Geopolitical risks have always existed. However, increasing globalization means that problems can spread more quickly from one region of the world to another than in the past.
Despite the fact that both society and business profit in many ways from globalization, new risks have also emerged. The compression of time and distance means that countries are more rapidly, and more deeply, exposed to geopolitical risks and their effects than ever before.
Geopolitical risks are closely linked and overlap with environmental, technological, societal and economic risks. According to the Global Risks Report 2016, produced by the World Economic Forum, three of the five greatest global risks for the next 18 months are geopolitical:
- State collapse or crisis
- Interstate conflict
- Failure of national governance
The events surrounding Brexit and the Italian constitutional reform referendum clearly show the interdependence of the EU states in terms of both domestic and foreign policy. In particular, they demonstrate the knock-on effects of decisions made by sovereign states acting in their own national interests. It is conceivable that such decisions will have a lasting effect on the political, social and economic constitution of the EU and will make its decision-making processes with regard to major European political issues, such as the refugee crisis, that much more complex. In addition, there is the still unresolved crisis in the Eurozone and the associated political challenges within the immediate EU community.
The continuing conflict in Syria and in Iraq, and the looming threat of famine in Africa, will greatly increase the pressure on Europe in terms of immigration flows. This problem is aggravated by the continuing uncertainty surrounding the political future of Turkey and its position as regards the EU and North Atlantic Treaty Organization.
Furthermore, if the current unpredictability surrounding Russian foreign policy increases, it will have a destabilizing effect on the EU states in the east of the continent. The result of the US election and the new political “unknowns” have led to greater uncertainties that could have potentially global ramifications – both political and economic. Taking this into account, the role of China must be reevaluated.
Longer-term political and economic consequences will therefore be harder to predict. These include, among others, the effects on business models, sales markets and supply chains. One thing is, however, certain: the momentum of the geopolitical crisis will continue.
Nevertheless, there are various ways of dealing with these uncertainties: boards have numerous tools at their disposal to sustainably increase the resilience of the organization. Some businesses and their managements may view these changes as a challenge, but others will see an opportunity.
Five key questions for boards:
- Which risk management strategies have you already put in place?
- Could you increase the resilience of your business through digitalization?
- In a volatile environment, how are you using CSR to strengthen the business?
- How will you transform your corporate culture to ensure the sustainability of your business?