It’s time to wake up to the grey rhino of political risk and climate change.
Political tensions are heating up within and between countries as a decade of stagnation fuels dissatisfaction with the status quo.
‘Make America Great Again’ is a nationalist call to action that is being mimicked by other global leaders and challengers.
Multilateralism is under strain, as is the ‘liberal market’ economy and governance from the left of the Democratic Party in the US and Labour Party in the UK, as well as from the right under presidents Trump and Bolsonaro.
The populist march and ‘de-globalisation’ is not unchallenged nor irreversible, but more nationalist and interventionist governments are set to feature in the policy landscape facing investors for the foreseeable future.
Despite an easing in trade tensions between the US and China, if, as expected, a ‘phase one’ deal is struck between President Xi and President Trump, the strategic rivalry between the world’s two most powerful nations will persist.
We believe the polarisation of politics will continue to be a source of uncertainty and volatility.
Elizabeth Warren may emerge as a formidable Democratic nominee for the US Presidency, raising the prospect of a radical and potentially disruptive change in the US policy regime for business and markets.
The unrest in Hong Kong could end with a further fracture in relations, not only between China and the US, but also with the ‘West’ more generally.
Since the global financial crisis, investors have been fearful of ‘black swans’ – unpredictable left-tail risks. But investors and policymakers are only now waking up to the ‘grey rhino’ risk of political volatility and climate change.
Environmental degradation and climate change are high-probability, high-impact yet neglected threats – a ‘grey rhino’ risk to social and economic stability.
Sustainable investing can include the portfolio exclusion of companies and industries that do not meet specified ESG criteria; the integration of ESG factors into portfolios to improve risk-adjusted returns; and investing with the goal of generating positive environmental and social impacts as well as returns (impact investing).
Asset owners and managers are beginning to face up to their responsibilities and the contribution that they can make to address these profound social and environmental challenges.
The incorporation of ESG – environmental, social and governance factors – explicitly into the investment process is a rational response to rising environmental and political risks.