Outsmarting geopolitical risks with enterprise risk management

Outsmarting geopolitical risks with enterprise risk management | Insurance Business America

Risk Management News

Outsmarting geopolitical risks with enterprise risk management

Moving companies away from a reactive stance and towards proactive strategies

Risk Management News

By
Kenneth Araullo

The frequency and severity of geopolitical risks are increasing. These risks, encompassing political instability, economic sanctions, and uncertainties related to policy, regulation, and physical threats, can significantly impact a company’s operations and profitability.

Managing geopolitical risks today requires more comprehensive, forward-looking, and sophisticated methods; enterprise risk management (ERM) offers a robust framework for addressing 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 addressing these challenges. The report highlights the prominent political risks of 2024, underscoring their global and wide-ranging implications for businesses.

The ongoing conflict in Ukraine remains a primary concern, with potential escalations affecting regional stability and global markets. With numerous elections scheduled globally, including critical US elections, the potential for political instability and policy shifts is high.

Tensions between the US and China continue to escalate, affecting trade policies and economic relations, with significant implications for the global market. Fluctuations in climate policy, especially in major economies, create uncertainty for businesses trying to align with regulations and transition 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 Houthis disrupting global shipping routes.

Traditionally, managing geopolitical risks has involved a reactive stance, focusing on immediate threats without considering long-term strategic implications. According to Simon Coote (pictured above), director of enterprise risk consulting, North America at WTW, this method is likely to prove inadequate as it fails to provide a proactive strategy for anticipating and mitigating potential strategic and financial impacts.

Coote said that traditional approaches were often siloed and characterised by efforts to predict political events and lobbying. These methods lacked a comprehensive, connected risk assessment, limiting organisations’ ability to respond effectively to the dynamic nature of global politics.

The modern geopolitical environment demands a more robust, mitigation-focused approach. ERM facilitates this shift. By integrating risk management into organisational planning and decision-making, ERM allows for a more adaptive and resilient strategy in the face of geopolitical uncertainties.

ERM enables organisations to identify, assess, understand, and manage all types of risks from an integrated, company-wide perspective. This approach is particularly relevant to managing geopolitical risks because ERM allows organisations to view potential threats holistically, ensuring a coordinated response across the entire organisation rather than isolated efforts in silos.

ERM and its benefits

Coote explained that applying ERM to geopolitical risks can deliver significant benefits. ERM promotes a systematic, unified approach to risk management, crucial to avoiding fragmented or inconsistent responses to threats. It ensures all business functions are aligned and working towards the same risk management goals, enhancing overall efficiency and effectiveness.

ERM frameworks typically comprise several components that can help organisations better manage geopolitical exposures. ERM encourages identifying geopolitical risks across the entire organisation, not just within specialised departments like government affairs. This broad-based identification is crucial because geopolitical risks can affect many aspects of the business, from supply chain logistics to regulatory compliance.

Once political risks are identified, ERM frameworks provide tools for quantifying and prioritising them. This step is vital in determining which risks pose the greatest threat to operations and should receive the most attention and resources. ERM methodologies, such as risk matrices or impact/probability charts, help assess risks systematically.

With risks identified and prioritised, ERM frameworks guide the development of proactive mitigation strategies. This might involve diversifying supply chains to avoid geopolitical hotspots, implementing compliance measures to adhere to new regulations, or developing contingency plans for rapid response to political upheavals.

The 2024 Political Risk Survey includes insights on practical tactics organisations are using to navigate geopolitical risk challenges, many of which align with ERM core components. Organisations are engaging in scenario planning to anticipate potential political disruptions. This involves developing detailed scenarios to predict and mitigate the impacts of political instability and prepare for various outcomes.

Forming cross-functional teams dedicated to monitoring and responding to political risks allows for a more coordinated and agile response to emerging threats. In 2024, many more respondents to the Political Risk Survey reported having new cross-functional teams compared to the previous year. These teams should include members from different departments to bring diverse perspectives, enhancing the ability to assess and respond to political risks.

Organisations are proactively monitoring geopolitical developments, analysing global political trends and their potential impact on business operations. Advanced analytics and intelligence services provide timely insights into political developments, helping organisations stay ahead of potential risks and adjust ERM strategies accordingly.