Application of portfolio management to biodiversity
As the report shows, the findings of portfolio theory are ignored today. This is somewhat surprising, since portfolio theory has not only been awarded the nobel price but has also had a fundamental impact on everyday business of banks and insurances during the last 50 years. The fact that portfolio theory is not applied to biodiversity up to this point comes as a surprise according to Stefan Volk, CFO of Gerling Group. “The value of diversity can only be detected with portfolio thinking. For equity portfolios this is generally accepted today. It is quite surprising from the point of view of a financial practitioner that portfolio theory is not used for the valuation and management of biodiversity.-
World’s biggest asset
Aiko Bode, project manager and head of the Cologne office of Gerling Sustainable Development Project GmbH, points out the importance of the associated challenge. “Biodiversity, without any doubt, is the world’s biggest asset. The value exceeds the market capitalization of all stock exchanges worldwide many times over. It is alarming to see that the tools and concepts of modern finance are not used to manage this asset. We expect the use of portfolio theory to provide additional incentives to conserve biodiversity.-
Portfolio theory was developed in the early fifties by the American economist Markowitz. Portfolio theory suggests e.g. that stock portfolios that consist only of a few low-risk stocks have a high rather than a low-risk profile. Portfolio managers who want to reduce portfolio risk must therefore invest in many different stocks even if the individual stocks are very risky. Only portfolio theory is able to detect the value of diversity. This method is used today for the management of securities and insurance risks in the first place. The new Gerling-CSM report applies portfolio theory to biodiversity for the first time and arrives at some interesting conclusions.
-Portfolio theory is not used for the management of biodiversity and this is a major reason for its current mismanagement. This becomes particularly evident in the agricultural context”, according to Dr. Frank Figge the author of the study, -The one-sided interest in the yield of crop plants has led to mis-balanced crop plant portfolios. Professional investment advisers would never advise their clients to invest in a stock portfolio that is as mis-balanced.”
As the report shows mistakes are also made in the assessment of biodiversity for a future pharmaceutical use. Plants are often the basis for new pharmaceutical substances. The probability of a specific plant resulting in a new pharmaceutical substance is however small. The value of a specific plant appears therefore to be uncertain. This has an adverse impact on its value. A fallacy as the report shows. There are a number of reliable estimates on how many pharmaceutical substances can be derived from the total number of plants, i.e. from the entire plant portfolio. The pharmaceutical value of a well diversified plant portfolio can therefore be reliably assessed.
The report sketches out the basics of a portfolio theory of biodiversity and demonstrates the consequences of a portfolio view on biodiversity. It introduces 9 rules that are considered self-evident in the management of securities today. “These rules are generally accepted in banks and insurances- according to Aiko Bode “It is disheartening to see that they are not applied in the management of biodiversity. Today stocks and other securities are managed more professionally than biodiversity, the biggest asset of all-.
The report has been prepared by Dr. Frank Figge of the Center for Sustainability Management (CSM) e.V. and is published by Gerling Group.
The report applies for the first time the findings of portfolio theory and portfolio management to biodiversity.
The report shows that biodiversity is managed less professionally than securities today. Only a portfolio perspective allows to unveil the economic value of diversity. A perspective that concentrates on single species, eco-systems etc results in an incentive to destroy biodiversity a major reason for the current dramatic loss of biodiversity.