When portfolio theory can help environmental investment planning to reduce climate risk to future environmental outcomes—and when it cannot

Abstract

Variability among climate change scenarios produces great uncertainty in what is the best allocation of resources among investments to protect environmental goods in the future. Previous research shows Modern Portfolio Theory (MPT) can help optimize environmental investment targeting to reduce outcome uncertainty with minimal loss of expected level of environmental benefits, but no work has yet identified the types of cases for which MPT is most useful. This article assembles data on 26 different conservation cases in three distinct ecological settings and develops new metrics to evaluate how well MPT can reduce uncertainty in future outcomes of a set of environmental investments. We find MPT is broadly but not universally useful and works best when multiple investments have negatively correlated outcomes across climate scenarios; a second-best investment has expected value almost as good as the value in the best investment; or multiple investments have little uncertainty in ecological outcomes.

Diversifying to Reduce Conservation Outcome Uncertainty in Multiple Environmental Objectives

“…Economists tackled spatial conservation planning under climate risk by adapting a portfolio optimization tool from the finance literature (Markowitz 1952, 1968), modern portfolio theory (MPT), to analysis of portfolios of conservation land investments (Ando and Mallory 2012; Convertino and Valverde 2013; Mallory and Ando 2014; Anderson et al 2015; Shah and Ando 2015; Ando et al 2018a). Spatial conservation portfolio analysis divides a landscape into subregions, among which the planner is choosing to divide total conservation investment.…”

“…To find efficient portfolios of protected lands for multiple objectives, the planner can take the following steps (Ando et al 2018b). First, choose preference parameters on the objectives in the conservation value function.…”

Optimal Budget Allocations for Protected Area Acquisition To Store Carbon in a Local Community Under Economic Growth Uncertainty

“…A branch of literature deals with the uncertainty associated with conservation benefits in targeting conservation investments (Williams et al 2005;Pressey et al 2007;Heller and Zavaleta 2009;Hodgson et al 2009;Carvalho et al 2011;Armsworth et al 2015;Albers et al 2016). Many of those studies focus on the influence of climate uncertainty on the benefits of conservation investments that affect the spatial targeting of investments (Hultman 2006;Ando et al 2018;Runting et al 2018). For example, the risk-diversification strategy of Markowitz (1952) from the finance perspective is suggested as a way to incorporate future climate uncertainty related to ecological outcomes (i.e., program benefits) in allocating conservation investments (Halpern et al 2011;Ando and Mallory 2012;Dunkel and Weber 2012;Hoekstra 2012;Mallory and Ando 2014;Shah et al 2017).…”

“…The problem arises because the number of assets that can be used in truly optimized optimal portfolio analysis should not exceed the limit of N-1 where N is the number of scenarios. For example, Ando et al (2018) conducted optimal portfolio analysis by creating 24 subunits for the U.S. portion of the Prairie Pothole Region, 7 subregions for birds of the Eastern U.S., and 11 subregions for Southern Appalachian salamanders across 71, 8, and 12 climate scenarios, respectively, where the number of subunits (or assets) is smaller than the number of scenarios (or observations per subunit).…”

Advances in conservation biogeography: towards protected area effectiveness under anthropogenic threats

“…However, individual recommendations for climate-wise management cannotbe given here, because the ideal management application depends on the local context of protected areas. Accordingly, many theories, frameworks and guidelines for climate-smart conservation planning and management have been developed (e.g Belote et al 2018, Ando et al 2018, Reside et al 2018…”