In the world of risk management, geopolitical risk is often overlooked as a potential threat to businesses.
Geopolitical risk is the uncertainty associated with a country’s economic, social and political environment due to shifts in government policy or actions taken by powerful countries or groups that could hurt your business operations.
It can come from economic sanctions imposed by governments, changes in tariffs and duties, instability in foreign markets where your company operates or even threats posed by terrorist organisations. All businesses need to consider geopolitical risk when planning their risk management strategies.
According to McKinsey’s latest survey of global economic conditions, geopolitical risk is at the top of the CEOs Agenda. In the face of fragmentation and uncertainty, many business leaders are responding by intensifying their focus on resilience.
In 2024 and beyond, risk managers should continue to monitor and juggle a multitude of geopolitical conflicts, tensions and ticking time bombs.
Geopolitical risk must be taken into consideration when developing a risk management strategy because it can have a direct impact on both short-term operations and long-term goals.
For example, if there are sudden changes in the political landscape of a country where you do business, you may find yourself unable to continue operations due to sanctions or other restrictions imposed by the government.
The world is undoubtedly at a governance crossroads. This year, at least 64 countries will hold elections and millions of members of Gen Z will reach the eligible voting age, increasing the probability of significant shifts in the established world order, including long-standing regulatory norms.
We are also experiencing intense economic uncertainty, volatile oil prices, supply chain disruption, issues with resource availability, environmental concerns and increased cyber threats.
To minimise their firm’s exposure and ensure business resiliency in 2024 and beyond, risk managers must understand their current risk profile and exposures to the global risk landscape since geopolitical risk can impact operations, supply chain integrity, cybersecurity protections and insurance premiums.
Firms should consider integrating geopolitical risk monitoring into existing risk management and reporting structures. Stress testing risk management programmes against alternative geopolitical scenarios is also important.
In addition, consider developing and delivering training on geopolitical risk to educate risk management teams on what to look out for on the global risk horizon.
Identifying emerging risks can strengthen a company's ability to respond and entities must also ensure that any key investment decision includes geopolitical risk analysis.
For instance, due diligence around mergers and acquisitions should incorporate how world events can impact well-established operating plans and projected valuations.
Making geopolitical risk management a board-level issue is another critical agenda. 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 its effect.
Finally, it’s essential to create contingency plans for different types of geopolitical risks that could occur including ways to protect yourself financially if necessary, so that you’re prepared for whatever might come up down the line.
Practising risk professional
