A new report looking at the risks reported by FTSE-100 companies, reveals that UK-related issues top the list of corporate anxieties.

Looking at both hard and soft risks faced by companies, a study by think tank Global Counsel, Hard and soft political risk – What FTSE-100 companies have to say, reveals that concerns about UK political risk extend beyond the impact of Brexit. Given the wide global footprint of some of the UK’s largest businesses, the “prominence of the UK as their single greatest source of risk is striking”, says the report.

The research, which is based on what companies say about political risks in their annual reports for financial years ending in 2016, analyses risks ranging from security threats, political instability, geo-political tensions through to regulatory changes, fiscal policy and the enforcement of new legislation. The findings revealed that the UK is top of corporate risk concerns for FTSE-100 firms, with almost half of risk concerns being centered around public policy. These include the national living wage, the apprenticeship levy, data protection, Heathrow expansion and tax policies.

“For many in the FTSE-100, the UK was the single biggest source of concern, even before the election was called,” author of the report and chief economist at Global Counsel, Gregor Irwin, tells GTR.

“The inconclusive result means the UK will be a much bigger concern now. The UK has become engulfed in political uncertainty, just as the government is embarking on one of the most ambitious programmes of legislation and policy change the country has ever seen. The government will struggle to remain united while making the compromises that are necessary to reach the sort of deal [Prime Minister] Theresa May envisaged beforehand.”

Brexit concerns

The number of firms identifying Brexit as a risk more than doubled to 55% compared to last year, with the most frequent concern being uncertainty on the UK’s future relationship with the EU. However, 45% of firms don’t report Brexit as a risk at all, while those that do judge the risk manageable as they are sufficiently diversified.

Our analysis reveals the relative importance of three specific issues that are often raised in the context of Brexit,” says Irwin referring to market access, supply chain implications and regulation.

“About a quarter of firms reporting Brexit risks are concerned about market access, with this concern higher among healthcare and consumer goods firms.”

The report references two examples:high-end fashion retailer Burberry and global biotech firm Shire.

“Burberry notes possible implications for its supply chain, while Shire notes the potential impact on the UK’s ability to benefit from EU free trade agreements,” says the study.

“Slightly more firms are concerned about the regulatory consequences, particularly among financials, but most say it is too early to tell. Concerns about labour issues are lower and noted by just 15% of firms reporting Brexit risks.”

Overall, across sectors, there were significant differences in risk reporting, but oil and gas, healthcare, basic materials and finance topped the list. Oil and gas companies are highly exposed to Brexit hard risks such as environmental regulation, competition policy and local content requirements, while financial firms are also exposed to political uncertainty from elections. Meanwhile healthcare firms will have high exposure to legal and ethical issues.

Unsurprisingly then, the company to report the most risks over the last year was Shell, followed by RBS.

“RBS’ concerns are legacies of the financial crisis, including state aid conditions imposed by the EU following RBS’ government bailout and from the influence of the UK government as a major shareholder in the bank,” the report says.

Growing soft risks

The study findings show that political risks faced by FTSE-100 firms are both growing and evolving with the total number of risks reported rising to over 450 this year, up from just over 300 last year. The research highlights a big increase in soft political risks (for examples changes to regulation, fiscal policies and the way legislation is enforced) and a sharp rise in political uncertainty, following major ballot box surprises over the last 12 months.

An increase in such risks could be a sign of companies feeling a push back against globalisation which is impacting on a wider range of policies that are disruptive for business. Across rich countries in particular, governments are struggling to address the side-effects of globalisation and technological change, which are increasing inequality and fuelling disillusionment with economic models based on openness to trade, investment and migration.

“In our report we found that FTSE-100 companies are more concerned about protectionism than they were last year and some of these concerns are linked to US President Trump’s election,” says Irwin.

“Some firms do have very specific concerns relating to FX controls, export restrictions and capital controls. These concerns are not widespread, but they are clearly an issue for some firms, most often in specific emerging markets.”

Commenting on the research results, trade and trade finance economist Rebecca Harding says the research stresses that multilateralism in trade cannot be taken for granted any more.

“Trump is aggressively using bilateral relationships and the threat of protectionism to shore up his ‘America first’ agenda, while the stance of the UK, although less stable than it was, is still founded on a desire to broker bilateral trade negotiations with our trading partners,” Harding, who is CEO of data analytics firm Equant Analytics, tells GTR.

“This is a worrying time for world trade. A return to explicit protectionism, that is the likely bi-product of the trade tensions that we are seeing at the moment, runs the risks of equally explicit retaliation – in effect starting a trade war. This would be very damaging for FTSE-100 companies and SMEs alike as it undermines much of the stability that businesses trading internationally have relied on for the last 20 years.”