Getting ahead of escalating geopolitical risks that could threaten the future of your organization can feel challenging. Applying enterprise risk management can help you outsmart global uncertainties.
The frequency and severity of geopolitical risks are on the rise. These risks, which range from political instability and economic sanctions to uncertainties related to policy, regulation and physical risks, can significantly impact your company's operations and profitability. Managing geopolitical risks today demands increasingly comprehensive, forward-looking and sophisticated methods; enterprise risk management (ERM) offers a robust framework you can use to deliver them.
To help you better address geopolitical risk, this insight combines findings from our Political Risk Survey 2024 with perspectives from our geopolitical and ERM specialists. Below, we explore:
- Key 2024 geopolitical risks
- Why your organization's approach to geopolitical risk needs to change
- Benefits of applying ERM to geopolitical risks
- Core components of ERM
- How organizations are managing geopolitical risk in 2024.
Key 2024 geopolitical risks
Our latest annual Political Risk Survey, carried out by Oxford Analytica on behalf of WTW, offers a comprehensive overview of the current state of global political risks and how companies are addressing these challenges. The report details the prominent political risks of 2024, pointing to the global and wide-ranging implications for businesses:
- Ukraine complications and escalations: The ongoing conflict in Ukraine remains a primary concern, with potential escalations affecting regional stability and global markets.
- Year of elections: With numerous elections scheduled globally, including critical US elections, the potential for political instability and policy shifts is high.
- US-China rivalry: Tensions between the US and China continue to escalate, affecting trade policies and economic relations, with significant implications and impact on the global market.
- Uncertain climate policy: Fluctuations in climate policy, especially in major economies, are creating uncertainty for businesses trying to align with regulations and transition strategies.
- Middle East escalation: Instability in the Middle East, particularly involving Iran and Israel, poses risks to global energy markets and regional security.
- Gray zone aggression: Non-traditional forms of conflict, such as cyber-attacks and economic coercion, are on the rise, such as Houthis disrupting global shipping routes.
Why your organization's approach to geopolitical risk needs to change
Traditionally, managing geopolitical risks has involved a reactive stance, which focused on immediate threats without considering long-term strategic implications. Today, this method is likely to prove inadequate as it fails to provide a proactive strategy for anticipating and mitigating potential strategic and financial impacts.
Traditional geopolitical risk management approaches were often siloed and characterized by efforts to predict political events (such as how the US-China relationship would evolve, or whether Russia would invade Ukraine) and lobbying. These methods lacked any comprehensive, connected risk assessment, limiting organizations' 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 the very fabric of organizational planning and decision-making, ERM allows for a more adaptive and resilient strategy in the face of geopolitical uncertainties.
Benefits of applying ERM to geopolitical risk
As a strategic business discipline, ERM enables you to identify, assess, understand and manage all types of risks from an integrated, company-wide perspective. It's particularly relevant to managing geopolitical risks because ERM allows your organization to view potential threats holistically, ensuring your response is coordinated across your entire organization rather than isolated in silos.
Applying ERM to geopolitical risks can deliver significant benefits. It promotes a systematic, unified approach to risk management, crucial to avoiding fragmented or inconsistent responses to threats. ERM helps ensure all business functions are aligned and working towards the same risk management goals, enhancing overall efficiency and effectiveness.
Core components of ERM applied to geopolitical risk
ERM frameworks typically comprise a number of components that can help you get a better handle on the geopolitical exposures facing the business:
Risk identification — ERM encourages you to identify geopolitical risks across the entire organization, not just within specialized departments like government affairs. This broad-based identification process is crucial because geopolitical risks can affect many aspects of the business, from supply chain logistics to regulatory compliance. Only by recognizing these risks early can you hope to effectively manage and mitigate them.
Risk assessment and prioritization — Once you've identified political risks, ERM frameworks provide the tools for quantifying and prioritizing them. This step is vital in determining which risks pose the greatest threat to your operations, so should therefore receive the most attention and resources. ERM methodologies, such as risk matrices or impact/probability charts, help you assess risks systematically, ensuring your responses are calibrated according to the severity and likelihood of potential threats.
Risk mitigation strategies — With your risks identified and prioritized, ERM frameworks guide how you develop 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. By embedding these strategies into your organizational processes, ERM not only helps manage current risks but also prepares your organization to face future challenges more effectively.
How organizations are managing geopolitical risk in 2024
Our 2024 Political Risk Survey includes insight on some of the practical tactics organizations are using to navigate geopolitical risk challenges. Many of these align with ERM core components, including:
- Engaging in scenario planning to anticipate potential political disruptions. This involves developing detailed scenarios to help 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. This 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. Your cross-functional team should include members from different departments who can bring diverse perspectives to the table, enhancing your company's ability to assess and respond to political risks.
- Proactively monitoring geopolitical developments, analyzing global political trends and their potential impact on business operations. Using advanced analytics and intelligence services can give you timely insights into political developments. Proactive monitoring helps you stay ahead of potential risks and adjust your ERM strategies accordingly.
- Enhancing your corporate processes, integrating political risk assessment into your strategic planning and enterprise risk management frameworks. The survey indicates how 60% of companies have enhanced their corporate processes (see section five of the report, Managing political risk) to better manage political risks.
Moving away from being reactive in the face of geopolitical risk will be central to safeguarding your interests and sustaining business growth. ERM approaches provide tried and tested methods to pivot to a proactive stance.
For support to enhance your organization's resilience against geopolitical uncertainties using ERM, get in touch with our specialists.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.