Political Risk Makes Dramatic Return to Boardroom Agendas
In the current climate of global volatility and expanding state influence, political risk has re-emerged as a critical consideration for investment decisions across British industries. The most forward-thinking companies are now systematically incorporating political factors into their strategic planning and risk assessment frameworks.
The Changing Landscape Since 2016
Looking back to early 2016 reveals a dramatically different business environment. Many recall this period with nostalgia as a time when political risk appeared manageable and remote. A decade ago, when questioning a private equity professional about portfolio exposure to policy changes, the response reflected widespread complacency: "we assume the portfolio company's done the due diligence."
At that time, the Conservative government enjoyed a parliamentary majority following coalition years, while Brexit and Trump's presidency remained distant possibilities rather than imminent realities. The business world remained focused on recovering from the financial crisis's lingering effects, with political considerations occupying minimal strategic space.
Financial Services at the Forefront
Recent research conducted by Bradshaw Advisory, surveying UK business leaders, demonstrates how profoundly this landscape has transformed. The study reveals that financial services firms now perceive political risk as significantly higher than companies in other sectors, including traditionally exposed industries like energy and pharmaceuticals.
This heightened sensitivity stems from finance's unique position in the economic ecosystem. Financial institutions sit downstream from risks affecting other sectors, as these costs ultimately feed through investment returns and recirculate throughout the economy by elevating capital costs. The City's expertise in pricing risk has naturally extended to political factors, making financial firms particularly attuned to this emerging challenge.
Multiple Dimensions of Political Risk
While international developments like Trump's trade policies dominate headlines, businesses are increasingly concerned about domestic political risks. With the state accounting for substantially more economic activity than three decades ago, a growing proportion of investment decisions now fall under ministerial influence.
The research identifies several critical dimensions where political risk manifests:
- Policy Communication Failures: Sixty-four percent of surveyed firms reported that pre-budget policy proposals created "undue uncertainty," with this figure rising to seventy percent among financial services companies.
- Political Leadership Instability: Businesses observe that Labour's agenda appears particularly vulnerable to external pressures and sudden changes.
- Government U-turns: Thirty-nine percent of financial services firms reported material losses resulting from government policy reversals.
- State Capacity Limitations: Even when ministers successfully navigate parliamentary approval, businesses worry about implementation failures across major projects and services.
The Delivery Challenge
Keir Starmer himself has highlighted systemic delivery problems, telling a select committee: "there are a whole bunch of regulations, consultations, arm's-length bodies that mean that the action from pulling the lever to delivery is longer than I think it ought to be." This implementation gap inevitably creates productivity drag and constrains economic growth.
Strategic Responses and Investment Patterns
Interestingly, the relationship between political risk and investment isn't straightforward. Research indicates that businesses sometimes accelerate investment to hedge against rising political uncertainties. For instance, companies might expedite renewable energy investments if political parties threaten to eliminate subsidies in future years.
Rather than causing aggregate investment decline, heightened political risk appears to redistribute capital across sectors and timelines. Companies are increasingly analysing, hedging, and reallocating resources in response to political developments.
A Permanent Feature of Business Strategy
Political risk has firmly established itself as a permanent consideration in C-suite and boardroom deliberations. While 2016 represented the calm before the storm, today's business leaders navigate persistent political gales. The most sophisticated firms aren't merely reacting to these developments but proactively pricing political factors into their strategic calculations.
This represents a fundamental shift in how British businesses approach risk management and strategic planning, with political considerations now occupying centre stage alongside traditional financial and operational factors.
