Why conflict of interest is the hidden detail holding back nature investment

Financing nature through investments, payment for services such as carbon credits, and offtake agreements have garnered much interest from investors and the public alike in recent years.

Commitments for large investments abound and over the last decade a vibrant ecosystem of investors, non-governmental organizations, funds, project developers and specialized service providers have emerged around nature finance.

This sector has huge potential to drive global nature protection and restoration, and climate resilience. And yet, nature markets have struggled to scale.

The voluntary carbon market (VCM), for example, is more than 25 years old but has remained stuck below about $2 billion since its 2021 peak. Why? One reason, we argue, is trust – or the lack of it.

Too often, trust is treated as a given or an irrelevant aside, incentives and conflicts of interest are considered an issue best left unmentioned.

But until we acknowledge and address the trust issues in nature markets, they will continue to undermine the sector and limit its scale and impact.

Investors need more than just a promising project – they need to trust the market’s structure. That’s where nature markets fall short. Conflicts of interest, and the perverse incentives they create, are widespread. And as Charlie Munger famously once said, “Show me the incentive and I’ll show you the outcome.”

This didn’t happen by design, it evolved: well-intentioned people built businesses in very young markets without always recognizing where conflicts of interest might arise.

These businesses ventured out with different models to meet market or shareholder demands. The markets then emerged with conflicts embedded, and any governance that exists was layered on top.

Examples include:

Oversight is so weak that journalists have become de facto watch dogs. Buyers are more scared of being caught out by a journalist than of actually doing something wrong, and conflict of interest stays in the shadows.

Of course, other sectors – including traditional finance – also wrestle with misaligned incentives. But they are a much bigger problem in nascent markets where new investors struggle to understand the logic of the market, the players, the risk categories, the geographies and the market standards.

In this context, even the appearance of a conflict of interest creates subtle unease that adds to the fog of uncertainty and deters capital.

There are several ways we can help build trust in investment in nature and address the issue of conflict of interest.

Let’s talk openly about conflict of interest. Transparency alone won’t solve the issue, but it helps. What if every transaction came with a conflict-of-interest notice? Can we start to build trust through radical honesty, even if the conflicts remain?

Thorough, independent due diligence helps investors understand risk. But if those services are funded by the projects they’re reviewing – or stand to benefit from its success – the process is compromised. Trustworthy due diligence must be structurally independent and paid for by buyers, never by suppliers.

Ultimately, we need better rules and stronger governance to change incentive structures. That takes time, but meanwhile individual actors can take responsibility and make a difference. For instance:

These decisions matter. Market players can lead by example.

Nature markets have enormous potential to finance the climate transition, but only if we make them trustworthy.

As we mark the International Day for Biological Diversity, let’s remove barriers to investment by making incentives, interests, and conflicts visible.

It’s not just about solving the problem of conflict of interest when it comes to nature investment, it’s about acknowledging it. Because until trust becomes the norm, capital will stay on the sidelines. But if trust is abundant, capital will flow and nature will thrive.

Visit UpLink to learn more about innovations helping to rewire economic models for a nature-positive future.