Natural Capital: what is it?

Natural capital projects are rapidly emerging as a significant area of focus for landowners, developers, and investors, as environmental priorities become increasingly embedded in policy, finance, and legal frameworks.

At their core, these projects seek to enhance or restore ecosystems while delivering measurable environmental benefits such as carbon sequestration, biodiversity gain, and improved air and water quality.

However, not all environmental projects fall neatly into this category. Distinctions remain between true natural capital projects and more traditional arrangements, such as compensatory planting or habitat management, which are often driven by regulatory requirements rather than the creation of additional, measurable environmental value. Understanding where that line is drawn is becoming ever more important as markets and frameworks continue to evolve.

With growing momentum in the UK and increasing recognition of natural capital as an investable asset class, we explore what natural capital projects are, how they differ from existing models, and what is driving their development in Scotland.

What are natural capital projects?

Natural capital projects are environmental projects which are carried out with the purpose of achieving an environmental or ecosystem benefit, such as:

1. enhancing or restoring existing ecosystems;
2. delivering some sort of measurable (and often monetised) ecosystem service, such as carbon sequestration, biodiversity gain, flood mitigation, or air and water quality improvement; or
3. delivering another quantifiable and monitored environmental impact.

In order to achieve this, natural capital projects will often align with existing frameworks like the carbon codes or other ecosystem service markets. Although not yet active in Scotland, there is some anticipation around aligning projects with the Biodiversity Net Gain (BNG) markets which are already becoming more active in the rest of the UK and further afield. With all of this in mind, the Scottish Government has also been developing the Ecosystem Restoration Code, which is intended to provide a model for voluntary private investment in biodiversity and nature restoration in Scotland.

What’s a compensatory planting agreement or habitat management agreement, and is that a natural capital project?

These are typically projects which are being carried out for the specific purpose of offsetting the environmental impacts of another action, such as the environmental impact and associated carbon emitted in the development of a windfarm and construction of its components.

Unlike true natural capital projects, compensatory planting or habitat management is usually designed to meet a planning or regulatory obligation on the landowner or developer in question, rather than for the purpose of achieving any additional environmental or ecosystem benefits.

Although not all compensatory planting or habitat management projects are considered to be natural capital projects, they may be considered a natural capital project if they go beyond basic compliance, for example, if they’re also:

1. designed to deliver carbon credits or other ecosystem service such as Biodiversity Net Gain (BNG) units; or
2. registered in a carbon credit scheme; or
3. measured using recognised frameworks (e.g., UK Defra biodiversity metric); or
4. subject to long-term management and monitoring; or
5. able to demonstrate additionality (i.e. benefits wouldn’t have happened otherwise).

For example, if a developer funds woodland creation that (a) generates verified carbon credits, (b) improves biodiversity beyond baseline, and/or (c) is managed for 30+ years, then that may qualify as a natural capital project.

Who’s driving the natural capital market in Scotland?

The natural capital market is being driven by a number of factors, including; landowners looking to diversify income and monetise their land, corporate ESG targets and environmental responsibility, developers and utility operators seeking to meet or exceed planning and regulatory compliance requirements imposed on them (although see above), and of course the opportunity for early investors to try and exploit future demand.

This is all set in the backdrop of a general consensus among landowners, developers, corporates and investors alike of a shared sense of environmental responsibility to future generations; and importantly this also follows on from the acknowledgement by BlackRock in February 2025 that natural capital is now an investable asset class.

Whether driven by environmental goals, planning requirements, or income generation, these projects demand carefully structured land and development agreements to fully realise their value for landowners, developers, and investors alike.

Will a natural capital project affect the continued use of my land?

Probably. Depending on the nature of the project, there may be some impact or restriction on the use of your land during the term of the project in order to maximise it’s potential to deliver an environmental impact or ecosystem benefits.

The type of restrictions and the level of impact will depend on the nature of the project in question, but different projects can have vastly different terms, depending on the outcome they’re intended to achieve. For example:

1. tree planting or ecosystem sponsorship agreements may only impose a short term (e.g. a 5-year commitment) to establish a woodland or wildflower meadow, or to conduct riparian revegetation;
2. compensatory planting agreements or woodland restoration agreements may have an intermediate term (e.g. 20 - 40 years) to allow the relevant woodlands to be established or restored for a full life cycle; and
3. woodland or peatland carbon credit projects will impose a much longer term (e.g. up to 100 years) because of the longevity required to sequester the expected amount of carbon from the atmosphere.

Will I still be liable for project obligations even if I sell the land?

The project obligations will usually be agreed between the landowner and the developer or investor in a personal contractual agreement, which means there will be personal obligations and not title conditions which attach to the affected land. However, since this could leave the project developer or investor exposed to breaches by future owners, they may (a) include a “successors bound” clause in the agreement, to oblige the landowner to take their successors bound by their obligations in the event of a future sale of the affected land, and (b) request the grant of a standard security over the landowner’s title to secure the landowner’s obligations.

Although the standard security doesn’t disclose the content of the agreement, it does put a flag on the title for any prospective purchaser that there’s an underlying third-party interest to be disclosed.

For more information, please see our previous article: Natural capital projects in Scotland: structuring land rights and long-term obligations for biodiversity projects.

Is the creation of natural capital projects and the sale of carbon credits taxable in Scotland?

This depends on the nature and structure of the project, as well as the personal circumstances and/or structure of the taxpayer. For example, the tax treatment of woodland carbon credits and peatland carbon credits may differ.

HMRC’s tax guidance on income and expenditure relating to the creation and management of natural capital projects, and the subsequent sale of carbon credits, is still evolving and so specialist tax advice should always be sought.

Our rural land and natural capital team regularly acts for interested parties across the spectrum, from landowners and charities to funders and institutional investors, always with a view to ensuring that each project delivers the best possible outcome for each party’s needs. Get in touch to find out how we can help.

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