Businesses need to adopt formal structures to assess the risks posed by political instability and unrest in emerging markets if they are to protect their growing investment in these areas, according to specialty insurer ACE Global Markets (ACE).
Nearly 30% of senior executives and risk professionals surveyed for the latest global risk briefing report, conducted by the Economist IntelligenceUnit (EIU) and sponsored by ACE, said their companies had been forced to cancel existing investments in emerging markets because of concerns about political risks.
ACE believes that this points to a potential gap in the risk assessment process both in terms of an understanding of the risks and the level of on going risk management these companies make for existing investments.
For most companies, risk management is concentrated on the period when an investment opportunity is being considered, says ACE. 80% of respondents said they consider political and operating risk as part of the due diligence process. However, only 44% revealed they monitor and manage risk on a continuous basis once the investment has been made.
“Emerging markets remain highly volatile but with these risks comes clear investment rewards,” says Julian Edwards, Head of Political Risk at ACE Global Markets. “However, without formal processes businesses face potential exposure to unnecessary and additional risks which can impact directly on the performance of their investment and, in some circumstances, lead to cancellation.”
Over half of those surveyed said the risks associated with investing in emerging markets have increased in the past three years and in response many companies are increasing the time and resources dedicated to risk management. The survey also showed that stability of political regimes was the one of the most significant threats to operations in emerging markets. In the past three years, the vast majority of companies that already invest in emerging markets(79%) deepened their investment over the period. 64% reported that rewards have increased.
“The results of the global risk briefing clearly shows the growing appetite for extending investment in emerging markets,” says Edwards. “But, with less than half of those surveyed performing ongoing risk assessment as part of their investment programme the pace of growth and the potential returns could be affected. There is no doubt that maintaining a structured approach to risk management is crucial.”