Reading · Antidote to Autocracy

We tend to think of democratic erosion as a political problem—something that plays out in elections, legislative chambers, and the news cycle. But institutional drift, the incremental weakening of the rule-based governance on which markets depend, is also a financial risk. And it is one that most investment frameworks have not yet been built to see, in particular for developed markets.

This post makes the case that monitoring the health of democratic institutions is not an ideological act. It is prudent risk oversight and increasingly relevant to how investors interpret fiduciary duty in the context of long-term system stability. For long-horizon investors in particular, it may be one of the most consequential analytical variables we are currently under weighting.

The evidence is hard to ignore. The Economist Intelligence Unit’s 2024 Democracy Index recorded its lowest global score to date. Only 6.6% of the world’s population lives in a full democracy. The United States, issuer of the global reserve currency, anchor of the world’s deepest sovereign bond market, is classified as a flawed democracy, with measurable and ongoing politicization of its regulatory institutions. These are not background conditions to note and move past. They transmit directly into portfolio risk through policy durability, correlation structure, and the viability of long-term investment theses, particularly for impact and sustainability-oriented strategies.

These dynamics are unfolding alongside longer-term structural trends, notably rising wealth concentration, which are increasingly associated with political polarization and institutional strain.

The good news, and there is good news, is institutional drift is measurable, and capital can be part of our response. Building upon themes explored in previous posts, this post examines the transmission channels through which institutional deterioration affects portfolios, offers a framework for monitoring governance trajectory, and considers how regenerative and solidarity-oriented approaches can actively contribute to institutional resilience rather than simply managing around its absence.

The question before us is not whether this is our problem.

It is whether we are willing to act like it is

In a previous post in this series, we encouraged investors to broaden their analytical lens—placing firm-level ESG considerations within the wider political, legal, and institutional systems that shape market outcomes. Capital markets depend on enforceable contracts, credible information, regulatory consistency, and durable constraints on power. Remove these foundations, and the rest of the architecture becomes unstable.

This post extends that argument by examining one of the most underappreciated dimensions of systemic risk: the condition and trajectory of our underlying institutions, and what that means for capital allocation, fiduciary duty, and long-term portfolio construction. We also consider whether emerging approaches within impact, regenerative, and solidarity-oriented finance offer meaningful pathways for strengthening the institutional foundations on which markets depend.

The empirical picture warrants our attention. The Economist Intelligence Unit’s Democracy Index (2024) recorded its lowest global score to date—with only 6.6% of the world’s population living in full democracies, and 39% living under authoritarian regimes, with the remainder in flawed or hybrid systems (V-Dem, 2025).

More people now live under conditions of democratic erosion than at any point in recent memory. Critically, this is not a story of dramatic coups or overnight regime change. The visible pattern is gradual movement along a spectrum—slow, often barely perceptible institutional weakening.

This is refer to as institutional drift—the incremental weakening of rule-based governance that underpins predictable capital markets. It is a quieter threat than collapse, and in many ways more dangerous for precisely that reason.

Rising wealth concentration globally does not., in itself, determine institutional outcomes. However, a growing body of empirical research associates sustained inequality with higher political polarization and institutional volatility (World Inequality Lab, 2022). Where institutional credibility is already under strain, these dynamics can reinforce uncertainty in taxation, redistribution, and regulatory policy—and the reinforcing interactions between polarization, disinformation, and autocratization further increase institutional volatility over time.

While the rise of autocracy is in many ways a global challenge, the United States merits particular attention here. It is classified as a flawed democracy (EIU, 2024), with the politicization of regulatory agencies becoming an increasingly visible feature of its governance landscape:

While perhaps not yet entering systemic breakdown, these indicators reflect measurable institutional strain within the world’s most systemically central economy.

As the issuer of the global reserve currency and anchor of the world’s deepest sovereign bond market, institutional developments in the United States transmit globally through dollar liquidity, asset pricing, risk-taking, and cross-border capital flows (Rey, 2015). The IMF (2025) has already flagged elevated global financial stability risks, including sovereign bond market pressures and tightening financial conditions.

Institutional drift, then, is not a political label.

It is a measurable shift in the governance conditions that underpin long-term capital formation—and therefore a structural variable in portfolio construction.

Traditional asset allocation frameworks have generally treated institutional quality in advanced economies as structurally stable. Governance risk premia are typically embedded in emerging market allocations; developed market institutions are assumed to provide predictable rule-of-law environments, central bank independence, and durable regulatory frameworks. That assumption has been foundational to the development of national and international economic orders. The continued durability of this assumption now warrants closer examination and where relevant, active stewardship by investors to support the long-term stability of the system on which all market activity ultimately depends.

Shifts in institutional quality can alter risk premia, policy predictability, and the reliability of diversification assumptions that underpin modern portfolio construction - affecting all investors, regardless of strategy or asset allocation.

Recent democracy and governance assessments document sustained erosion across multiple dimensions including judicial independence, executive constraint, and regulatory quality—not simply in emerging markets, but across developed nations as well (V-Dem, 2025; Freedom House, 2024; World Bank, 2024). The implications differ depending on portfolio structure, strategy, and time horizon, but the underlying question applies across all investor types:

How confident are we in institutional assumptions we’ve long taken for granted?

