Utilising portfolio theory in environmental research - New perspectives and considerations

Green bonds and other assets: Evidence from extreme risk transmission

Green bonds (GB) are gaining a prominent role in sustainable development because of their ability to fund environment-friendly projects. This study aims to investigate if investors can benefit from the risk diversification properties of including GB with other assets, particularly within the context of the ongoing COVID-19 pandemic. To do so, we utilize a quantile-connectedness approach to examine a set of GB and traditional assets, i.e., commodities, stocks, and bonds, from 2008 to 2020. We find higher total time-varying risk spillovers during extreme high volatility periods than those with average and low volatility. For pairwise risk spillovers, GB offers more diversification opportunities when volatility is very low. Nevertheless, the diversification benefits increase during the COVID period. The strong bidirectional risk spillovers between GB and conventional bonds imply that GB can be considered a good alternative to traditional bonds while benefiting from their diversification potential, particularly with energy and agriculture. Our findings are useful for investors wishing to implement green diversification portfolio strategies in extreme volatility periods and act as an encouragement to policymakers to establish efficient policies to promote green finance.

Environmental risk in an age of biotic impoverishment

The science underpinning biodiversity's importance to human well-being seems to be taken up little by environmental decision makers. Since the 1950s, ecological, evolutionary and environmental research has pointed to the importance of biodiversity as a significant factor influencing the stability and functioning of population, community, eco- and Earth-systems and the environmental services they provide. Despite its prominence and the tremendous contributions to our understanding of the natural world, this field of research, which we term 'bio-functional ecology', seems not to have had the impact it should. Biotic impoverishment, the loss of biodiversity across all scales and across all taxa, continues to worsen. We suggest that redirecting ecology's emphasis on ecological stability to a focus on environmental risk could help bring bio-functional ecology research more into the environmental arena. Rather than managing biodiversity as an agent of ecological stability, biodiversity could be managed as a natural capital asset in a portfolio of social, human, produced and financial capital assets. This would allow using portfolio theory to identify options for minimizing environmental risk while ensuring human well-being. In this essay, we argue that environmental risk more accurately captures people's motivation to preserve and manage biodiversity than does ecological stability. This redirection from stability to risk may provide greater clarity for decision makers and people in general as to why biodiversity is fundamentally linked to human well-being. In doing so, we can help curb the currently unabated spread of biotic impoverishment across the biosphere.

Recognizing the insurance value of resilience: Evidence from a forest restoration policy in the southeastern U.S

The long-term supply of ecosystem services is dependent on properly functioning ecosystems and their susceptibility to natural and anthropogenic disturbances such as climate change and urbanization, as they can alter ecosystem structure and function. Forest function is not static, but rather a risky asset that fluctuates and can decrease as a result of forest disturbance. Therefore, concepts such as resilience and insurance value as well effective policy formulation, management, and restoration are key to maintaining these benefits. This study estimates the insurance value that the public places on a policy that promotes restoration for increased resilience and ecosystem services using binary choice (BC) and best-worst scaling (BWS) models to estimate willingness to pay (WTP) and to vote for the restoration of longleaf pine (LLP) forests in the southeastern United States. Our BWS findings indicate that respondents seemed to only prefer programs with low risk of forest damage and lower monthly costs, while BC models show that low and moderate risk programs increased the likelihood of voting for them and that excellent wildlife habitat was also highly valued by our respondents. Positive attitudes towards the environment also positively influence voting for forest restoration programs. Findings contribute to an emerging body of literature on social-ecological systems and how the voting public conceptualizes trade-offs among ecosystem services, insurance value, and resilience. Results may help assess the use and incorporation of concepts such as resilience, ecosystem services, and insurance value in restoration, environmental, fire management, and climate change-related policy instruments and programs.

How Much Agroforestry Is Needed to Achieve Multifunctional Landscapes at the Forest Frontier?—Coupling Expert Opinion with Robust Goal Programming

Agroforestry has been promoted as a key forest landscape restoration (FLR) option to restore ecosystem services in degraded tropical landscapes. We investigated the share and type of agroforestry selected in an optimized landscape, accounting for a mosaic of alternative forest landscape restoration options (reforestation and natural succession) and forest and common agricultural land-uses. We extend previous studies on multi-objective robust optimization and the analytic hierarchy process by a systematic sensitivity analysis to assess the influence of incorporating agroforestry into a landscape. This approach accounts for multiple objectives concurrently, yet data and computational requirements are relatively low. Our results show that experts from different backgrounds perceive agroforestry (i.e., alley cropping and silvopasture) very positively. Inclusion of large shares of agroforestry (41% share of landscape) in the FLR mix enhanced simulated ecosystem service provision. Our results demonstrate that landscapes with high shares of agroforestry may also comprise of high shares of natural forest. However, landscapes dominated by single agroforestry systems showed lower landscape multifunctionality than heterogeneous landscapes. In the ongoing effort to create sustainable landscapes, our approach contributes to an understanding of interrelations between land-covers and uncertain provisions of ecosystem services in circumstances with scarce data.

Accounting for multiple ecosystem services in a simulation of land-use decisions: Does it reduce tropical deforestation?

Conversion of tropical forests is among the primary causes of global environmental change. The loss of their important environmental services has prompted calls to integrate ecosystem services (ES) in addition to socio-economic objectives in decision-making. To test the effect of accounting for both ES and socio-economic objectives in land-use decisions, we develop a new dynamic approach to model deforestation scenarios for tropical mountain forests. We integrate multi-objective optimization of land allocation with an innovative approach to consider uncertainty spaces for each objective. These uncertainty spaces account for potential variability among decision-makers, who may have different expectations about the future. When optimizing only socio-economic objectives, the model continues the past trend in deforestation (1975-2015) in the projected land-use allocation (2015-2070). Based on indicators for biomass production, carbon storage, climate and water regulation, and soil quality, we show that considering multiple ES in addition to the socio-economic objectives has heterogeneous effects on land-use allocation. It saves some natural forest if the natural forest share is below 38%, and can stop deforestation once the natural forest share drops below 10%. For landscapes with high shares of forest (38%-80% in our study), accounting for multiple ES under high uncertainty of their indicators may, however, accelerate deforestation. For such multifunctional landscapes, two main effects prevail: (a) accelerated expansion of diversified non-natural areas to elevate the levels of the indicators and (b) increased landscape diversification to maintain multiple ES, reducing the proportion of natural forest. Only when accounting for vascular plant species richness as an explicit objective in the optimization, deforestation was consistently reduced. Aiming for multifunctional landscapes may therefore conflict with the aim of reducing deforestation, which we can quantify here for the first time. Our findings are relevant for identifying types of landscapes where this conflict may arise and to better align respective policies.

Sustainable Portfolio Optimization with Higher-Order Moments of Risk

Sustainable economic growth and development of stock market plays an important role in diversifying the investment opportunities that can be assessed accordingly. However, a true diversification in portfolio is impossible without inclusion of higher-order moments, skewness and kurtosis. However, the risk-taking behavior of investors is modelled with the help of higher-order moments of risk. Therefore, this study is intended to construct optimal portfolios and efficient frontiers with the inclusion of higher-order moments of risk. The findings show that optimized portfolios with inclusion of skewness and kurtosis are sustainable and significantly different than those from mean-variance optimized portfolios which show asymmetric and fat-tail risk. Results further confirm its significance in balancing the additional risk dimensions and returns in Asian emerging stock markets for sustainable returns. The results also endorse that induction of skewness and kurtosis affects portfolio allocation weights and expected returns. Therefore, this study strongly recommends the inclusion of higher moments of risk for optimization to curtail their effect and sub-optimal decisions.