Managing Geopolitical Risk in today's environment

Geopolitical risks have become a major concern for companies, particularly those with global operations. Geopolitical risks can be numerous and varied, ranging from political instability, economic sanctions, and natural disasters to cyber attacks and pandemics. There could be a kitchen sink list of these risks, making it difficult for companies to prioritize and manage them effectively. Moreover, there is often a lack of consensus within the organization on how to approach these risks, leading to delays in decision-making and risk mitigation.

It's important to prioritize these risks, and potentially can be done into two buckets: elevated risk and increasing risk in the future. Elevated risks are those that already exist and have the potential to cause significant harm to a company's operations, reputation, and financials. For example, a company operating in a politically unstable country with a high risk of terrorism faces an elevated risk of an attack on its facilities or employees. Similarly, a company that heavily relies on a specific commodity, such as oil or rare earth minerals, faces elevated risks from price fluctuations or supply chain disruptions.

Increasing risks are those that are expected to arise in the future due to geopolitical events that have not yet occurred. For example, a company that operates in a country that is facing economic sanctions may face increasing risks if the sanctions escalate or if the country responds with retaliatory measures. Similarly, a company that relies on a specific geographic region for its supply chain may face increasing risks due to the impact of climate change, such as extreme weather events or rising sea levels.

One of the challenges of managing geopolitical risks is integrating them with business decisions. Doing so would mean severe time and cost implications for companies, which is why many organizations struggle to address these risks adequately. Nonetheless, it is crucial for companies to monitor geopolitical risks and develop a proactive approach to manage them.

There is no one-size-fits-all response to geopolitical shocks. Every company must assess its risks based on its unique circumstances, which may include its industry, size, geographic location, and operations. Companies should develop a risk management framework that includes risk identification, risk assessment, risk mitigation, and risk monitoring. This framework should be integrated into the company's decision-making process, and the relevant stakeholders, such as the board of directors and senior management, should be involved in the process.

To integrate geopolitical risks into the decision-making process, companies should develop a risk appetite statement that outlines the level of risk they are willing to take. This statement should be aligned with the company's overall strategy and objectives. Companies should also conduct regular risk assessments to identify and prioritize potential risks. In addition, companies can use scenario planning to assess the potential impact of geopolitical risks on their operations and develop contingency plans to respond to geopolitical shocks, which may include diversifying their supply chain, adjusting their operations, or seeking legal support.
While there is no one-size-fits-all approach to managing geopolitical risks, managing geopolitical risks requires a proactive approach that includes indicators, scenario planning, and contingency planning. By establishing a risk monitoring framework and using these tools, companies can identify and mitigate potential risks before they escalate, and ensure that they are prepared for any eventualities.