Sovereign and non-sovereign risks are on the rise

Sovereign risk is on the rise in both frequency and impact, according to geo-political risk specialist Dr Nigel Gould-Davies, but there is also a new creeping form of non-sovereign political risk that needs to be addressed.

Speaking at the StrategicRISK Forum 2017, held in Singapore, on the impact geopolitical instability is having on corporates, Royal Institute of International Affairs associate fellow Gould-Davis explained that after decades of declining geopolitical risk and the positive impact it has had on trade, it is again on the rise – and in more forms than one.

He said: “Until recently, the story of the recent decades was that the rate of growth of trade substantially exceeded the rate of growth of global GDP. Trade was not only increasing, it was becoming in relative terms more important to the global economy.

“That is because blocking as a form of sovereign political risk until recently had declined. Borders had come down, and the fall of the iron curtain had made way for the raising of the bamboo curtain.”

He added that other forms of sovereign political risk - the power to destroy, regulation, and the power to seize assets - had also been a decline, which had impacted positively on trade.

“But now, most of them are rising,” he explained. “We’re seeing a resurgence of global violence and worries that in some countries, including developed countries, we may see the re-emergence of rules of regulation.”

According to Gould-Davis, as well as the increase in sovereign risk, there has been an explosion of non-sovereign risk, which is affecting corporations heavily.

He said: “We’ve seen an explosion over the past 20 to 30 years of new political risk. these are political risks generated not by states, but rather they come from society.”

He explained that with the power of the societal moral compass “Behaviours that were once routine in the corporate sector are now vilified”.

He highlighted that the response to Nike sweat shops and the furore that it created; BP and the Gulf of Mexico disaster, which turned into a corporate catastrophe where some of the earlier examples of this phenomenon. Starbucks was also flagged for not paying its corporation tax in the UK and the power of public opinion that led to it offering a voluntary donation to the UK government.

These changes are affecting the industry’s ability to foretell future outcomes - using the US election and Trump’s subsequent win as a case study, Gould-Davies highlights the perils of prediction.

With this in mind, Gould-Davies urged delegates to approach the growing risk in a proactive manner.

He said: “We need to move past predictions and work on what we do with them. As reputation and brand equity is growing in importance, We need to think more and more about active engagement. Avoidance, resilience and engagement are key.”