Open AccessWhen portfolio theory can help environmental investment planning to reduce climate risk to future environmental outcomes—and when it cannot
Author(s) -
Ando Amy W.,
Fraterrigo Jennifer,
Guntenspergen Glenn,
Howlader Aparna,
Mallory Mindy,
Olker Jennifer H.,
Stickley Samuel
Publication year - 2018
Publication title -
conservation letters
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.153
H-Index - 79
ISSN - 1755-263X
DOI - 10.1111/conl.12596
Subject(s) - portfolio , investment (military) , climate change , work (physics) , environmental resource management , outcome (game theory) , value (mathematics) , investment strategy , modern portfolio theory , natural resource economics , business , economics , environmental economics , actuarial science , ecology , computer science , microeconomics , finance , engineering , mechanical engineering , machine learning , politics , political science , market liquidity , law , biology
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.