Risk managers must guide businesses to invest in geopolitical resilience and keep expecting the unexpected

There was a general feeling that the 2020s kicked off with such an unthinkable string of once-in-a-lifetime events that the decade could not possibly maintain that pace.

Yet, in May 2023 as the World Health Organization ended the global emergency status for COVID-19, some three years after its original declaration, it merely closed one chapter of volatility – by no means the book.

In 2024, risk managers continue to monitor and juggle a multitude of geopolitical conflicts, tensions and ticking time bombs.

Wars rage in Ukraine, Israel, Gaza and most recently Iran, and tensions continue to grow between superpowers such as the U.S. and China.

This year the world is seeing a slew of knife-edge elections. Bangladesh, Pakistan, Russia, Taiwan and South Korea have already headed to the polls. The UK, US and India are all still to come.

We are also experiencing intense economic uncertainty, volatile oil prices, supply chain disruption, issues with resource availability, environmental concerns and increased cyber threats.

That is, alongside all of the standard threats that risk managers face daily. With many at a loss over when more stability will return to the international landscape, how can risk managers prepare for continued tensions?

REACHING FEVER PITCH

“Geopolitics is at the top of the board and CEO agenda today,” says Ziad Haider, partner and global director of geopolitical risk at McKinsey & Company.

“Conflicts in Europe and the Middle East, and escalating strategic competition in Asia are compounded by an unprecedented number of global elections in 2024, the transversal impact of AI, and the proliferating application of geo-economic tools such as sanctions, export controls and investment screenings.

“Global multinational corporations are having to reconfigure their strategy, operations and footprint in real time to survive and thrive.”

Anna Gilmour, head of global risk insight at risk intelligence company Verisk Maplecroft , says its data shows that political risks are at their highest global levels for the last five years, reflecting increases in civil unrest, government instability and confl ict intensity.

“The difference now is not only the pace at which these issues are intersecting with geopolitics, but also the less predictable nature of how they are impacting each other.”

“In our 2024 Global Risk Agenda, we identify geo-economic fragmentation as the leading risk for corporates,” says Gilmour.

“The key driver is a continued shift towards greater geostrategic misalignment between competing world views, which is manifesting across an increasingly interconnected ecosystem of risk.

“While multinational business has always had to manage political, economic, social, security, environmental and regulatory risks, the difference now is not only the pace at which these issues are intersecting with geopolitics, but also the less predictable nature of how they are impacting each other.”

Gilmour says global risk management is being impacted by increased political volatility as it can lead to shifts in the operating environment in the affected countries.

“Companies that may previously have had limited exposure to geopolitical risk are now finding themselves proactively incorporating geopolitical risk monitoring and mitigation into risk management strategies”

“Companies may also be impacted by pressure on supply chains, which can affect import and export of key goods and materials, pushing up logistics and transportation costs for companies. This increase may then be passed on further down the supply chain,” she says.

“Companies that may previously have had limited exposure to geopolitical risk are now finding themselves proactively incorporating geopolitical risk monitoring and mitigation into risk management strategies, rather than adopting reactive responses to isolated spikes in political risk.”

For Cristian deRitis, deputy chief economist at Moody’s Analytics, risk managers need to consider the potential impact of geopolitical tensions on their businesses and portfolios even if they do not have direct exposure to areas with active, ongoing conflicts.

“The most obvious way they may be affected is when conflicts interrupt global exports and cause energy prices to spike. Supply chain disruptions are another potential consideration, along with the impact on financial markets. For example, a shift in investor sentiment towards the US dollar could have implications for the relative price of exports and imports, as well as global interest rates,” he says.

“The concern for risk managers, and everyone else, is that one of the parties involved miscalculates and there is a significant escalation in the scale and intensity of conflict.”

Elizabeth Stephens, an investment and country risk advisor and managing director of geopolitical tech company Geopolitical Risk Advisory, says the fundamental concern with today’s conflicts is what is bubbling beneath the surface.

“China is supplying Russia with weapons in its war with Ukraine and enabling North Korea to do the same. China is buying Iranian oil, which enables Tehran to fund its ‘resistance’ groups across the Middle East. The concern for risk managers, and everyone else, is that one of the parties involved miscalculates and there is a significant escalation in the scale and intensity of conflict.”

She adds that it is difficult for risk managers to develop an effective risk management strategy against such potential trouble when the risks are multiplying at an unprecedented rate.

WHO IS MOST VULNERABLE?

Gilmour believes it comes down to what your supply chain looks like.

“Companies with lengthy supply chains or those dependent on particular transport routes, such as the Strait of Hormuz or the Red Sea, are particularly vulnerable to spikes in geopolitical tension and resulting logistical challenges,” she says.

For deRitis, industries with direct exposure to exports from countries in active conflict are the most vulnerable, although markets have already adjusted to recent threats to a degree.

“For example, European producers have found alternatives to Russian natural gas,” he says.

“Companies with lengthy supply chains or those dependent on particular transport routes, such as the Strait of Hormuz or the Red Sea, are particularly vulnerable to spikes in geopolitical tension”

“But sectors that are sensitive to high energy prices and ocean-bound shipping may face ongoing threats as tensions continue to flare.”

