Overcoming geopolitical risk through business risk management

The frequency and intensity of geopolitical risks are increasing. These risks, including political instability, economic sanctions, and uncertainty related to policy, regulations, and physical threats, can have a significant impact on the company's performance and profitability.

Managing national risks today requires comprehensive, forward-looking, and complex approaches; Enterprise risk management (ERM) provides a strong framework for dealing with them.

The latest annual Political Risk Survey, conducted by Oxford Analytica on behalf of WTW, provides a detailed overview of current global political risks and how companies are responding to these challenges. This report highlights the prominent political risks of 2024, emphasizing their global and broad implications for businesses.

The ongoing conflict in Ukraine remains a key concern, with possible escalation affecting regional stability and global markets. With many elections scheduled around the world, including critical US elections, the potential for political instability and policy change is high.

Tensions between the US and China continue to escalate, affecting trade policies and economic relations, which have a major impact on global markets. Changes in climate policy, especially in major economies, create uncertainty for businesses trying to keep pace with changing regulations and strategies.

Instability in the Middle East, particularly involving Iran and Israel, poses risks to global energy markets and regional security. Non-traditional forms of conflict, such as cyber-attacks and economic coercion, are on the rise, such as the Houthis disrupting global shipping lanes.

Traditionally, geopolitical risk management has involved an operational posture, focusing on immediate threats without considering long-term strategic implications. According to Simon Coote (pictured above), director of business risk consulting, North America at WTW, this approach may prove inadequate as it fails to provide an effective strategy to anticipate and mitigate potential strategic and financial impacts.

Coote said traditional methods are often muted and characterized by attempts to predict political events and influence people. These approaches lacked a comprehensive, connected risk assessment, which limited the ability of organizations to respond effectively to the changing global political environment.

The modern geopolitical environment requires a robust, reductionist approach. ERM facilitates this change. By integrating risk management into organizational planning and decision-making, ERM allows for a more flexible and robust strategy in the face of political uncertainty.

ERM enables organizations to identify, assess, understand, and manage all types of risk through an integrated, company-wide view. This approach is very important in managing the risk of the political environment because ERM allows organizations to look at potential threats holistically, ensuring a coordinated response across the organization rather than isolated efforts.

ERM and its benefits

Coote explained that applying ERM to national risks can bring significant benefits. ERM promotes a systematic, integrated approach to risk management, which is essential in avoiding disparate or inconsistent responses to threats. It ensures that all business functions are aligned and working toward common risk management goals, improving overall efficiency and effectiveness.

ERM frameworks typically include several components that can help organizations better manage political exposure. ERM encourages the identification of risks related to the political environment throughout the organization, not just in specialized departments such as government affairs. This broad-based identification is important because country risk can affect many aspects of a business, from supply chain behavior to regulatory compliance.

Once political risks are identified, ERM frameworks provide tools to quantify and prioritize them. This step is important in determining which risks pose the greatest risk to operations and should be given more attention and resources. ERM methods, such as risk matrices or impact/probability charts, help assess risk in a systematic way.

With risks identified and prioritized, ERM frameworks guide the development of effective mitigation strategies. This may involve diversifying the supply chain to avoid hotspots within the country, implementing new regulatory compliance measures, or creating contingency plans to respond quickly to political conflicts.

The 2024 Political Risk Survey includes information on the practical strategies organizations are using to address geopolitical risk challenges, many of which align with the core components of ERM. Organizations are involved in the planning process to anticipate potential political disruptions. This includes developing detailed forecasting scenarios and mitigating the effects of political instability and preparing for various outcomes.

Building cross-functional teams dedicated to monitoring and responding to political risks allows for a more coordinated and faster response to emerging threats. By 2024, many more respondents to the Political Risk Survey reported that they had new groups working together compared to the previous year. These teams should include members from different departments to bring different perspectives, improve the ability to assess and respond to political risks.

Organizations continuously monitor the country's development, analyze global political trends and their potential impact on business operations. Advanced analytics and intelligence services provide timely information on political developments, helping organizations stay ahead of potential risks and adjust ERM strategies accordingly.

Research shows that 60% of companies have improved their business processes to better manage political risk. This includes integrating political risk assessment into strategic planning and business risk management frameworks.

Coote stressed that moving away from a reactive approach to geopolitical risk is key to protecting interests and sustaining business growth. ERM methods provide ways to adapt to the operational environment, ensuring that organizations are better prepared to manage the uncertainties of the environment.

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