A theoretical framework for forestry risk mitigation under climate change scenarios based on fuzzy portfolio selection

Diversification of forest management regimes may reduce the exposure of long-term forestry investments to future climate-related risks. We investigate this hypothesis by proposing a novel theoretical framework based on a fuzzy-based extension of Modern Portfolio Theory to forestry. We tested our proposed framework with empirical data from commonly adopted forestry regimes in New Zealand. We constructed optimal forestry regime portfolios based on the implicit consideration of fuzzy probabilities under uncertain climate change scenarios. Annualized forestry returns and respective fuzzy probabilities were computed based on future productivity of Pinus radiata plantations and timber price simulations for four Representative Concentration Pathways (RCPs) for 2050–2090. We then used this information to construct a series of 10-year fuzzy portfolios that minimize forestry investment risk for a given target return under specific RCP scenarios. Our results indicate that regime diversification can reduce the risk exposure of forestry investments to climate change, but the level of risk mitigation achieved through regime diversification alone is expected to be low due to the high temporal correlation among the forestry returns from the tested regimes. This suggest that diversification of forestry regimes alone has limited potential to increase plantation resilience to climate change. Higher risk reductions could be potentially achieved if the forestry regimes were based on different tree species. The theoretical framework proposed here may be adapted to study crop diversification strategies under climate change.