Political Risk is Closer Than You Think
It's different from economic or financial risk, but its impact demands preparedness
Political risk is closer than you think; it is part of our daily lives. It impacts most people. If we heat our homes, drive a car, invest for retirement, use the internet, vote in elections, travel abroad, or deliver products and services, political decisions shape the environment we live and work in, often as much, sometimes more, than economic or financial forces. While economic and financial risk is quite tangible and may seem easier to prepare for, what has become known as political risk is often the unpredictable hidden force shaping our business, career, and the economy.
More familiar to most businesses, economic and financial risks can be normally tracked and modelled with reasonable accuracy using quantitative tools, particularly over short to medium time horizons (e.g. market volatility, liquidity crunches, recessions), political risks are a different kettle of fish, they can have high impact but in many cases seem much more random because they are human-driven and not all humans act the same. Political decisions (e.g., sovereign defaults, expropriations, nationalisation of industry) are shaped by actors with divergent ideologies, intentions, incentives, and capabilities, which, depending on the leaders, can lead to better-run societies, but can also create, inadvertently or intentionally, new economic and financial risks.
The world’s supply of critical energy products and minerals — from oil and gas to lithium and cobalt — often comes from politically unstable or strategically assertive regions. While some exporters are stable and cooperative, a concentrated reliance on a few producers increases vulnerability to shocks, supply disruptions, policy changes, and political manipulation. This reliance creates vulnerability because, without access to these inputs, many modern economies — and the workplaces within them — could grind to a halt.
Government mismanagement of the domestic economy is another source of such political risk, driving up prices, undermining industrial competitiveness, and sending ripples through bond and stock markets, with real consequences for investments and retirement savings. Political decision-making also has consequences for people's career success, where a sharp change in policy, such as sanctions, trade tariffs, immigration, or climate policy, can destabilise entire sectors of the economy.
Long-term structural shifts in societies, such as rising inequality or cultural fragmentation, can leave them more politically polarised. In such societies, there is the risk that public stances on divisive issues such as climate policy or DEI can harm or enhance a business or individual’s reputation. Moreover, in our highly interconnected world, political ideas in one part of the world can quickly export political risk to others. If a leading economy embraces economic nationalism in its policies, that is likely to impact exporters elsewhere. This creates disruption and instability because policies that promote nationalism conflict with the current norm of global supply chains, migration, and climate interdependencies.
Meanwhile, technological advances have transformed business operations and efficiency. But they have also expanded the tools available to governments and bad actors, enabling surveillance, industrial espionage, and the manipulation of public debate, both at home and abroad. Cheaper and more accessible weapons technologies now increase the threat posed by rogue states and non-state actors to global markets and private citizens alike.
The problem is, in an increasingly fragmented, multipolar world, no overarching global authority exists to police the international system and manage such risks consistently — a reality political scientists term ‘international anarchy’. Businesses, investors, and individuals face heightened uncertainty that political decisions will produce economic change that is not normally expected. Thus, a strong understanding of political risk — and learning how to deal with it effectively — is essential for opportunity, agility, and maintaining a competitive advantage over the longer term. This requires including appropriate political risk strategies in the planning process.
Key Strategies to Mitigate the Impacts of Political Risk
1. Understand the Political Landscape, Monitor What is Happening
The first and probably the most basic step in mitigating political risk is to know what is going on politically within the areas that could impact your business or career. Use tools like PESTEL analysis (political, economic, social, tech, environmental, legal) to structure what you monitor, particularly with an eye for what factors are driven by politics. What is key here is the quality and the reliability of the information. There is a lot of noise from political commentary and reporting, so you will want to trust credible sources that are knowledgeable, insightful, balanced, educational, and actionable. In keeping abreast of political developments, you should be looking out for developments such as regulatory shifts, leadership changes, trade policy trends, policy proposals, campaign manifestos, emerging skills gaps, and social movements, both locally and globally. You need to know why decisions are made. Political risk is dynamic, so early awareness allows for faster, better-informed responses. Big surprise developments often have earlier signals (e.g., public debates or policy red lines) that indicate the potential direction of change, such as Brexit, the war in Ukraine, or the Trump trade agenda.