1. For universal owners

Investors whose portfolios approximate the market across asset classes and geographies face whole-portfolio exposure—because governance quality shapes economy-wide productivity, capital formation, and aggregate risk premia. Institutional deterioration is not a sector-level problem for these investors. It’s a systemic one.

2. For impact and sustainability-oriented investors

Institutional drift transmits through broad market repricing and direct thesis impairment: regulatory reversals, weakened enforcement capacity, disclosure deterioration, capital controls, or constrained exits. Where policy credibility weakens, intended environmental and social outcomes may be delayed, diluted, or repriced. This is not a hypothetical risk—it is already playing out in multiple jurisdictions.

3. For long-horizon investors

Whose liabilities or mandates extend across political cycles, institutional trajectory becomes particularly material—because governance conditions shape multi-decade return assumptions and the durability of investment theses.

The broader implication applies across all investor types thereby raising the question of fiduciary duty. Monitoring institutional trajectory—alongside macroeconomic and financial variables—is fundamentally an exercise of prudent risk oversight. At the same time, capital allocation inevitably interacts with and helps shape the broader political, social and economic order. Choosing not to engage with institutional dynamics does not imply neutrality. It may instead reinforce existing conditions. Recognizing institutional risk is therefore not about politicizing investment decisions, but acknowledging the role capital already plays within the systems on which markets depend.

Institutional drift does not announce itself cleanly in a single line item. It works through multiple reinforcing channels, each of which deserves attention in at least four different risk frameworks:

1. Policy durability risk: Expanded executive discretion in a time of growing executive overreach increases the probability of regulatory reversals or abrupt shifts in climate, industrial, and social policy - often with little warning and limited recourse.

2. Monetary and fiscal credibility: Even as monetary authorities seek stability, geopolitical risks can tighten global financial conditions in ways that central banks cannot fully offset.

3. Correlation and diversification compression: Institutional stress across multiple jurisdictions (often exacerbated by geopolitical fragmentation) may serve to weaken traditional diversification assumptions and elevate cross-asset correlations precisely at the moment when investors most rely on diversification to manage risk.

4. Impact and sustainability thesis fragility: Investments tied to long-term sustainability goals depend on predictable regulatory environments. Institutional drift can produce direct thesis impairment through regulatory reversal, constrained exits, capital controls, or disclosure deterioration.

Policy volatility matters for capital allocation because it affects capital expenditure decisions, regulatory risk, and taxation expectations. Heightened market uncertainty may increase hurdle rates, delay investment, and compress valuations (Baker, Bloom & Davis, 2016). These effects are particularly acute for impact and sustainability projects, where markets are still in development and returns may often depend on durable policy frameworks and credible regulatory implementation (IEA, 2023).

Impact and sustainability-oriented investors allocate capital across public and private markets while seeking structural transitions in energy systems, land use, industrial production, and corporate governance. This creates a dual exposure worth naming plainly: dependence on institutional stability for implementation, and active participation in structural change that may itself generate political contestation.

Such capital frequently operates on extended time horizons—particularly in infrastructure, transition finance, and systems-level strategies. Where mandates are long-dated, policy stability and regulatory credibility become material to financial performance and outcome durability (IMF, 2023). The critical variable is not duration alone. It is exposure to system-level governance conditions that shapes aggregate returns and the real-world delivery of intentional, strategic impact.

Where institutional credibility weakens, transition pathways may slow, fragment, or reprice. Where it remains stable, sustainability capital may scale efficiently within existing systems.

This relationship between institutional health and impact delivery is not peripheral to our work—it is central to it.

One practical implication of taking institutional drift seriously is that it requires us to track it. The good news is that it is measurable. Directional changes in the following governance indicators provide useful signal:

1. Executive constraint and judicial independence sub-scores (V-Dem)

2. Rule of law and regulatory quality (World Bank Worldwide Governance Indicators)

3. Freedom of expression and electoral integrity (Freedom House & EIU)

4. Sovereign risk premium trends and policy volatility indices

Beyond these annual or static indicators, investors should monitor change trajectories—the directional movement over time—as leading signals of drift, and embed these into:

1. Sovereign allocation models (governance trend overlays)

2. Stress testing for infrastructure and climate assets

3. Political risk scoring in private markets

4. Scenario analysis linking governance deterioration to market outcomes

None of these require inventing new methodologies. It requires taking existing data seriously and integrating it into investment governance frameworks that have historically treated developed-market institutions as a given.

At a deeper level, institutional drift may be understood as a systems challenge rather than a series of isolated governance failures. Political polarization, economic concentration, declining institutional trust, and ecological stress interact across economic and social systems, shaping the conditions under which markets function. Investors concerned with long-term value creation are not only managing portfolio exposures; they are operating within (and helping to shape) the broader systems that enable markets to operate effectively.

