Political, social and regulatory risk
What is it?
It is the risk that changes in the political, social, or regulatory environment negatively affect an investment. This risk can be caused by factors such as changes in government policies, political instability, social tensions, or modifications in regulations that directly impact businesses or assets in which one has invested.
Investments in countries or regions with unstable political systems, frequent changes in legislation, or high levels of social conflict are particularly exposed to this type of risk. Investors must remain alert to changes that may occur at the government level, such as tax reforms, expropriations, or new regulations that could alter market conditions.
Key aspects to consider
Political, social, and regulatory risk is particularly relevant in emerging markets or in countries with a changing political and social environment. Political instability or regime change can have an immediate and significant impact on invested assets, especially in sectors that depend on current legislation, such as energy, infrastructure, or the financial sector.
Investors should constantly monitor political and social factors that could affect their investments, paying attention to fiscal policies, government stability, and regulatory changes that could increase operating costs, limit market access, or alter the economic environment. Additionally, diversifying investments geographically and across different sectors can help mitigate this type of risk, as it reduces exposure to adverse events in a specific region or country.
Investors should also be aware of social tensions, such as protests or social movements, that may influence market stability and create economic uncertainty.