Bio-folio: applying portfolio theory to biodiversity

Author: Figge, Frank

Source: Biodiversity and Conservation, Volume 13, Number 4, April 2004 , pp. 827-849(23)

Publisher: Springer

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Abstract:

Genes, species and ecosystems are often considered to be assets. The need to ensure a sufficient diversity of this asset is being increasingly recognised today. Asset managers in banks and insurance companies face a similar challenge. They are asked to manage the assets of their investors by constructing efficient portfolios. They deliberately make use of a phenomenon observed in the formation of portfolios: returns are additive, while risks diversify. This phenomenon and its implications are at the heart of portfolio theory. Portfolio theory, like few other economic theories, has dramatically transformed the practical work of banks and insurance companies. Before portfolio theory was developed about 50 years ago, asset managers were confronted with a situation similar to the situation the research on biodiversity faces today. While the need for diversification was generally accepted, a concept that linked risk and return on a portfolio level and showed the value of diversification was missing. Portfolio theory has closed this gap. This article first explains the fundamentals of portfolio theory and transfers it to biodiversity. A large part of this article is then dedicated to some of the implications portfolio theory has for the valuation and management of biodiversity. The last section introduces three development openings for further research.

Keywords: Assessment; Asset management; Biodiversity; Diversification; Portfolio management; Portfolio theory; Valuation

Document Type: Research Article

DOI: http://dx.doi.org/10.1023/B:BIOC.0000011729.93889.34

Affiliations: School of the Environment, University of Leeds, Leeds LS2 9JT, UK ( ), Email: figge@sustainablevalue.com

Publication date: April 1, 2004

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