Financial Implications of Rising Political Risk in the US

Stephen M. Davis is a Senior Fellow at the Harvard Law School Program on Corporate Governance and a Co-organizer of the Capital+Constitution project.

Calls to overturn elections and limit voting in the US are having a powerful, long-term, but under-the-radar impact on the financial world. First hard evidence surfaced on August 1 2023, when Fitch Ratings downgraded the US’s credit level, citing deteriorating governance standards. Now, according to a first nonpartisan probe of investor opinion in the wake of the January 6, 2021 insurrection at the Capitol, some 90% of big institutional investors believe threats to democracy in the US are rising. But, worryingly, less than 30% of these same investors are confident that US public companies are today equipped to manage that political risk. Indeed, on average, respondents estimated that only some 45% of public corporations “are well-prepared to handle political risk to their businesses in the US.”

Released on August 24 2023, the survey was conducted anonymously and was fielded jointly by the Brookings Institution and States United between Jan. 30 and April 21, 2023. It drew responses from 22 institutional investors representing almost $10 trillion in assets under management. The research is part of the Capital+Constitution (C+C) project. Tapping leading figures in the investor and business worlds, as well as academic and political experts, C+C’s dual mission is to explore the interaction of business and democracy in the wake of the January 6, 2021 insurrection and to understand whether non-partisan risk mitigation steps are available to institutional investors, including in connection with the 2024 presidential election cycle. In the C+C survey political risks were defined as “interference with electoral processes, disruptions to orderly transitions of power, deterioration of checks and balances across branches of government, and/or the erosion of the rule of law.” C+C has sponsored multiple off-the-record investor roundtables and two papers: “Is Democracy Failing and Putting our Economy at Risk?” by Brookings Senior Fellows William A. Galston and Elaine Kamarck (Brookings Institution and States United, January 4 2022); and “The Financial and Economic Dangers of Democratic Backsliding” by Layna Mosley, professor of Politics and International Affairs at the School of Public and International Affairs, and in the Department of Politics at Princeton University (Brookings Institution and States United, July 10 2023).

The new C+C survey results reveal striking anomalies. Almost all respondents take political risk into account in making investment allocation decisions when focused outside the United States. However, a significant percentage assume no such risks inhabit the US market. As many as 40% reported that they typically do not consider political risk at all when deciding about investments in the US. But at the same time, nearly 60% of institutional investors responding to the survey said they have paid more attention to political risk in the US in the wake of the January 6, 2021 insurrection than they did before.

Indeed, 50% reckon that political risk in the US is rising “moderately” while another 35% say it is rising “steeply”. This may be the reason why so many—more than 60%—say they incorporate concerns about political risk into conversations with US portfolio company board directors and executives. Another 20% said they while they hadn’t included the topic in agendas in the past, they are considering doing so now. Only 10% of surveyed investors said that they include nothing at all about political risk in such engagements.

The C+C survey was anonymous, but it encouraged respondents to include examples of how they address political risk, if they do so, when engaging with companies. One investor explained that its team focuses on “ensuring that boards and management are cognizant of the issues and that the appropriate internal governance structure is in place for the board to effectively monitor” political risk.  Another said “We have expanded our stewardship team and are more closely examining the governance, actions and disclosure of portfolio company lobbying and political spending activities, and may take voting or investment action if significantly misaligned with” the institution’s principles. Wrote another: “We have focused more intently on the headline risks of lobbying and other similar expenditures, and whether companies are adequately disclosing those expenditures.” Another institution offered that “In the months following Jan. 6th, we wrote a letter to companies that had allocated funds to any of the ‘election deniers’ in Congress.” And another added: “We are going to start to explore how we can intertwine political risks into our governance, sustainable financial system, and stewardship team’s analyses/reports.”

On the other hand, one investor wrote: There is “much higher emerging market and international political risk long term for US investors than US-based political risk.” A second agreed and provided a rationale, pointing to “the most powerful yet non-democratic US institution: the Federal Reserve. The Fed has served, and will serve, as a political and social risk buffer.”

The C+C survey results raise important implications for business and finance. Corporations and institutional investors have increasingly found themselves in tension with certain public authorities over political matters, including over voting rights. A number of prominent US corporation CEOs have spoken out in support of nonpartisan safeguards to democracy, arguing that rising political risk could have a negative effect on business (see, for instance, Based on the C+C survey, institutional investors appear to share a similar concern that political risk is material to long-term value. C+C papers and survey results strongly suggest that investors increasingly see there to be a fiduciary duty to take account of political risk in the US in furtherance of protecting the financial interests of beneficiaries. Indeed, political risk in the US might now be considered by some institutions to be a systemic risk akin to climate change.

To mitigate such risk, institutional investors are already choosing, or may choose to exercise, a spectrum of options that has emerged during the course of C+C research and discussions. These are summarized in the paper by Prof. Layna Mosley. They include:

  • Adding U.S. political risk to the set of factors assessed both in asset allocation and stewardship decisions.
  • Issuing an explicit statement that political risk resulting from democratic erosion in the US elevates probabilities of domestic political disorder and market instability, thus posing a material risk to client investments.
  • Asking board directors and executives at portfolio companies whether they consider US political risk relevant to their business operation. These conversations can heighten firms’ attention to US political risk, while also providing institutional investors with a better sense of the quality of firm governance and forward planning.
  • Conveying support for business leaders who advocate electoral integrity and respect for the rule of law; encouraging firms that have thus far remained silent on these issues to join with corporations that already are championing fair elections and respect for constitutional integrity.
  • Advocating full disclosure of corporate lobbying expenditures as a means of ensuring that lobbying is consistent with corporate strategy and political risk mitigation objectives.
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