Charlotte Ingham is a Senior Political Risk Analyst at Maplecroft. Maplecroft’s risk analysis and mapping form a vital part of the risk management processes of multinational companies, financial institutions, governments and NGOs.
Q: What one fact that sets you apart from the competition would you like the market to know?
Charlotte Ingham (CI): Maplecroft’s risk analysis has its foundation in quantitative analysis. The indexing of key political, global, human rights, natural hazard and climate risks enables our clients to make highly informed decisions. A particular benefit of this approach is that it enables clients to make like-for-like comparisons when making business and investment decisions, and to be able to put risks in the context of a company’s overall operations. With five years of data, we provide our clients with a detailed insight into recent trends. Our analysts use this data to ground their qualitative analysis.
Q: You take a comprehensive approach to the world of risk. Is there a benefit from this to the investor or underwriter who is primarily interested in political risk? Put another way, do you find, for example, that natural hazard risks and political risks are sometimes correlated?
CI: Maplecroft assesses natural hazard risk by examining the risk of an event, economic exposure to any such event and, crucially, levels of socio-economic resilience. Exposure to natural hazards isn’t correlated to political risk, as such events obviously occur independently. However, resilience to natural hazards is closely correlated to political risk, particularly issues such as governance, societal resilience (adaptive capacity, education and so forth). Countries with strong governance and high levels of societal resilience are able to “bounce back” much more quickly from natural hazard events. Furthermore, natural hazard events in countries with low resilience may exacerbate political risk trends, undermining the economy and regime stability for example.
Q: Beyond the political risk categories underwriters typically insure against (currency convertibility, expropriation, political violence, and non-honoring of sovereign obligations), what are some political risks that you try to focus investors’ attention on?
CI: Governance risks, particularly with regard to corruption are a key risk for investors, particularly those based in the US and UK due to the Foreign Corrupt Practices Act and Bribery Act respectively. As such, we have developed a Corruption Risk Index, which assesses the frequency, duration, coverage and severity of incidents of corruption, as well as taking into account levels of impunity. In addition to immediate, dynamic political risks such as this we examine longer term, structural political risk factors which have implications for a country’s long term growth potential such as infrastructure readiness, resource security and human rights risk.
Q: Investors who disregard environmental, social and governance issues may enjoy a short-term competitive advantage. Is there hard evidence that that advantage is likely to turn into a long-term disadvantage, or is good citizenship just a good idea for investors whose home governments and shareholders care about these things?
CI: Businesses that disregard environmental, social and governance (ESG) issues purely in order to win short-term gains will reduce their capacity for long-term value creation. Business actions that, for example, violate the internationally recognized rights of workers, flout anti-corruption laws or cause environmental harm are likely to result in significant economic, reputational and legal damage, each of which will have a substantial impact on a business’s bottom line. Businesses are increasingly acknowledging the need to ensure that their actions are beneficial to all stakeholders in order to continue producing profits for shareholders in the long term. ESG risk analysis is a fundamental part of this process. Good corporate citizenship is not simply an issue of compliance—it is a way of doing business that can help to ensure sustainable value creation.
Evidence of the way in which failure to observe good ESG practices may place companies at a long term disadvantage can be observed by examining the growing risk of resource nationalism. Companies with poor ESG records are particularly vulnerable to resource nationalism, increasing the likelihood that governments, often spurred by public pressure, will implement measures to recoup extra value from these activities. Central to managing the risk of resource nationalism is a company conducting itself in a manner which enables it to build a compelling narrative with a country’s host government about the value that extractives investments create on multiple fronts, including tax revenue, job creation and regional development.
Q: Supply chain risks are getting increasing attention. Do you see a trend toward pulling manufacturing back to home or nearby countries, or at least trimming the number of offshore suppliers, for economic or policy reasons?
CI: There have been a number of headline cases—General Electric for example—reshoring some of their manufacturing activities in the US. The increasing cost of labor in countries such as China and Brazil is a central factor in this move. However, the majority of the multinationals involved in this process are only bringing back some of their production, and their simultaneous expansion in other regions balances out the impact. Furthermore, to escape the persistent crisis in the eurozone, and the continuing slow recovery in the US, we see many companies looking out, not in, with key growth economies in South and Southeast Asia continuing to thrive, while Latin American economies also perform well. It is not simply a matter of companies seeking to benefit from cost advantages, but also turning their attention to the growing middle class which provides a key consumer base at a time when demand remains low in the West.
Q: In your political risk analysis, how far out do you try to look? Is that client-driven?
CI: As standard, we provide clients with short (within the next quarter), medium (18 months to 3 years) and long term forecasts. In bespoke reports, depending on the client’s requirements, we tailor these outlooks to key concerns for their operations: for example, the lifecycle of an investment or project or the anticipated passing of new legislation. For particularly volatile circumstances, Maplecroft can undertake scenario planning to enable clients to navigate their way through opaque operating environments.
More about Maplecroft:
Our multi-award-winning Global Risks Portfolio combines expert analysis of risks at local, country, issue, and sector level, with rigorously researched quantitative risk indices and state-of-the-art mapping technology. These resources provide horizon scanning solutions that enable global organizations to identify and monitor the full range of extra-financial risks to their operations, supply chains, investments and assets.