Technical Policy Briefing Notes - 5
Portfolio Analysis
Key Messages
Policy Briefs
Portfolio Analysis
Key Messages
- There is increasing interest in the
appraisal of options, as adaptation moves from theory to practice. In
response, a number of existing and new decision support tools are being
considered, including methods that address uncertainty.
- The
FP7 MEDIATION project has undertaken a detailed review of these tools,
and has tested them in a series of case studies. It has assessed their
applicability for adaptation and analysed how they consider
uncertainty. The findings are including on the MEDIATION Adaptation
Platform and summarised in a set of policy briefing notes.
- One
of the tools recommended for adaptation is Portfolio Analysis (PA).
- PA
is a tool that helps in the design and evaluation of portfolios, i.e.
in selecting a set of options which (together) are effective over a
range of possible future climates, rather than a single option best
suited to one possible future.
- The
approach allows the identification of efficient portfolios, i.e. those
that have the highest possible expected return for a given risk, or the
lowest degree of risk for a given rate of return. This then provides
the investor or decision maker with a choice of alternative (efficient)
portfolios, which they can choose from based on their risk-return
preferences.
- The approach
has considerable potential for addressing climate change uncertainty,
through the use of portfolios of options rather than single solutions.
It has a high resonance with the concepts of iterative risk management
in its encouragement of diversification (a key part of risk
management). The approach can be used within an economic analytical
framework and can also assess portfolios in terms of nonmonetary
(physical) effectiveness.
- The
review has considered the strengths and weakness of the approach for
adaptation. The main strength of portfolio analysis is that it provides
a structured way of addressing (climate change) uncertainty through the
identification of suitable combinations of options that –
between them – reduce climate impacts over the range of
impact uncertainty, expressing the effectiveness of alternative
portfolios in quantitative terms.
- This
provides a way of managing uncertainty that the analysis of individual
adaptation options does not allow. It can also assess benefits in
economic or physical terms, allowing application in market and
non-market sectors.
- The
potential disadvantages are that it is resource intensive, requires a
high degree of expert knowledge, and relies on the availability of
quantitative data. The approach also requires the use of probabilities,
which can prove challenging for the application to climate change. The
technique is obviously not relevant when one option addresses the full
range of uncertainty in climate impacts.
- Previous
applications of PA for adaptation have been reviewed and a number of
adaptation case studies are summarised which provide information on
practical applications.
- The
review and case studies provide useful information on the types of
adaptation problem types where PA might be appropriate, as well as data
needs, resource requirements and good practice lessons.
- PA is a key tool for helping to identify and analyse alternative portfolios of adaptation options. It has a clear application in cases where adaptation actions are likely to be complementary in reducing climate risks.
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