Measuring Political Risk: Assessing the Probability of Change in Regulatory Standards

MSCI ESG Research is currently working on developing tools to help investors assess their exposure to key social and regulatory risks across a range of sectors and countries.

The objection of the Capstone project was to develop scalable frameworks for capturing the relative variation in regulatory environments and the prospects for change in 58 developed, emerging and frontier markets. These frameworks were developed for three distinct issue areas:

1. Labor Standards
2. Consumer Protection
3. Privacy and Data Security

For each issue area, a sub-team of SIPA students conceptualized the underlying issue with respect to a relative baseline across countries, identified variables and proxies that correlate with the latent variable, gathered the data for each variable, devised an aggregation method for the final calculation, and performed a case study where necessary to identify analytical gaps.

To assess likelihood of change, the sub-teams followed different processes based on directions from MSCI and the existing constraints on data availability. For the Data Security issue area, an assessment of likelihood of change was performed using proxy variables, as was constructed for the relative baselines, as well as developing a survey instrument for improving this assessment in the future with the addition of subject matter expert assessments. Case studies on China were performed for the Labor Standards and Consumer Protection issue areas to identify both opportunities for assessing prospects for change and analytical gaps.