In the world of institutional investing, geopolitical risk has emerged as a pressing concern. While some asset owners contend that they are fully capable of analysing and managing such risk, they appear to be in the minority. Many public investors are still largely unprepared, lacking proper analytical frameworks and relevant expertise to tackle geopolitics in a structured and rigorous way. However, there is a relatively simple and straightforward solution to this: asset owners can apply some of the same methodologies and approaches they are already using to address the climate crisis.

While the underlying drivers of these risks are different, there are some important similarities: both are non-traditional, long-term risks that cut across asset classes, geographies and industries; both, in their current form, are relatively new to the investment profession; both require outside expertise and collaboration with peers; and both must be analysed in the broader context of what other actors are likely to do. Therefore, investors should borrow a few pages, literally, from Climate Change for Asset Owners, published in June 2018 by the International Centre for Pension Management’s climate change working group.

Public investors must shift from being geopolitically agnostic to geopolitically aware. They must reach out to their more advanced peers and learn how they address geopolitical risks in their portfolios. They must review their own underlying portfolios for specific exposures to geopolitical risks, both systematic and idiosyncratic. They should consider how geopolitics might impact some of their core beliefs and underlying assumptions, both in the short and the long term. Ideally, they should formulate an explicit investment belief with respect to geopolitical risks and how to manage them. And while economics and finance may not offer relevant analytical tools for this task, investors can easily borrow and adapt the tried-and-tested methodologies from the fields of national security and intelligence analysis.

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