Political risk is back – and financial services are most exposed
As global politics becomes more volatile and the state accounts for more activity, political risk is becoming a major factor in investment decisions – and the smartest firms are pricing it in, says Benedict McAleenan
There’s a meme on social media where people post photos of themselves in the innocent days of early 2016. Gen Z seems to view that year as the last calm before the storm, like the long hot summer of 1913. It’s hard not to share in the nostalgia.
Early that year, I asked a friend in private equity how his colleagues approached their portfolio exposure to public policy changes. What if they’re thinking of buying a retailer just as ministers eye up a rates rise? Or a manufacturer, with new energy levies lurking around the corner?
His response was sanguine: “we assume the portfolio company’s done the due diligence.”
It’s no wonder politics barely registered for my friend. Back then, the world was dusting itself off from the long tail of the financial crisis. The Tories had a majority after five years in coalition. Brexit and Trump were on the horizon, but both seemed remote. Political risk was manageable.
Ten years later, new evidence shows things have changed. Political risk is a real presence in boardroom strategy, and the financial sector is feeling the heat most. Research by my colleagues at Bradshaw Advisory, surveying UK business leaders, found that financial services perceive political risk far higher than others, even among highly exposed sectors like energy or pharma.
Finance sits downstream of many risks faced by other sectors, because their costs feed through via investment returns. It recirculates into the economy by raising the cost of capital. Pricing risk is what the City does best, and financial firms are waking up to politics like nobody else.
Trump and trade
That might sound obvious; Trump and trade have dominated the news. Yet firms are detecting political risks closer to home too. The state accounts for increasingly more activity than 30 years ago, so more investment decisions are subject to ministerial influence. And stories of over-regulation are not hard to find.
But a theme that crops up again and again is one of confusion over government plans. Whilst tax and monetary policy are the single leading risk driver, failure of political delivery is a major risk, especially for investment firms. This plays out at different levels.
The first is policy communication; ministers can’t clearly articulate what they’re planning; 64 per cent of firms said the trailing of policy proposals before the last budget created ‘undue uncertainty’ (70 per cent for financial firms).
A third of firms reported material losses caused by government U-turns (39 per cent in financial services)
The second is political leadership: businesses find Labour’s agenda is easily buffeted. A third of firms reported material losses caused by government U-turns (39 per cent in financial services).
Finally, state capacity is poor. Assuming a minister gets their agenda through Parliament, there’s still a chasm to cross. Businesses worry about an ineffective state, unable to deliver efficiently on major projects and services. It’s something that even Keir Starmer complains about, telling a select committee that: “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.”
Inevitably, that creates a drag on productivity and growth. Yet the story isn’t straightforward. Research including our own suggests businesses often frontload investment to hedge against rising political risks. For example, pulling forward renewables investment might make sense if Reform UK threatens to end new subsidies in 2029. The aggregate level of investment doesn’t necessarily decline in response to higher political risk, it moves around.
Political risk is actively shaping C-suite and boardroom decisions, and it’s here to stay. Companies are analysing, hedging and reallocating in response. While 2016 may have been the calm before the storm, the political gales are blowing now. And the smartest firms are pricing them in.
Benedict McAleenan is a director at Bradshaw Advisory and co-author the UK Political Report 2026