting their financial approaches to address these constraints while maintaining viability

Overview of Business Models in Natural Capital Projects 

Natural capital projects typically combine multiple revenue streams and financing sources to achieve viability. Understanding these core elements of the business models such as Revenue, Costs and financing are essential for developing sustainable business models.

Core Revenue Streams

The primary revenue streams for natural capital projects in Scotland currently come from:

• Carbon Credits: Through established mechanisms like the Woodland Carbon Code and Peatland Code. While prices achieved in Scotland after typically higher than global averages this income often requires combining with other revenue streams to achieve project viability.
• Ecosystem Services Payments: Including:
  • Natural flood management benefits
  • Water quality improvements
  • Biodiversity enhancement
  • Recreation and tourism income

Cost Structures

Natural capital projects typically face three main categories of costs:

• Development Costs: Including baseline surveys, stakeholder engagement, technical design, and verification/certification costs. FIRNS projects report these being significantly higher than initially estimated.
• Capital Costs: The upfront investment in physical works like tree planting, peatland restoration, or water flow management works. These may benefit from blended finance solutions combining public grants and private investment.
• Operational Costs: Ongoing management, monitoring, and maintenance costs which must be factored into long-term business models and supported by ongoing revenue streams.

Financing Approaches

Projects are typically financed through a combination of:

• Public Grants: Often covering 50-70% of capital costs, particularly for peatland projects supported by the Peatland Action programme.
• Private Investment: Through:
  • Direct equity investment
  • Debt financing
  • Revenue share agreements
• Carbon Credit Pre-sales: Though careful consideration is needed regarding the split between upfront sales and retained credits

Stacking and Bundling

These represent two main approaches to combining revenue streams:

• Stacking: Generating separate revenue streams from different ecosystem services on the same land (e.g., carbon credits plus biodiversity payments)
• Bundling: Packaging multiple benefits into a single product (e.g., premium carbon credits with verified biodiversity and community benefits)

Current market codes generally restrict full stacking of benefits, requiring clear additionality for each revenue stream. This highlights the importance of careful business model design that aligns with market requirements while maximising sustainable revenue opportunities.

Reflections from FIRNS Projects

The FIRNS projects have provided valuable insights into the practical challenges and opportunities around developing viable business models for natural capital projects in Scotland. Key learnings include:

Early Stage Funding Needs and Solutions

FIRNS projects consistently reported underestimating the time and costs involved in the early stages of project development. Activities like community engagement, baseline surveys, and developing governance structures often took significantly longer than anticipated. This highlights a critical need for patient, flexible early-stage funding to support these essential foundations for successful projects.

Potential solutions raised by projects include:

• Dedicating a portion of grant funding specifically for these early-stage activities
• Exploring philanthropic funding or patient capital options
• Collaborating with local partners and networks to share costs and resources

Valuing and Pricing Ecosystem Services

Projects found challenges in robustly quantifying and valuing the full range of ecosystem services their projects could deliver, particularly for benefits beyond carbon like flood management, water quality, and biodiversity. This was compounded by uncertainty around long-term revenues from these sources.

However, projects also saw growing awareness and interest from buyers in these wider benefits. Key needs identified include:

• Developing standardised metrics and methodologies for quantifying co-benefits
• Agreeing clear, long-term payment mechanisms for a wider range of ecosystem services
• Continued engagement with buyers to understand their needs and priorities

Experiences with Different Revenue Models

The most established revenue streams came from woodland creation and peatland restoration via the Woodland Carbon Code and Peatland Code. However, the current carbon price was often seen as insufficient as the sole revenue source.

Projects are therefore exploring innovative approaches like bundling co-benefits with carbon credits, working with local beneficiaries (e.g. insurance companies for flood benefits), and collaborating with other landowners to achieve scale and cost-efficiencies.

Several projects also highlighted the importance of tailored revenue models suited to local contexts and community needs – for example, working with local businesses on nature-based tourism opportunities.

