Modern Portfolio Theory Aids Reserve Design Under Climate and Land Use Change

Seashore scene

Seashore scene

A research team led by SE CASC Research Ecologist Mitch Eaton has released results from the project, Climate Change Adaptation for Coastal National Wildlife Refuges, in the journal Ecological Applications, “Spatial conservation planning under uncertainty: adapting to climate change risks using modern portfolio theory.” Eaton and co-authors, Simeon Yurek, Zulqarnain Haider, Julien Martin, Fred A. Johnson, Bradley J. Udell, Hadi Charkhgard, and Changhyun Kwon, used principles of Modern Portfolio Theory (MPT) to formalize diversification as an explicit strategy for managing risk in reserve design in the face of changing climate and land use. MPT quantifies risk as the variance and correlation among assets, in contrast to treating risk as an absolute measure and ignoring the context of the management problem and risk preferences of stakeholders. Researchers used this scientific approach to inform strategies for managing uncertainty related to climate and urban growth in planning conservation reserves in South Carolina’s Lowcountry, the low-lying southern coastal plain that includes Cape Romain National Wildlife Refuge Complex.

Uncertainty related to climate change and urban growth complicates design of protected areas and can lead to decision makers failing to meet conservation goals. Researchers used MPT to evaluate multiple conservation objectives, allowing managers to balance the benefits and risks of management under climate change and land change uncertainty. Application of risk management theory emphasizes diversification of portfolio of assets, with the goal of reducing the impact of system volatility on investment return. The approach allows decision makers to balance management benefits and risk when preferences are contested or unknown, and includes additional decision options such as parcel divestment when evaluating candidate reserve designs.

An efficient search algorithm that optimizes portfolio design for large conservation problems was applied in addition to a game theoretic approach to evaluate portfolio tradeoffs that satisfy decision makers with divergent benefit and risk tolerances, or when a single decision maker cannot resolve their own preferences. Evaluating several risk profiles for the South Carolina case study, they show that a reserve design may be somewhat robust to differences in risk attitude but that budgets will likely be important determinants of conservation planning strategies, particularly when divestment is considered a viable alternative. Their analysis identified a possible fiscal threshold where adequate resources can protect a sufficiently diverse portfolio of habitats such that the risk of failing to achieve conservation objectives is considerably lower.

In addition to evaluating different reserve designs, the proposed framework can be used to inform other portfolio problems including managing species communities, allocating budgets, controlling invasive species, translocating populations, or identifying sites for habitat restoration. The model can identify important fiscal thresholds in analyzing cost-benefit tradeoffs.