US investors and boards have started to weigh the impact of political instability on their investments, which some may now consider on a par to the risk associated with climate change, according to a leading academic.
The warning comes following a number of research articles looking at the implications of risks currently inherent in US politics.
In a paper for the Harvard corporate governance blog, Harvard senior fellow Stephen Davis says a recent survey raises key questions for boards and investors over the state of US politics. The survey, by the Capital+Constitution Project, of which Davis is a co-founder, says that 60% of the investment managers polled say they pay more attention to political risk in the US since the insurrection in January 2021.
Half of them say political risk in the US is rising and 60% revealed they build political risk concerns into conversations with company board directors. Another 20% said they are considering introducing the topic to engagement conversations in the future.
The results offer a startling insight into the thinking of investment managers and its implications for board directors and they grapple with political tensions gripping the country.
‘Fiduciary duty’
Davis writes that institutional investors now share with many corporate leaders a “concern that political risk is material to long-term value”.
He adds that “investors increasingly see there to be a fiduciary duty to take account of political risk in the US in furtherance of protecting the financial interests of beneficiaries.
“Indeed, political risk in the US might now be considered by some institutions to be a systemic risk akin to climate change.”
Given the rancorous nature of current political exchange in the US, that may not shock many. However, Davis points out the survey highlights the fact that while investors consider political risk when investing in other countries, as many as 40% do not consider the US political climate when considering transactions at home.
US politics has become highly polarised since the election of Donald Trump and even more so since the emergence of election denial claims following Joe Biden’s victory in 2020.
Corporate governance has been caught up in the debate in other ways. ESG (environmental, social and governance) has increasingly moved to the centre of governance in the US, prompting vitriolic opposition from the Republican Party and its supporters, who label its use “woke” capitalism.
Some have argued that the bitterness over ESG—with many states moving to block its application by their own pension fund managers—could be resolved by a change in “fiduciary duties”.
Either way, it remains a hotly contested issue. News that investors increasingly discuss political instability will further add to the sense that the country faces serious challenges.
In a paper for the Brookings Institute, a think tank, Princeton professor Layna Mosley sets out options for investment managers. These include close engagement with boards to “convey support for business leaders who advocate electoral integrity and respect for the rule of law”, and establishing whether boards consider political risk relevant to their companies.
“These conversations,” Mosley writes, “can heighten firms’ attention to US political risk, while also providing institutional investors with a better sense of the quality of firm governance and forward planning.”
Given the insurrection attempt of 2021, the continued denial of the previous year’s election and ongoing trials of key political figures, it should be no surprise that US politics be considered an item for corporate risk registers. This latest research underlines the fraught nature of Washington politics and the need for boards to build it into their strategic thinking.