Approaches to Blending Public-Private Finance

Developing an optimal blend of public grants and private investment was a key focus for many projects. Most were combining capital grants (often 50-70% for peatland projects) with revenue-based private finance – through mechanisms like selling a proportion of carbon credits, or via profit-share arrangements.

Getting the right balance and timing of different funding sources was complex – in particular, the interaction between eligibility for public grants and evidence of private finance commitments. Several projects reported challenges due to mismatches between the pace of securing grants vs private investment, with delays in one impacting the other.

There was also debate around the balance of risks and returns between landowners and investors. Some felt that models transferring long-term carbon rights to investors were a poor deal for landowners. Addressing these challenges may require greater flexibility and alignment between public and private funding streams.

Early Lessons on Buyer/Investor Engagement

Effective engagement with buyers and investors was consistently identified as essential, but also an area where projects often underestimated the time and specialist skills required. Particular challenges included:

• Navigating the different needs and priorities of buyers
• Securing clear commitments and pricing from buyers
• Communicating the investment opportunity and structuring deals with investors

Some success factors projects identified include:

• Dedicating sufficient resources to this engagement from an early stage
• Leveraging the experience and connections of expert advisors and platforms like FIRNS and the Community of Practice (as well as the Social Investment Scotland’s wider support networks), Scottish Nature Finance Pioneers, the Ecosystem Knowledge Network and the Green Finance Institute.
• Developing clear, compelling investment propositions backed by robust evidence and data
• Building long-term relationships with aligned investors and buyers

The Flow Country Partnership Case Study

The Flow Country Partnership case study provides practical insights into developing viable business models for peatland restoration at scale.

Business Models: Lessons Learned

Project development has revealed several valuable insights. 

• Significant upfront funding and time (for up to 2-3 years) is needed before partnerships can hope to generate meaningful revenue from carbon sales or other ecosystem services. Much of this early-stage development work is high risk and may require grant funding.
• Engagement and consultation with local communities is critical but should be balanced with the need for a smaller 'core' team who can get on with delivery and decision making.
• Successful restoration partnerships require a wide range of expertise and capacity covering ecology, project management, grant funding, contracting, stakeholder engagement, communications and business planning.
• Dedicated core staff and leadership are essential to drive complex, multi-stakeholder partnerships forward. Partner organisations can provide valuable expertise but for core function reliance can lead to capacity delays and missed opportunities.
• Effective knowledge sharing between projects can help avoid 're-inventing the wheel' and ensure that lessons learned, and best practice spreads quickly.

Business models: What Would Help

Based on FIRNS project experiences and market analysis, several targeted interventions could help develop more viable business models for natural capital projects:

Market Development Support

• Develop mechanisms like price floors or guaranteed offtake agreements to provide revenue certainty
• Support development of new markets beyond carbon (e.g., biodiversity, water quality)
• Create frameworks for stacking multiple revenue streams where appropriate
• Explore innovative financing mechanisms such as blended finance funds, revolving credit facilities, and revenue support mechanism such as contracts for difference or outcome payments.

Early-Stage Project Support

• Provide dedicated funding for project development activities including baseline assessments and stakeholder engagement
• Support development of robust financial models and business cases
• Enable access to specialist expertise and technical assistance
• Create mechanisms for sharing development costs across multiple projects

Grant and Investment Integration

• Better align public funding timelines with private investment cycles
• Develop more flexible grant structures that support blended finance approaches
• Create clear frameworks for combining different funding sources
• Review intervention rates to ensure accessibility for different project types

Business Model Innovation

• Support further development of approaches like aggregation vehicles and cooperative models
• Continue to support standardised approaches to reduce transaction costs
• Further enable knowledge sharing of successful business models, providing guidance on optimal structures for different project types and scales

These interventions would help address key barriers while maintaining environmental integrity and supporting development of sustainable business models aligned with Scotland's principles for responsible investment in natural capital.