If institutional drift reflects deeper economic and social stress, and a growing body of research suggests it does (World Inequality Lab 2022, IMF, 2015; OECD 2021), then capital allocation itself is not simply exposed to this dynamic. It can either reinforce fragility or contribute to resilience. That is a meaningful choice, and one that applies across investor types particularly those focused on long-term value creation or explicit impact objectives.

Across investor types and time horizons, such considerations increasingly intersect with fiduciary duty, particularly where institutional conditions influence the durability of financial returns and, where relevant, intended impact outcomes. In this sense, system-level stability is not a peripheral concern—it is a condition for sustained capital deployment.

A central premise of the AtA Series is the notion that capital innovation, courageous capital, is required if we are to counter the forces supporting the increasing drift toward autocracy. Courageous capital contributes to innovation beyond conventional financial structures to strengthen the social, economic and institutional foundations on which markets ultimately depend. The capacity and potential of courageous capital to lay the foundation for broader asset ownership by under resourced communities is a critical part of that argument.

Within this broader systems context, regenerative finance and solidarity economy approaches offer complementary perspectives on how capital can contribute to institutional resilience. Regenerative finance focuses on restoring and reinforcing social, ecological, and economic systems that underpin long-term value creation. Solidarity economy models emphasize broader participation in ownership, production, and economic decision-making, strengthening the social legitimacy upon which stable democratic institutions depend.

For investors, these approaches don’t replace conventional capital allocation—but they may inform strategies that strengthen the institutional and social foundations on which markets depend, and societies thrive.

In practice, this might take several forms:

Local and inclusive economic participation: Allocations that broaden asset ownership, support small and medium enterprises, or strengthen local production networks may reinforce the social foundations on which institutional legitimacy depends. This doesn’t replace mainstream markets—it can complement them by diversifying economic agencies.

Capital structure innovation: In private markets, revenue-based finance, shared-upside models, and patient capital structures can align investor returns with enterprise durability rather than short-term extraction—reducing financial fragility while remaining market-compatible.

Stewardship for institutional quality: Investors can integrate governance-system resilience into engagement priorities—supporting regulatory transparency, judicial independence, and predictable policy frameworks through sovereign engagement, corporate stewardship, industry networks, and policy consultations.

Illustrative examples include non-extractive finance models such as The Working World, field-building platforms like the Global Steering Group for Impact Investment, and community wealth-building experiments like the Preston Model (The Democracy Collaborative, 2022). Other, related examples are identified in AtA Series Post #23: Impact In Action: Capital Innovation as Democratic Renewal.

These vary in scale and approach, but together demonstrate something important:
Capital strategies can actively engage with institutional resilience rather than simply treating governance conditions as an exogenous variable to be managed around.

Institutional quality shapes the conditions under which markets allocate capital, contracts are enforced, and policy commitments are implemented. Changes in institutional trajectory therefore affect both financial risk as well as the durability of intended outcomes—and they do so across all investor types, not just those with an explicit sustainability or impact mandate.

For universal owners, governance conditions influence aggregate portfolio performance. For impact and sustainability-oriented investors, institutional credibility affects both financial returns and outcome delivery. For long-horizon investors, governance conditions shape the stability of multi-decade capital assumptions. In each case, the logic is the same:

Where institutional conditions materially affect expected risk, return, or outcome durability, fiduciary responsibility is implicated.

Institutional quality does not determine outcomes in isolation. But as an enabling condition for durable value creation and credible impact delivery, it warrants systematic consideration within investment governance and strategy.

We have a choice in how we engage with this reality. We can treat institutional drift as background noise—a variable to note and move past. Or we can take seriously what the evidence increasingly suggests:the health of democratic institutions is deeply intertwined with the health of portfolios, and capital thoughtfully deployed, can help reinforce long-term system stability.

Courageous capital, capital willing to innovate, experiment, and expand our understanding of it’s purpose, can play a critical role to in addressing the forces driving institutional drift and in supporting regenerative and solidarity-based economic approaches Such approaches can strengthen the social and institutional foundations on which durable financial and impact outcomes depend.

For all investors, particularly those with long-horizon mandates, monitoring institutional trajectory and actively engaging where possible is prudent fiduciary stewardship. Where institutional conditions materially influence risk, return, and the durability of investment theses, this engagement becomes an expression of fiduciary responsibility.

The opportunity to shape this trajectory (and to contribute to more resilient systems) is ours to co-create and scale in coming years.

Building on questions raised in the previous post while reflecting on implications for issues raised in this post, several practical questoins follow for investment teams and boards:

1. How exposed is our total portfolio to jurisdictions exhibiting measurable institutional deterioration?

2. Are we distinguishing between cyclical volatility and structural institutional drift—and does our risk framework capture that distinction?

3. Does our stewardship approach actively support institutional resilience, including regulatory transparency, judicial independence, and rule-based governance?

4. For impact and sustainability-oriented investors: how can capital allocation support institutional resilience without undermining market stability?

5. How should fiduciary duty be interpreted when long-term system durability and short-term performance appear in tension?

6. What role can regenerative and solidarity-based models play in strengthening the underlying social contract on which markets depend?

Bonus Post: Institutional Drift, Fiduciary Duty, and the Evolution of Courageous Capital

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