5 Strategies for Mitigating Political Risk
by Lydia Stowe, FiscalNote
Political risk management is vital to operating in different regions or countries. Here are five effective strategies for effective political risk mitigation.
Increasingly, nearly every industry is deeply impacted by geopolitical events that might have seemed distant in the past. Organizations that may not have paid attention before are forced to do so now, or risk being caught off guard by disruptions that threaten their business. For example, China’s zero-Covid policy has impacted the supply chain even for national and local organizations, such as home builders or car dealerships. Similarly, landmark decisions by the U.S. Supreme Court around abortion and gun rights have had an impact even for organizations outside of the areas directly hit by these decisions — either because of public pressure or while trying to keep their unrelated issues front and center with legislators.
As organizations realize that political events around the world can have a major impact on their business, mitigating political risk is becoming a pressing task. Political risk management allows you to stay on top of policies that could be detrimental and identify and seize opportunities for your organization. Here are the top strategies to keep in mind.
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What is Political Risk?
Political risk is the possibility that your organization could suffer because of political events on a national or global scale, such as an armed conflict, constitutional referendum, election, or major policy developments. Changes in legislation or policies can also present a political risk for an organization.
There are two types of political risk: macro and micro risk. A macro risk is a threat to a country’s economic or government environment, impacting entire industries. A micro political risk has smaller-scale impacts and might threaten only an individual organization. However, the effects of a micro political risk can be just as damaging to your organization as a macro risk.
Global or multinational companies may be more likely to encounter more political risk, but increasingly, monitoring and navigating policies and politics around the world is becoming more important for organizations of all shapes and sizes. Events in the last several years have sent many teams scrambling to keep up and find a way to monitor global political risk, and this trend shows no signs of abating: 25 percent of government affairs professionals expect global legislation and regulation to have a bigger impact on their organization over the next five years, a FiscalNote report found.
Political Risk Mitigation: Key Strategies
Using these political risk management strategies can safeguard your organization and save time, money, and prevent devastating business impacts. Here are five fundamental strategies to mitigate political risk:
Risk analysis. It is vital to research and analyze the local infrastructure of a region before investing.
Consult with local partners. Make connections with local organizations to better understand the market, local political system, and specific risks.
Local banking. Employ local banks in the region where you’re conducting business to mitigate financial and political risk.
Political risk insurance. Purchase insurance to protect your organization’s assets.
Monitor global issues. Proactively stay up-to-date on local issues and policies to plan and prepare for potential risks.
Risk analysis is ongoing, not a one-time transaction. If you want to be ahead of the curve, a company's considerations of the global political climate must be constantly evolving.Erica Stieper, Manager, Professional Services
1. Risk Analysis
Researching and analyzing the local infrastructure of a potential region for planned investment before actually investing is a key strategy to mitigate political risk. Factor in the local political climate, recent history, and experts’ projections for the future. It’s also necessary to weigh the potential benefits against the likelihood of loss if legal issues or political turmoil arise.
Risk analysis should extend to the full spectrum of macro risks: geopolitical, markets, policy, economic, regulatory, social, environmental, security, and reputational, as well as issues on a micro risk level that could impact your organization.
“Risk analysis is ongoing, not a one-time transaction,” says Erica Stieper, manager of Professional Services at FiscalNote. “If you want to be ahead of the curve, a company's considerations of the global political climate must be constantly evolving.”
Rather than conducting risk analysis alone, it is beneficial to hire specialists in political risk management analysis. These advisors can provide a personalized understanding of the external risks and challenges facing your organization and enhance your political risk management strategy.
A consultant “gives an understanding of how to manage different priorities or risk situations in particular parts of the world,” Stieper says. “They can distill complex issues that differ across industries, countries, and regions, keeping track of and filtering sanctions, legislation, and regulation to help companies understand the threats and opportunities to come.”
2. Consult with Local Partners
Partnerships with local companies and leaders are invaluable in your political risk mitigation strategy. Making connections within a local market allows your organization to better understand the market, its local political system, and specific risks. “You’re making a positive investment in a region with the people you employ, the income you bring in, and imports and exports,” Stieper says. “You want to partner with community leaders to show them the value of collaboration. The more you connect, the more opportunities open up.”
Team up with local businesses, research and professional trade organizations, local governments, and political leaders to get “boots on the ground” intel and gain a deeper awareness of a region. This allows you to understand a region’s struggles, have stakeholders to advocate for you, and get locals on your team.
“Connecting with international colleagues who reside in your key markets is a great initial step toward understanding not only the region’s priorities but also the potential implications in your home market,” says Yvette Williams, senior manager of political programs and grassroots advocacy at Johnson & Johnson. “Extending an invitation for a virtual introductory conversation with an overseas colleague is a quick and easy step to making those connections.”
3. Local Banking
Using local banks, or a bank with branches or connections in the region where you’re conducting business, is an often-overlooked way to mitigate political risk. While local banking can seem like a hassle (and may not always be possible), it minimizes financial, and therefore political, risk and is an opportunity every organization should look into.
As you consider financial risk, “think about tax rates, government stability, and exchange rate fluctuations and whether it’s beneficial to do business there based on that,” Stieper recommends. During times of political crisis, the winning combination of local partners and local banking keeps your organization protected and in the know.
4. Political Risk Insurance
Purchasing political risk insurance is an important way to protect your organization and investors financially. This insurance protects against political actions that would cause your organization to experience a major financial loss. Having this insurance can offer peace of mind when your organization looks to expand into developing countries since it will incur less risk if the region faces political instability.
There are many places to purchase political risk insurance, so shop around and find the plan that is tailored to your organization’s needs. Your political risk insurance plan should cover the countries in which your organization operates and ideally be locked in for many years as political landscapes can change quickly.
5. Monitor Global Issues
Today, change happens faster than ever — and it can be broad, unclear, and difficult to deal with. From the ongoing global pandemic and its health, trade, and economic fallout to cybersecurity breaches and geopolitical upheavals, mitigating risk and identifying opportunities can be a mission impossible... unless you have the right tools in place.
Traditional approaches to monitoring global issues are too fragmented, so it’s crucial to rely on data and expert analysis, manage stakeholders, and drive cross-departmental coordination through dedicated issues management software. Monitoring global issues is a proactive strategy that keeps your organization updated at all levels of government and markets, and therefore potential risks, to plan and prepare for the future.
FiscalNote’s solutions allow you to proactively identify, monitor, and mitigate threats. Combining AI capabilities, expert analysis, business intelligence, and regulatory and geopolitical data, we provide you with the leading geopolitical, macroeconomic, and industry intelligence to navigate complex markets and inform critical decisions.
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