Politically Correct: Risks from Populism

They say that being forewarned is to be forearmed, but the cost of such preparation can be high. Some companies, such as Royal Dutch Shell, have an entire department devoted to scenario planning, while others turn to political risk consultancies, although their insights can be expensive and too general for the use of companies and sectors for business planning and investment purposes.

Nevertheless, in such uncertain times, the efforts needed to build up a profound understanding of potential sources of instability are well worth it. So why is the corporate sector often slow to act?

After the end of the Cold War, the world enjoyed a long period of extraordinary political stability, both globally and in domestic politics. Looking at underlying trends, this period seems to be over. And yet, many investors and business leaders struggle to adjust mentally. The consistency of the past makes it difficult to realize how profoundly the world has changed. Expectations that things will return to 'normal,' in terms of stable democracies and an open, globalized economy, are unlikely to be met.

When the world is in a state of flux, long-term investments become more difficult - one reason why Western companies sit on trillions in cash. But that entails the risk of missing opportunities. Disruptions in established structures do not have only downsides. The changes we see in Western democracies, for example, can sometimes lead to populism, but they can also lead to an election victory for reformist newcomers like Emmanuel Macron.

Businesses must adapt to this new environment of increased political uncertainty. They must stay alert and constantly observe the global situation. This will require more investment in political risk analysis and management.