TY - JOUR

T1 - Utilising portfolio theory in environmental research - New perspectives and considerations

AU - Matthies, Brent D.

AU - Jacobsen, Jette Bredahl

AU - Knoke, Thomas

AU - Paul, Carola

AU - Valsta, Lauri

PY - 2019

Y1 - 2019

N2 - 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.

AB - 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.

KW - Diversification

KW - Ecosystem service

KW - Environmental management

KW - Environmental risk

KW - Modern portfolio theory

U2 - 10.1016/j.jenvman.2018.10.049

DO - 10.1016/j.jenvman.2018.10.049

M3 - Comment/debate

C2 - 30602254

AN - SCOPUS:85057202993

VL - 231

SP - 926

EP - 939

JO - Journal of Environmental Management

JF - Journal of Environmental Management

SN - 0301-4797

ER -