Defining Political and Geopolitical Risk
Political risk is an oft-misunderstood concept, that gets lost within a cloud of business buzzwords. It is most commonly misdefined as the risk faced by investors and companies operating in emerging and volatile markets. I take a different, and more robust, approach, that helps me advise my clients of both the risks and the opportunities. I define political risk as any change in a company's business and security environment within a country. A revised mining code that strengthens protections for investors, or the introduction of a new regulatory framework for mandating where tech companies' user data is stored, are both political risk issues, though one is a positive development, while the other might present challenges. Similarly, geopolitical risk is defined as any change in a company's business and security environment that involves a cross border issue, such as bilateral sanctions that make it impossible to do business with a certain country, or a reduction in tariffs for cross-border trade, that might make expanding into a new market much more lucrative. When viewed through this lens, it is clear that political and geopolitical risk exist in developed countries. We've seen this with the election of Donald Trump in the United States and the decision to pursue Brexit in the United Kingdom, both events that have far-reaching consequences for developed and emerging markets.
Although a risky endeavor isn't guaranteed to fail, we tend to view "risk" in a negative light. Given my definition of the concepts, I think political and geopolitical risk would be better renamed "political and geopolitical flux," since change is the primary driver of the analysis, and consequently, the insight. Sometimes the change is negative, other times positive, and still other times, for large companies especially, it can be a bit of both.
The value of political risk insight is not in predicting the future. Instead, the types of simulations that I design help companies identify and address vulnerabilities that can be exacerbated by deteriorating operating environments, while also helping them identify and take advantage of strategies that will allow them to capitalize on opportunities in new markets. Instead of writing reports that few read, and which are often commissioned after a decision is already made, I provide my clients with an interactive experience that brings together a spectrum of perspectives that allow them to practice making decisions and dealing with the likely consequences. In these simulations, participants gain a better understanding of political risk, how it affects them, and how their actions affect their operating environment. The simulations allow me to incorporate the insights of subject matter experts, and create injects tailored to all the different participants- including, for example, data for a sales team, or negative press for the PR/media team. These experiences help clients make better decisions, change minds, and empower participants to use their newly gained insight to make positive contributions towards addressing vulnerabilities, optimizing protocols, and seizing opportunities.