Lesson 7 of 8 · 13 min
Types of geopolitical risk and how to assess them
Classify a geopolitical risk as event, exogenous or thematic, then judge it on three dimensions together: likelihood, velocity of impact and size and nature of impact.
In short
- Event risk: tied to known dates (elections, legislation, anniversaries); political calendars are the starting point. Predictability gives time to prepare but does not change likelihood, speed or size.
- Exogenous risk: sudden, unanticipated (uprisings, invasions, natural disasters); hits a country's cooperative stance, non-state actors' ability to globalize, or both.
- Thematic risk: known risks that evolve and expand over time (climate change, migration patterns, populism, terrorism, cyber threats).
- Assess on likelihood (probability; more art than science), velocity (how fast it hits the portfolio: high = short term, low = long term) and size and nature of impact (discrete = one firm or sector; broad = sector, country or world).
- Highly cooperative, globalized countries are less likely to face geopolitical risk but more vulnerable to risks elsewhere. Impact is larger in a downturn.
- Weigh all three together: likely-but-trivial risks need little attention; unlikely-but-severe ones merit a scenario but not constant monitoring.
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