Utilising portfolio theory in environmental research – New perspectives and considerations

Brent D. Matthies, Jette Bredahl Jacobsen, Thomas Knoke, Carola Paul, Lauri Valsta

Research output: Contribution to journalComment/debate

24 Scopus citations

Abstract

Modern Portfolio Theory is a well-established method in economic research for considering the risks and returns in asset allocations and the potential benefits of diversification for risk averse agents. Thus, it is a useful tool for guiding sustainability discourse under uncertain future states. Existing discussions around the method's use in environmental research have evolved during over the 75 years of its application, leading to a continued renewal of perspectives on utilising it. We classify the environmental questions where portfolio theory has been applied, and critically discuss the methodological approaches taken; providing a stepping stone for future use of the method. This article provides a framework for its application in environmental research using the following questions: 1) what is the type of research or management question and objective(s) of the decision-maker(s); 2) what are the definitions of the assets to be included in the portfolio; 3) what are the ways that returns are valued, discounted, distributed and weighted; 4) what is the most appropriate way for risks to be accounted for and managed, including the selection of the appropriate model and taking into account risk preferences; and 5) what are the definitions of constraints in the programming problem.

Original languageEnglish
Pages (from-to)926-939
Number of pages14
JournalJournal of Environmental Management
Volume231
DOIs
StatePublished - 1 Feb 2019
Externally publishedYes

Keywords

  • Diversification
  • Ecosystem service
  • Environmental management
  • Environmental risk
  • Modern portfolio theory

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