Today’s investment challenges are compounded by a period of unparalleled political and social instability. U.S. and European markets, which host a large portion of investments, are not exposed to “unforeseen” risks. Brexit, the U.S. presidential election, and mass refugee migrations exemplify these challenges. Investors do not have tools to predict or understand the implications of these risks. They rely on geopolitical and financial experts, who consistently fail to predict political and social events and feed speculative information to financial markets. This leaves financial analysts without accurate insights on how political and social events will impact markets.
Populist movements have swept across the U.S. and are gaining traction in upcoming elections across Europe (e.g., Germany, France, Greece, Italy and Spain). But election outcomes are not the only sign of unrest. After a pledge by Starbucks’ CEO to hire 10,000 immigrants, #BoycottStarbucks created a backlash that lowered stock prices and diminished support from a segment of its customer base. On the other hand, President Donald Trump continues to leverage the power of social media to influence public sentiment on specific companies. Apps now exist with the sole function to inform investors when President Trump publicly castigates firms in their portfolios.
The proliferation of communications technology has permanently changed the financial landscape. Individuals and activist groups can scale rapidly to not only shape the political landscape, but also to impact a company’s operations, reputation, and value. These new “people problems” can be triggered by seemingly innocuous decisions or events if not communicated effectively.
Events like these increase indecision, uncertainty, and muddy the accuracy of multi-year cash flow forecasts, which translates into financial market instability and a lack of actionable business intelligence. The solution is not to double-down again on traditional approaches, nor is it to hire subject matter experts, engage government liaisons, or conduct regression analysis to understand these events.
To more accurately define risk portfolios, financial institutions need to go to the source of this instability: social risk. Specialized data analytics through a social risk lens is the key to unlocking a novel competitive advantage and to sustaining long-term value. Social risk analysis is a scientific, data-driven approach that delivers consistent, repeatable, and measurable results. It augments traditional risk analysis to accurately measure a risk profile (e.g., technical, default, regulatory, environmental, reputational) of a geographic region, sector, or target asset.
Social risk analysis cuts across geography, culture, language, and time. It is a new way to systematically compare investment options and deliver a competitive advantage tailored to each sector:
- Energy companies can identify and measure the perception of key stakeholders (e.g., national government, local communities, activist groups) to shape security environments and reduce cost overruns.
- Telecom companies can target and engage key demographics (e.g., millennials, female professionals, male Latinos), to increase subscribership and usage in previously untapped markets.
- Industrial companies can conduct nodal analysis up and down their global supply chains to pinpoint, forecast and mitigate social risk to proactively manage their exposure to disruption.
- Consumer goods companies can augment their traditional marketing approach of building personas that define what consumers do, and instead anticipate consumer needs by understanding why consumers make choices.
Social risk analysis is an investment tool that: (1) identifies mispriced assets; (2) pinpoints previously undefined operational efficiencies; (3) deciphers complexity and indecision from a number of data sources (e.g., financial reports, social media, online news, regional periodicals, academic publications); and (4) solves people problems. Recent examples in which social risk analysis could have forecasted and mitigated events include:
- Protests at the North Dakota Pipeline
- Negative public perception in response to Uber providing rides to JFK airport during a New York City taxi drivers boycott
- Reduction in Ivanka Trump product sales at Nordstrom, and the subsequent support for Nordstrom after President Trump’s negative tweet
- Selloff of Under Armour stock, boycott of merchandise and potential drop by endorsed athletes as a result of pro-Trump comments by the company’s CEO
Social risk analysis is no panacea. It does, however, provide reliable business intelligence that reduces uncertainty, and helps proactive decision-making. It can be applied from the due diligence stage to the sale of an asset, which enables PE firms to forecast the implications of external events on the bottom line. Social risk analysis is a dynamic solution to avoid the impending PE downturn, and create value in every stage of the investment cycle.