There are few things business leaders hate more than uncertainty. Increasingly, in today’s hyper-connected world, much of this uncertainty centers on geo-political risks. From international trade disputes to environmental regulation to the future of the eurozone, political decisions pose a real threat to both investors and a company’s bottom line.
One need look no further than the 2016 U.S. presidential election to see the risk associated with uncertainty. Companies were left scrambling to figure out how to operate in an unpredicted, highly political environment. For the first time in history, companies are faced with a uniquely vocal chief executive who is unafraid to target companies pushing opposing policy initiatives. While there is sure to be disagreement around the Trump presidency, most of us can agree that the political climate is ever-changing and increasingly unpredictable—exactly what investors fear most.
As a result of this new political climate, investors are adjusting their strategies accordingly. According to the Edelman Trust Barometer Special Report: Institutional Investors, 88 percent of institutional investors agree that the current political climate is changing their firm’s investment strategy. In fact, the strategy has to change. So how do these institutional investors—banks, hedge funds, pensions, etc. —navigate today's volatile geopolitics? Institutional investors will benefit from having a team in place that can help leaders identify and assess political risks and then navigate through the divide. They must be nimble, adaptable and prepared to manage risk. They need to see around the corner at the next geo-political crisis and when it hits, they must react. The world is calling for responsive and responsible leadership.
The Edelman Trust Barometer surveyed more than 500 chief investment officers, portfolio managers, and buy-side analysts in five countries (U.S., Canada, UK, Germany and Japan), representing firms that collectively manage over $4.5 trillion in assets. The findings show that 76 percent of respondents believe CEOs should take the lead on change rather than waiting for the government to impose it. Ninety-eight percent of investors think public companies are obligated to address societal issues to ensure the global business environment remains healthy and robust. Sitting on the sidelines in no longer an option in today’s interconnected world.
For example, institutional investors are now able to participate in increasingly “safe” activism by considering Environmental, Social and Governance (ESG) factors when choosing investments. Once considered risky, Edelman’s Trust Barometer finds that ESG options are expected by the majority of investors globally. Ninety-three percent of global respondents believe that ESG features are integral to long-term value, alongside financial performance. An even more compelling argument for the long-term success of ESG investing is the fact that 87 percent of global respondents said their firm would consider investing with a lower rate of return if the investment included sustainable or impact investing considerations. Today, more than ever, firms are willing to take a financial hit if it means investing in the trends of the future. In addition, according to the Forum for Sustainable and Responsible Investment, socially responsible assets have had a 13.6 percent compounded annual growth rate since 1995, when the organization first started measuring.
Moreover, institutional investors looking to manage political risk require transparency and open, thoughtful communications on the part of C-suite executives. A private sector executives’ digital presence is integral to strengthening trust and demonstrating corporate transparency. The overwhelming majority of respondents surveyed consult a company or executive’s social media channels when evaluating a current or prospective investment. Ninety percent of investors want to see visual ways of sharing information when evaluating a current or prospective investment, and digital content presents this opportunity.
Yet most investors also agree that the way companies share information for IR purposes is outdated. This presents an opportunity for innovative company leaders to make an impression among stakeholders. According to survey results, a business/financial academic or expert on a company’s industry or issues is as credible as a source of information as the company’s CEO. And when dealing with political risks that put your reputation is on the line, it’s imperative to reach these external influencers, whose opinions will likely affect the choices of investors and consumers.
Transparency, responsibility and forward thinking are all factors that institutional investors consider when assessing opportunities. And as a certain amount of risk is to be expected with volatility masquerading as the new normal, institutional investors will support initiatives that help the greater good, bringing ESG investing to the forefront. In today’s increasingly complicated world, with rising volatility and insecurity, uncertainty, it turns out, is really the only certainty.
Emily Kuchman is an account executive, Financial Services, Washington, D.C.
Sean Neary is an executive vice president, Financial Services, Washington, D.C.