The Victorian Government has agreed to set aside 2,000 hectares of forest in East Gippsland to help protect three threatened species of owl.

Environment East Gippsland took legal action against the Victorian Department of Environment, Land, Water and Planning (DELWP) and state-owned VicForests over the issue.

An agreement was reached on Friday between the parties before the case was scheduled to appear in the Supreme Court.

Environment East Gippsland's Jill Redwood said it was a "fairly significant" win for the threatened Sooty, Masked and Powerful Owls.

"It also means that the department acknowledges that there needs to be more done to protect owls, that they were undersized zones that they had set aside and a lot of them were destroyed in the 2014 bushfires," she said.

As part of the settlement, DELWP will identify land across East Gippsland that will be protected from logging.

DELWP's director of land management Nina Cullen said the department will work to identify where exactly land will be protected.

"A number of factors will determine that, species' needs, habitat requirements, the research and the knowledge that we have from scientific input over many years around these species," she said.

When asked if DELWP would have taken action to protect the owls without this legal action, Ms Cullen said the department takes many actions to protect threatened species.

"The department takes actions through all of its operations and as part of its normal course of business, it would have been protecting the owls," she said.

Ms Redwood said the department did not do enough.

"This is just one example of that where we have had to force them to court until they acknowledge, yes they could do more to protect these species," she said.

As well as setting land aside, research will be carried out on the threatened owls and DELWP will pay part of Environment East Gippsland's legal costs.