Political uncertainty is the risk associated with:

There is some evidence that political relationships support company innovation – likely due to reduced political uncertainty fostering greater investment in innovation. An analysis of patents and political contribution data of more than 6,500 American companies found that those that support more politicians, winning politicians, politicians with jurisdiction over their industry, and those who join congressional committees innovate more.14 A similar result was found with relation to high-tech firms’ affiliation with higher levels of government in China.15

But there is countervailing evidence as well. A study focused on transition economies found that managerial time invested in political ties can weaken the relationship between organizational innovation and productivity.16 One study found a potential solution for companies with less international experience is to co-locate R&D activities with production activities, which can substitute for the ability to coordinate complex and dispersed organizational structures.17

Incorporate political risk analysis into business decisions

With material impacts from political risk on a wide array of business activities, the case for incorporating political risk analysis into C-suite decisions is clear. This is especially important for maintaining competitiveness because researchers have found that the vast majority of political risk impacts that companies report are firm specific (91.7%), rather than shocks that occur at the sector (7.5%) or market (0.8%) level.18

There are several specific actions executives can take to reduce their company’s political risk exposure and more effectively manage the political risks they still face. They should use scenario planning or other strategic foresight tools to assess how political risks may affect their workforce mobility and cross-border supply chains in the coming years. They should also incorporate political risk analysis into market entry and global footprint decisions. And as CR and ESG continue to rise up the C-suite agenda, executives should determine how stakeholder relationships could improve the effectiveness of their political risk management. Finally, companies should consider how their political risk management and innovation decisions may be intertwined – and make any adjustments necessary to foster greater innovation in the future.

These political risk management actions are especially important in the midst of the COVID-19 crisis, as governments play a more active role in managing their economies. Companies need to ensure that they have the necessary governance frameworks to integrate political risk analysis into their strategic planning and broader risk management processes in order to mitigate the potential negative impacts of political risk and also seize any opportunities that the shifting political environment may generate.

There are few things business leaders hate more than uncertainty. Increasingly, in today’s hyper-connected world, much of this uncertainty centers on geo-political risks. From international trade disputes to environmental regulation to the future of the eurozone, political decisions pose a real threat to both investors and a company’s bottom line.

One need look no further than the 2016 U.S. presidential election to see the risk associated with uncertainty. Companies were left scrambling to figure out how to operate in an unpredicted, highly political environment. For the first time in history, companies are faced with a uniquely vocal chief executive who is unafraid to target companies pushing opposing policy initiatives. While there is sure to be disagreement around the Trump presidency, most of us can agree that the political climate is ever-changing and increasingly unpredictable—exactly what investors fear most.

As a result of this new political climate, investors are adjusting their strategies accordingly. According to the , 88 percent of institutional investors agree that the current political climate is changing their firm’s investment strategy. In fact, the strategy has to change. So how do these institutional investors—banks, hedge funds, pensions, etc. —navigate today's volatile geopolitics? Institutional investors will benefit from having a team in place that can help leaders identify and assess political risks and then navigate through the divide. They must be nimble, adaptable and prepared to manage risk. They need to see around the corner at the next geo-political crisis and when it hits, they must react. The world is calling for responsive and responsible leadership.

The Edelman Trust Barometer surveyed more than 500 chief investment officers, portfolio managers, and buy-side analysts in five countries (U.S., Canada, UK, Germany and Japan), representing firms that collectively manage over $4.5 trillion in assets. The findings show that 76 percent of respondents believe CEOs should take the lead on change rather than waiting for the government to impose it. Ninety-eight percent of investors think public companies are obligated to address societal issues to ensure the global business environment remains healthy and robust. Sitting on the sidelines in no longer an option in today’s interconnected world.

For example, institutional investors are now able to participate in increasingly “safe” activism by considering Environmental, Social and Governance (ESG) factors when choosing investments. Once considered risky, Edelman’s Trust Barometer finds that ESG options are expected by the majority of investors globally. Ninety-three percent of global respondents believe that ESG features are integral to long-term value, alongside financial performance. An even more compelling argument for the long-term success of ESG investing is the fact that 87 percent of global respondents said their firm would consider investing with a lower rate of return if the investment included sustainable or impact investing considerations. Today, more than ever, firms are willing to take a financial hit if it means investing in the trends of the future. In addition, according to the Forum for Sustainable and Responsible Investment, socially responsible assets have had a 13.6 percent compounded annual growth rate since 1995, when the organization first started measuring.

Moreover, institutional investors looking to manage political risk require transparency and open, thoughtful communications on the part of C-suite executives. A private sector executives’ digital presence is integral to strengthening trust and demonstrating corporate transparency. The overwhelming majority of respondents surveyed consult a company or executive’s social media channels when evaluating a current or prospective investment. Ninety percent of investors want to see visual ways of sharing information when evaluating a current or prospective investment, and digital content presents this opportunity.

Yet most investors also agree that the way companies share information for IR purposes is outdated. This presents an opportunity for innovative company leaders to make an impression among stakeholders. According to survey results, a business/financial academic or expert on a company’s industry or issues is as credible as a source of information as the company’s CEO. And when dealing with political risks that put your reputation is on the line, it’s imperative to reach these external influencers, whose opinions will likely affect the choices of investors and consumers.

Transparency, responsibility and forward thinking are all factors that institutional investors consider when assessing opportunities. And as a certain amount of risk is to be expected with volatility masquerading as the new normal, institutional investors will support initiatives that help the greater good, bringing ESG investing to the forefront. In today’s increasingly complicated world, with rising volatility and insecurity, uncertainty, it turns out, is really the only certainty.

What is political uncertainty?

Which risk is also considered as political risk?

What is the cause of political risk?

What are the four types of political risks?