The human and financial costs of geopolitical turbulence are rising sharply. The World Bank estimates that by 2030, two-thirds of the world’s poorest populations will live in countries affected by fragility, conflict, and violence, while the Armed Conflict Location and Event Data Project (ACLED) reports a 40% increase in conflict between 2023 and 2020. Further, the 2021 Economic Value of Peace report indicates the global economic impact of violence is at $14.4 trillion — and this does not include the substantial costs associated with Russia’s war against Ukraine, the Hamas attacks of Oct. 7 and the ensuing Israeli invasions of Gaza and Lebanon, or the recent civil war in Sudan.

Amid this alarming trend, it is increasingly important for investors to think proactively about the risks posed by conflict-affected and high-risk areas (CAHRA) to fulfill their responsibilities to clients, fund mandates, emerging due diligence legislation, and vulnerable populations. An August 2024 study by the Thinking Ahead Institute found that 84% of the world’s 26 largest investors named “geopolitical confrontation” as one of their top three systemic risks. However, there is a lack of holistic data, analysis, and guidance to help investors identify and address CAHRA-related portfolio risks, with managers often needing to take a reactive approach to each emerging conflict and crisis. This problem is compounded by resource constraints, as many investors have limited resources to manage a wide range of sustainability risks in globally diversified portfolios.

A recent white paper, co-authored by Heartland Initiative, Wespath Benefits & Investments, and Schroders, explores the intersection of human rights and financially material risks, known as the “saliency-materiality nexus.” The saliency-materiality framework aims to equip institutions with a clear, rigorous analytical approach to decision-making, which is integral as institutions pressure test and manage regional risks to invest with more confidence.

The nexus is based on a straightforward premise: CAHRA human rights harms to people most often translate into material risks for companies and shareholders. According to the Organisation for Economic Co-operation and Development (OECD), CAHRA are “characterized by widespread human rights abuses and violations of national or international law,” including, but not limited to, the killing of civilians, forced displacement, state-based repression, corruption, and lack of access to basic goods and services. The human costs associated with global conflict and fragility are dire, as highlighted by the ACLED Conflict index, which reported that 2022 was the deadliest year for conflict since 1994 — the year of the Rwandan Genocide.

CAHRA are also characterized by a higher prevalence of financially material risks — regulatory, legal, operational, and reputational. According to the International Finance Corporation, companies operating in these settings “face business risks that are much greater than those in other emerging markets,” including destruction of physical capital, weak state control, lack of security, and supply-chain disruptions. However, current reporting has largely overlooked how corporate involvement in human rights violations and conflict dynamics can significantly impact long-term financial performance and share value.

From an investment perspective, it may be easy to overlook the linkages between human rights harms and material impacts, but the state of geopolitics generally — and a number of recent headlines — are sharpening investors’ focus. Whether you’re reading about Chiquita and United Self-Defense Forces of Colombia, Lafarge and the Islamic State in Syria, or TotalEnergies and the state military in Mozambique, there is a common theme: Companies are increasingly facing financial repercussions because of their proximity to human rights harms in CAHRA. This last example alone includes hundreds of Mozambican civilians who were killed, tortured, or otherwise disappeared by the military and the non-state armed group, Al Shabab. In addition, the company declared $20 billion force majeure due to the local fighting, is facing a criminal investigation by the French government for its failure to protect subcontractors and local civilians, and is the subject of intense scrutiny by European lawmakers and international media for its role in the conflict.

While CAHRA present a higher degree, quantity, and frequency of risks, the paper does not seek to deter investment in these markets. On the contrary, these regions rely on capital investment to stimulate economic growth, reduce conflict, and enhance human rights protections. Instead, the paper presents the saliency-materiality nexus as a practical, rights-based framework that helps investors identify and address the most severe and systemic social risks among their investments, allowing them to avoid wholesale exclusion which could damage the diversification and integrity of portfolios.

At the systemic stewardship level, investors can use the nexus to assess the relative risks of various companies, enabling them to build concentrated analyses and inform engagement efforts to address the most significant risks. At the active ownership level, this framework facilitates investor-led discussions with portfolio companies regarding their human rights and material risks across CAHRA, promoting improved policies, practices, and governance. Companies with consistent processes spanning their global operations are better equipped to manage controversies, crises, and accusations of bias as they arise.

This prioritized approach, based on the severity of risk, aligns with both normative (e.g., UN Guiding Principles on Business and Human Rights, OECD Guidelines for Multinational Enterprises, SASB materiality model) and legal frameworks (e.g., Sustainable Finance Disclosure Regulation, EU Corporate Sustainability Reporting Directive). As a result, it enables investors to more effectively identify, engage on, and better manage financially material risks in portfolios — furthering their ability to preserve or enhance financial value.

Leading international indexes — the Economist Intelligence Unit Democracy index, Transparency International Corruption index, Freedom House’s annual Freedom in the World report — point to an increasingly chaotic geopolitical environment. In the absence of fit-for-purpose data and guidance, a framework that enables investors to identify and prioritize the most severe risks to people and portfolio performance is needed. It is crucial for investors to develop strategies to address these risks across their holdings to better protect and enhance the value of their investments. This ability for institutions to make decisions aligned with their legal, normative, and fiduciary responsibilities is a best practice required to avoid political controversy and financial losses.

Lazaro Tiant is a sustainable investment analyst at Schroders in New York. Chirag Acharya, is senior analyst, sustainable investment stewardship, at Wespath Benefits and Investments in Chicago. Mallory Miller is a legal advisor at the Heartland Initiative in San Luis Obispo, Calif. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.