In today’s news alone, three separate articles discuss the impact of geopolitical risk on investment. In the first article, the author suggests that the world is becoming a more dangerous place, especially in the Middle East, North Africa, and Sub-Saharan Africa. The second article argues “political risk cover is the ‘make or break’ for power projects in Sub-Saharan Africa” and the “demand for this type of insurance is growing but the region’s political instability makes securing appropriate insurance difficult.” The last article provides specific examples of how economies are impacted by and not immune from geopolitical risk.
These articles have one thing in common: they recognize the need for accurate political risk assessments to secure their investments and increase profitability. However, “the problem with political risk evaluation is that many do not understand the risks, the threats and the weaknesses.” Political risk is merely one component of the overall risk portfolio and frequently not a dominant driver. Company decision makers “lack market, country and social-dynamic knowledge. It’s far more complex than many of them perceive.” This is particularly true in frontier markets where multinationals use the same companies to assess risk without local knowledge or contacts. In these markets “personal relationships are everything, because you cannot rely on institutions.”
“The relationships between populations and their governments has also undergone some profound changes, leading to pronounced civil unrest in previously ‘safe’ markets.” This is because societies today have the ability to impact country, political, regulatory, and even geopolitical risk. The explosion of communications technology and social media enables societies to quickly aggregate and mobilize. In essence, “All Risk is Local” and the need to understand population-dynamics is the most important factor to accurately assess risk.
Accurate risk assessments, from population-centric perspective is merely the first step to reducing overall risk. Companies need to understand the social-dynamics where they invest or operate in order to forecast potential risk. “The companies that stand best prepared to mitigate the risks to their operations are those that are continually monitoring and responding not only to events in current ‘risk hotspots’, but are also horizon-scanning for emerging issues in key markets.” By understanding society’s movements across the human geography, companies can accurately forecast risk, make sound investment decisions, and mitigate potential negative population-centric actions or activities.