Legal Structures, Governance and Community Benefits 

Overview of Legal Structures, Governance and Community Benefits 

While business models focus on financial viability, their successful implementation depends on appropriate legal structures and governance. These frameworks must protect stakeholder interests while enabling effective project delivery. Therefore, the development of Scotland's natural capital markets requires robust legal and governance structures that can effectively balance multiple stakeholder interests while delivering environmental and community benefits. These structures must support complex transactions, manage long-term commitments, protect community interests, and provide confidence to investors - all while remaining practical and accessible for land managers and project developers.

FIRNS has provided valuable insights into the range of organisational structures being evolved across Scotland's emerging natural capital sector. Analysis of FIRNS applications shows constituted organisations (including registered charities and trusts) make up 46% of funded projects, while private organisations account for 37% and public bodies the remaining 17%. This diversity reflects the varied approaches being explored, from community-led initiatives to private sector projects and public-private partnerships. Notably, constituted organisations were disproportionately successful in securing funding, making up just 36% of applicants but 46% of grantees, suggesting their governance models may be particularly well-suited to delivering high-integrity natural capital projects.

The legal and governance challenges these projects face are significant. They must navigate issues around land tenure, community rights, long-term environmental commitments, and fair distribution of benefits. Many projects are breaking new ground - testing innovative models like farmer cooperatives, community joint ventures, and aggregation vehicles that could enable smaller landholdings to participate in markets. Their experiences offer crucial learning for Scotland's emerging natural capital framework.

Getting these structures right is vital for Scotland's natural capital market development. Effective models are needed to unlock private investment while ensuring projects deliver genuine environmental improvements and community benefits in line with Scotland's principles for responsible investment in natural capital. Without appropriate legal and governance frameworks, projects may struggle to secure investment, manage risks effectively, or maintain community support - all essential elements for building a high-integrity market at scale.

Reflections from FIRNS Projects

Drawing from discussions at the FIRNS Community of Practice event and project experiences, several key themes have emerged around legal and governance structures:

Barriers to Land Manager Participation

Risk, lack of clarity, and financial uncertainty are the primary factors holding back landowners. Many landowners express interest in restoration but hesitate due to the long-term commitments required. With markets not yet established and few success stories to build confidence, committing land to effectively unchangeable uses for extended periods appears too risky. This is particularly acute for farmers operating on marginal profitability. The recent agricultural payments update has not provided sufficient incentives for change, making the status quo appear safer despite interest in restoration approaches.

Supporting Smaller Landholdings

Initial evidence suggests cooperative and catchment-based approaches promise to enable smaller landholding participation. However, these require careful consideration of governance structures and benefit-sharing arrangements.

Legal Models and Governance

Experience from projects like Highland Rewilding suggests simpler legal structures can be effective, particularly for smaller initiatives. Their approach uses basic contracts for micro-businesses that satisfy both landowner and business needs without creating unnecessary complexity. However, there is a demand for a clearer set of template governance models that align with different project types and codes.

Community Stakeholder Perspectives

Key issues raised by communities include:

• The challenge of defining community benefit - with local perspectives often differing from standardised definitions
• The time required to develop genuine community relationships and engagement
• The importance of building circular economies within communities through skill-sharing and strengthening local relationships
• The need for governance structures that enable long-term community participation

The Certification Mark for UK Natural Capital Projects and Dreel Burn Case Studies 

The two case studies demonstrate emerging approaches to governance and community benefit delivery - one developing market infrastructure standards, and another showing community-led restoration in practice.

