Measuring the value of ecosystem-based fishery management using financial portfolio theory

Abstract

We highlight the potential benefits of adopting Ecosystem-based Fishery Management (EBFM). We compare the EBFM implementation with the more traditional single-stock approach. We show the contribution of the portfolio theory to the EBFM, which can be achieved by selecting an optimal portfolio to maximise the average revenues and minimise the variance. We use this approach to construct two frontiers: the ecosystem efficient frontier, which considers stock interactions (the variance-covariance matrix), and the stock efficient frontier, only considering individual stock variances. We also define two risk gaps. The first gap shows the reduction in the standard deviation per unit of revenue that the fleet could have achieved if they had decided to use the optimal portfolio of the stock frontier instead of the historical portfolio. The second gap reflects the reduction in the standard deviation per unit of revenue when the management moves from the stock frontier to the ecosystem frontier portfolio. This approach is adapted to the Basque inshore fleet. According to our results, taking the single-stock approach as the benchmark, the EBFM would obtain the same historical revenue while reducing the risk by 23\%. Alternatively, allowing the same level of risk, it could achieve a 21\% increase in revenues.