Tip: Create a watchlist of policy areas or countries relevant to your business, career, or investments, and follow trusted sources, analysts who also understand your industry, government information sites, regulatory authorities, and think tanks. There are now many firms and independent political risk specialists, some better than others. Some may analyze with one particular lens, which can leave them open to confirmation bias, so it is best to follow or engage with those who take an eclectic approach. Moreover, there is a lot you can do by yourself, there are plenty of internet sites that allow you to receive filtered information on choosing topics that you are monitoring, such as Google Alerts. Many universities now offer micro-credentials in international relations and business.
2. Scenario Planning, Think About ‘What-If?’
Having got a good measure of what is going on politically within the areas of relevance for your business or career, you can now begin to build political risk considerations into your future planning with this tried-and-tested strategic planning tool. Scenario planning has its origins in military intelligence and was popularised in business by corporations like Shell in the 1970s.
The goal here is to develop multiple “what-if” scenarios, stories if you like, that account for impactful political developments such as policy shocks, geopolitical tensions, or regime changes that could happen, given the known facts and the emerging trends that you have uncovered. Once you have done that, it is then possible to brainstorm your potential responses. Judgment and adaptability are key because while some political developments can be predicted (e.g., election outcomes), many others can involve unknown unknowns, and thus the probability of an event cannot be statistically measured in the way that much economic and financial risk can. Thus, preparedness becomes more important.
You will find that this activity will foster agility in your approach because it should become apparent that many factors often combine in complex ways to produce unpredictable outcomes, dynamic scenarios, that would have been initially difficult to forecast due to the phenomenon of systemic feedback loops (for more on that, listen to the Forces and Signals podcast). Moreover, political developments can have cascading effects (for example, sanctions on a country could lead to economic disruption and then migration to the country imposing the sanctions).
It will likely emerge that the political environment in which you are operating may not be progressing on a linear pathway, and thus, quick adaptation may be needed if one or a series of ‘what-if ’ events do unfold. In a complex environment, scenario planning is a logical device that will allow you to bring a degree of order to that complexity and improve decision-making. As new information becomes available, identified scenarios can be updated and retested.
Tip: Remember, the goal here is not to predict the future; that’s a fool's game. Resilient businesses and professionals don’t predict the future; they are prepared for a range of futures. Preparing for the possibility of multiple scenarios requires an investment of time, but it also helps reduce risk and puts you on a better footing in terms of cost, competitive advantage, and opportunity in comparison to the alternative of reacting to events as they unfold.
3. Don’t Get Caught Out, Diversify Your Exposure
Having assessed the political environment and prepared for possible scenarios that could transpire, another key strategy that you should follow to mitigate risk is to diversify your exposure to such risks. In short, don’t get caught out by putting all of your eggs in one basket.
For a business, that means avoiding overreliance on a single country, supplier, or political environment as a source for your inputs and a market for your outputs. A friendly country today could become a hostile country tomorrow. Whether you’re sourcing materials, allocating capital, or growing your customer base, diversification reduces vulnerability to sudden political shocks.
For individuals, this might mean expanding your skill set or at least focusing on transferable skills (e.g., data analysis, project management, language fluency) so that if politics gets in the way of your career, you have other options. Moreover, it always makes good sense to spread retirement investments across geographies and asset classes aligned to your risk tolerance.
Tip: For businesses, operating in multiple countries or regions with different political systems and risk profiles helps avoid overexposure to a single government or regime. Partnering with local firms or building products in multiple locations can also help reduce risk and provide political cover, particularly during times of politically driven trade wars. For individuals, building your international work experience can help give you a global professional identity and a network that isn’t limited to one political system or country. Moreover, choosing an employer in industries with a diversified global footprint gives you more career options than locally concentrated workplaces (e.g., a tech or financial services business gives you more flexibility than an inherently local government job or a lawyer qualified in local law practice, which may be significantly different elsewhere).