Legal Structures, Governance and Community Benefits: Learning Points

The experience of FIRNS projects has highlighted several key learnings about effective legal and governance structures for natural capital projects:

• Revenue Streams Are Essential. Without clear, reliable revenue streams, even interested landowners struggle to justify participation. The most successful approaches blend different funding sources and provide certainty around long-term income, particularly important given the extended commitments required for nature restoration.
• Simple Structures Work Best. While projects are complex, simpler legal and governance structures often prove more effective. Overly complicated arrangements can deter participation and increase costs. Basic contracts have worked well for smaller initiatives, particularly when focused on specific outcomes.
• Community Engagement Takes Time. Building genuine community relationships requires significant upfront investment but pays dividends in project success. Early engagement helps shape appropriate governance structures and benefit-sharing arrangements, though this needs to be balanced against project development timelines.
• Scale Through Cooperation.  Individual projects often lack the scale needed for market viability, but cooperative approaches show promise. These need careful consideration of governance arrangements to balance different stakeholder interests.

Legal Structures, Governance and Community Benefits: What Would Help

Based on FIRNS project experiences, several interventions could accelerate market development:

Funding and Policy Support

• More flexible funding to support early-stage project development to ensure structures are correct and community is involved
• Clear policy frameworks around long-term land use commitments

Legal and Governance Templates

• Development of model governance structures for different project types
• Template contracts that align with existing codes and standards
• Clarity around community benefit definitions and requirements and guidance on cooperative and aggregation models

Capacity Building Support

• Education and training for landowners on natural capital opportunities
• Support for community engagement and relationship building
• Shared learning from successful projects
• Technical assistance on governance and legal structures

These interventions would help build market confidence while ensuring projects deliver genuine environmental and community benefits aligned with Scotland's principles for responsible investment in natural capital.

Conclusion and Key Learning Points

The FIRNS programme has provided valuable progress and insights into the development of Scotland's natural capital markets. Through supporting 35 projects, a growing market has been further established, and a clearer understanding has emerged about what's needed to continue to scale high-integrity nature restoration with private investment in Scotland. FIRNS has become an integral and vital part of the current pipeline of projects supporting a wide range of capacity building and market innovations.   

Market Development Themes

Four key themes emerge across demand, pipeline development, business models, and governance:

1. Demand

• Carbon remains dominant revenue model, but other revenue streams are often required to support a viable project
• Significant potential in emerging markets (biodiversity, water quality, natural flood management) which can be further supported by developing policy frameworks
• Buyers often seek local projects where there can be geographic misalignment with supply
• Premium pricing for high-integrity project and credits is possible but also challenging
   

2. Project Pipeline

• Early-stage development typically requires 2-3 years and funding support; grant funding or blended finance is essential for many projects
• Upfront costs (baseline assessments, stakeholder engagement) often underestimated
• Need for patient capital and flexible funding structures
   

3. Business Models

• Multiple revenue streams needed beyond carbon and business models need to reflect this
• Cooperative and landscape-scale approaches show promise
• Patient capital can be essential to support extended development periods
• Technical business modelling support is often required to support projects engaging with buyers
   

4. Legal Structures, Governance and Community Benefits

• Simple governance and legal structures can often be most effective; sharing of models and contracts supports market development
• Community engagement crucial but requires significant time investment
• New frameworks are emerging for benefit sharing and demonstrating community benefits
• Cooperative models show promise for smaller landholdings

 Priority Actions for Market Development

Based on FIRNS experience, three immediate priorities emerge:

1. Policy Framework Development

• Clear policy guidance on carbon and biodiversity credits, including SBTI compliance for peatland credits, standardised verification processes, and development of a Scottish biodiversity net gain and planning framework
• Support for compliance markets in areas like Biodiversity Net Gain where possible
• Templates for legal structures and community benefit sharing
   

2. Financial Support Evolution

• Flexible early-stage funding
• Better alignment of public and private funding cycles
• Support for aggregation approaches
   

3. Capacity Building

• Knowledge sharing through Communities of Practice
• Technical assistance on business models and governance
• Support for community engagement

The FIRNS programme demonstrates significant potential for scaling private investment in Scotland's nature restoration. Success will require continued collaboration between the public sector, project developers, investors, and communities to build high-integrity markets that deliver genuine environmental and social benefits.