Mastering Geopolitics, a common Denominator to the global Risk landscape for corporates

A recommended Approach to building Resiliency in growing Complexity

by Evelyne Legaux on 16-05-2024

 

This article takes a look at some of the latest developments in the inter-connected global Risk landscape, and explores a recommended approach corporates should adopt to navigate growing uncertainty & complexity and build resiliency.

 

In 2024, managing Risk – with capital R - continues to invite itself at the top of Executive leaders & Boards’ agendas. While geopolitical tensions unfolded unsurprisingly for the most part of 2023, the Middle-East conflict that suddenly erupted again last October has now taken centre stage. In addition, further sources of risk or threats have emerged, those Gen AI-related not being the least ones.

 

So, what does the Risk landscape look like for corporates in 2024?

• Geopolitical risk remains top of leaders’ mind today due to growing complexity on the international scene. While more key actors are getting involved, such as the EU & China compared to the core US vs USSR stand off during the Cold War era, a number of geopolitical swing states mainly arising from the BRICS grouping - along with Turkey & Saudi Arabia - are also becoming increasingly influential.

Most importantly, those swing states have already emancipated themselves from the traditional Eastern & Western blocs and follow their own pathway, thus creating a strongly multipolar world. Equally, some smaller countries are following suit and  re-drawing the global map of strategic alliances.

While current conflicts & regional tensions exacerbate the risk of escalation, reading geopolitical influences & rivalries – whether regional or global - is becoming a very complex matter, thus making predictions near impossible.

 

• Elections everywhere on the planet. With 54% of the global population expected to head to the polls in countries that represent 60% of global GDP, the likelihood of political change in key parts of the world is very high. Part of this, the looming US presidential elections with nothing less than the future of Western democracy at stake and the potential to reshuffle those international alliances, will also bring further policy-making & regulatory uncertainty for businesses, let alone the heightened risk of cyber-attacks & widespread mis-information.

More broadly, in countries where the level of dissatisfaction with democracy is growing, upcoming elections are likely to bring stronger support for extreme political parties & social unrest, thus causing disruption to operations or supply chains and potentially triggering legal or reputational risk for businesses with a local footprint.

 

• Geostrategic competition rising in targeted sectors such as Electric Vehicle (EV) manufacturing, energy security, essential mining & metals, international shipping or GenAI, to name a few. These critical sectors are becoming strategic battlegrounds amongst nations, thus imposing themselves in international relations and triggering geopolitical dynamics of their own.

While economic actors & policymakers across countries will continue to foster innovation, governments will attempt to lead the way when it comes to sourcing supplies security, regulation or risk mitigation. The world of GenAI for instance has become very emblematic in this regard, being now at the core of US-China relations. Likewise, maritime corridors that carry 90% of the global goods trade are being increasingly threatened by disruptions of a geopolitical nature.

Elsewhere, the EV sector witnesses renewed focus on securing critical supplies, incentivizing domestic production and imposing border restrictions or tariffs on scrutinized imports & FDIs from geopolitical rivals, that might threaten national &/or economic security.

 

• Financial markets & counterparty risks arising from recent tight monetary policies combined with the present global stagflation or slow recovery. With so much dependency on geopolitics in an inter-connected world, corporates struggle to make realistic predictions with regards to interest or foreign exchange rates. How can such risks be best measured & mitigated today? How can the cost of financing be best managed? How does it impact on liquidity risk?

Likewise, ongoing pressures on Cash Flow is making counterparty risk critical for businesses, not just with trade customers but with financial institutions & vendors alike. Managing their exposure with banks, customers or vendors is of the essence. More than ever before, businesses must have a good grip on Working Capital, Cash forecasting & liquidity management, in order to be resilient as they navigate uncertainty.

Let alone the ongoing risks of cyber-attacks, data breaches, poor talent attraction, workforce shortage or else climate change – a longer-term risk in nature - that could hamper companies’ efforts to innovate, become sustainable and remain competitive.

When looking at the bigger picture, it is clear that no one risk can be taken in isolation. Whether political, technological, environmental or economic, all risk factors are inter-related instead, and amplify each other as a result.

 

Is insurance the panacea?

In such a dynamic context, insurers have a primary duty to ensure their own resiliency by revisiting their risk appetite, adjusting their underwriting policies & premium models and innovating in terms of products & technology so as to provide a better customer experience.

New players or new products developed by historical underwriters keep entering the market and keeping its dynamics upbeat.

To support clients in challenging circumstances while reaching their own financial targets, underwriters focus on differentiating their offering across the various risk types. While preferred risk types benefit from abundant coverage capacity, flexible underwriting & lower premiums, the more challenging risk types are logically met with capacity limitations, stricter scrutiny & higher pricing, although moderately.

The insurance market remains fluid, however as always there are gaps in traditional cover, and progress remains slow when it comes to non-traditional risks cover. Therefore, best is for corporates to consider self-insuring in the mix of options.

 

Measures corporates can take to mitigate complex risks effectively

In such a global trading environment, corporates have no choice but to increase risk readiness and build resiliency through a holistic all-encompassing risk management  approach.

So, what can they practically do?

• Be strategic - Corporates, especially those trading internationally, must not only bolster geopolitical risk awareness & understanding of its dynamics throughout their organizations, but also go further and embed it into their business strategies.
• Be tactical & opportunistic - They must also rethink/design their operating models in ways that protect supply chains & operations against geopolitical disruptions or other threats, and equally seize new opportunities arising in strategic sectors that are likely to drive public investments & incentives.
• Be proactive - To minimize non-compliancy, legal & reputational risks, corporates must remain on top of any new legislations or regulatory requirements, and learn to read the mind of policymakers, so as to anticipate likely changes to come.
• Be prepared - Corporates must also prepare for the expected surge of compliance costs in relation to sustainability, new technologies, cybersecurity or else data protection in particular.
• Be a visionary - First and foremost, they must take a holistic look at the risks landscape they are operating in, embrace any immediate or short term impacts and identify factors – whether in isolation or inter-related – that will lead to new threats or risks to their operations, assets & resources in the foreseeable future. Understanding and quantifying those risk exposures in their Profit & Loss statement and Balance Sheet comes as an essential next step.

Taking a proactive approach to build resiliency by identifying & mitigating risks in a fast-evolving & uncertain business environment, is of the essence for corporates to survive, innovate & thrive. Those most risk-aware and open to alternative ways of assessing risks, will simply be best-positioned to outgrow their competition.

 

Let us know your thoughts or questions by email on info@financeotcconsulting.com or indeed through our Contact page.

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