However, for Stephens, the answer is that all sectors are exposed. 

“The risks are now too broad – and involve the world’s two largest economic powers and a large number of smaller states – to say any sector is immune,” she says.

She does acknowledge, however, that the oil sector is particularly affected due to the volatility in the Gulf region and agrees that any industry that relies on supplies transited through the Straits of Hormuz or the Red Sea is at risk.

“This, in turn, impacts the financial sector and every other sector,” she adds.

INSIGHT, OVERSIGHT, FORESIGHT

While it is difficult to predict the future of any one geopolitical issue, risk managers must try to prepare for the strands and variants that come from them.

“Many of the companies with whom we speak understand the problem but have few good solutions to navigating a fragmenting global order,” says Haider.

“We are now seeing them start to invest in building what we call ‘geopolitical resilience’. This includes materially upgrading their level of insight, oversight and foresight around geopolitics.

“This covers everything from setting up a geopolitical risk unit as a monitoring and early warning system to dedicated standing time on the board and leadership agenda in order to review key geopolitical developments, implications and the strategic moves required.”

“We are seeing a strategic shift in mindset as business leaders assess a world that is paradoxically deeply connected yet experiencing geopolitical fragmentation”

Haider says such considerations must be made around supply chains, and conducting scenario planning that considers black swans (unexpected, highimpact risks), grey rhinos (highly probable, high-impact yet neglected threats), and, importantly, silver linings - the opportunities in the volatility.

“Aside from these investments in capabilities and processes, though, we are seeing a strategic shift in mindset as business leaders assess a world that is paradoxically deeply connected yet experiencing geopolitical fragmentation,” he says.

“The 21st century corporation will need a fundamentally different global operating model.”

Gilmour says that risk mitigation measures should include ongoing monitoring of geopolitics and the identification of key signpost events that might trigger a shift in business planning.

“The 21st century corporation will need a fundamentally different global operating model.”

“Regular use of scenario analysis to play out and cost the potential impact of specific geopolitical events will help companies identify contingency plans for short-term impacts, while also developing longerterm strategic plans, such as shifts in established supply chains.”

Risk managers should actively look to hedge and diversify their suppliers in the short term, deRitis advises, and consider the feasibility of reducing dependencies by switching to alternative fuel stocks or improving efficiencies where possible.

For Stephens, at a basic level, companies need to diversify their exposure to geopolitical risk and plan for the unthinkable. “Three years ago, most business people did not expect Russia to invade Ukraine. Plan for the next ‘unbelievable’ event.”

HOW TO PREPARE FOR THE FUTURE

“We expect geopolitical risk to remain a key risk factor for managers throughout 2024 and into 2025, exacerbated by the high tempo of elections taking place globally this year,” says Gilmour.

“Country-specific and regional monitoring can help identify increases in tensions and likely flashpoints, feeding into broader geopolitical scenario analysis and business continuity planning. Our clients are increasingly incorporating both quantitative and qualitative insights around geopolitical risk into risk planning processes, aiming to identify potential risk hotspots before they hit the headlines.”

She adds that using a combination of qualitative and quantitative data inputs will help to cut through information overload and exaggeration around country and geopolitical risk increases, enabling risk managers to assess the level of risk against an established baseline and highlight areas of significant shifts in risk levels.

“Global geopolitical tensions will remain high for the foreseeable future,” says deRitis. “Resolution of armed conflicts in the Ukraine and the Middle East is far from imminent. In addition, tensions between the US and China remain high, with the threat of additional tariffs and trade restrictions likely.

“Persistent inflation and the prospect of slowing economic activity in emerging markets could lead to domestic unrest and armed conflict, and may accelerate immigration outflows to more developed countries.

“Risk managers need to prepare for a period of heightened uncertainty and adopt strategies that can allow them to quickly pivot as new threats emerge.”

LOOK THROUGH A DIFFERENT LENS

Stephens agrees that geopolitical tensions will only continue to rise and says predicting the future comes down to perspective. “Risk managers can prepare for the inevitable shifts in the international landscape by enhancing their understanding of all aspects of geopolitics.

“Most senior decision-makers have an understanding of the international system but it is from their own cultural perspective.

“For example, Western companies were taken by surprise by Russia’s invasion of Ukraine because they did not understand geopolitical dynamics from Russia’s perspective. For Putin, the invasion was a logical move, at the time at least.”

“Another key risk mitigation strategy is to incorporate geopolitical risk management into the company’s overarching risk management strategy.”

Stephens says perspectives from North, East, South and West differ markedly and only by understanding the viewpoints of others - and in some cases the viewpoints of states our own government may consider an enemy - can we gain insight into the future direction of geopolitical change

“Another key risk mitigation strategy is to incorporate geopolitical risk management into the company’s overarching risk management strategy. It is not a standalone risk but one that impacts all other risk management functions from supply chains to cyber security.

“Making geopolitical risk management a board level issue is crucial. Often boards of companies avoid discussing geopolitical risk because there isn’t a ‘quick fix’ available to manage the risk.

“Geopolitical risk needs to be front and centre of board meetings, and strategies need to be developed to deal with a range of scenarios. Those companies that planned for a Russian invasion of Ukraine performed far better than those that did not.”