Diversification of forestry portfolios for climate change and market risk mitigation. (1st July 2021)

• Record Type: Journal Article
• Authors: West, Thales A.P.; Salekin, Serajis; Melia, Nathanael; Wakelin, Steve J.; Yao, Richard T.; Meason, Dean
• Is Part Of: Journal of environmental management. Volume 289(2021)
• Publication Date: 2021-07-01
• Subjects: Modern portfolio theory -- Climate change adaptation -- 3-PG -- Forest management -- Representative concentration pathway; Environmental policy -- Periodicals; Environmental management -- Periodicals; Environment -- Periodicals; Ecology -- Periodicals; 363.705
• DOI: 10.1016/j.jenvman.2021.112482
• Languages: English
• ISSNs: 0301-4797

Abstract

Abstract: Investments in forestry are long-term and thus subject to numerous sources of risk. In addition to the volatility from markets, forestry investments are directly exposed to future impacts from climate change. We examined how diversification of forest management regimes can mitigate the expected risks associated with forestry activities in New Zealand based on an application of Modern Portfolio Theory. Uncertainties in the responses of Pinus radiata (D. Don) productivity to climate change, from 2050 to 2090, were simulated with 3-PG, a process-based forest growth model, based on future climate scenarios and Representative Concentration Pathways (RCPs). Future timber market scenarios were based on RCP-specific projections from the Global Timber Model and historical log grade prices. Outputs from 3-PG and the market scenarios were combined to compute annualized forestry returns for four P. radiata regimes for 2050–2090. This information was then used to construct optimal forestry portfolios that minimize investment risk for a given target return under different RCPs, forest productivity and market scenarios. While current P. radiata regimes in New Zealand are largely homogenous, our results suggest that regime diversification can mitigate future risks imposed by climate change and market uncertainty. Nevertheless, optimal portfolio compositions varied substantially across our range of scenarios and portfolio objectives. The application of this framework can help forest managers to better account for future risks in their management decisions. Highlights: Diversification of forestry regimes can mitigate future climate change risk. Unpruned regimes were associated with lowest expected risk. Pruned regimes were associated with highest expected returns.