Geopolitical risks arising from COVID-19 pandemic

Key risks that businesses in India should watch out for in 2021:

• Geopolitics of COVID-19: The geopolitics of COVID-19 will shape the global operating environment for companies in 2021. The country that wins the vaccine race is likely to get a boost in geopolitical standing and reputation. Some of the restrictions that could create or exacerbate geopolitical tensions between some countries include - imposing temporary export restrictions for critical medical supplies and pharmaceuticals as long as the pandemic persists, trade flows may be subject to additional tariffs as governments seek sources of revenue to finance COVID-19 relief efforts, cross-border movement of people will remain restricted in 2021, among others. Hence, the key business implications of such geopolitical risks are:
  • Pandemic uncertainty will require a renewed approach to building enterprise resilience. Amid this rising uncertainty, business planning and budgeting exercises will remain complicated during at least the next 12 to 18 months. Greater use of data science and modelling scenarios may enable companies to make more intelligent decisions in this uncertain environment.
  • COVID-19 reinforcement of nationalism creates reputational and compliance risks. Companies operating in strategic sectors such as pharmaceuticals are likely to continue to be pressured to serve domestic markets first. This situation creates new opportunities for companies, but also reputational and compliance risks if companies are perceived to be serving foreign markets ahead of domestic ones.
  • The pandemic underpins the need to re-evaluate supply chains. Even before the pandemic, a rise in protectionism in some markets had led companies to consider reshoring and nearshoring supply chains. Governments responded to COVID-19 by further restricting cross-border trade, exposing companies to the risk of long international supply chains, particularly when dependent on a single country or region. A diversification of supply chains with a mix of local, nearshore and global strategies is therefore likely to persist with respect to essential items such as food, medical equipment and pharmaceuticals.
  • Immigration and travel restrictions will impact talent decisions. International mobility will remain a challenge amid the varying restrictions on cross-border travel that many countries have in place. This will continue to affect business travel and the ability of companies to hire talent globally. The rise of remote work in some industries offers the opportunity to employ talent wherever they live, although this could come with complicated tax implications for the employer, employee or both.
• Neo-statism on the rise: COVID-19 has accelerated some on-going trends such as, a greater role for state intervention in many economies, adoption of more restrictive FDI rules related to national security, imposing export restrictions on critical medical supplies and personal protective equipment. In 2021, the world will enter a new era of neo-statism as COVID-19 continues to heat up the debate on self-reliance. India has also taken a big step to become self-reliant with its Atmanirbhar Bharat agenda, meant to support local manufacturing. Hence, this is causing many countries to launch efforts to reshore manufacturing or diversify supply chains. Thus, some of the key business implications include:
  • Trade and investment protections will affect supply chains and cross-border transactions. Companies will need to factor in greater scrutiny of FDI and exercise higher due diligence while considering cross-border transactions, especially mergers and acquisitions.
  • Industrial policies will skew market dynamics and growth opportunities within strategic sectors. The playing field in countries that pursue industrial policies is likely to become tilted in favor of domestic firms that benefit from greater state aid and potentially support to become ‘national champions’. However, a possible exception exists for globally recognized companies that have important know-how or IP, which may have opportunities for new alliances with local companies in some markets.
  • Potential politicization of companies creates reputational risks. Companies across the world may face increasing pressure to support their home governments’ domestic and foreign policies, and to uphold the values of their respective governments and societies in their foreign operations. This would elevate reputation and compliance risks for companies in both their home and foreign markets.

• Reinvigorated climate policy agendas: Global CO2 emissions are expected to drop by 4%–7% in 2020 due to COVID-19 lockdowns and sharp reductions in air travel. But climate change has not stopped, with 2016–20 set to be the warmest five-year period on record. Even though more citizens worldwide are concerned about climate change, regulatory responses are divergent. We expect that reinvigorated climate policy agendas will shape the global business environment in 2021 and beyond. Some of the steps in the right direction include – U.S. President Joe Biden planning to rejoin the Paris Agreement, EU launched a “Green Deal” codifying carbon neutrality by 2050, China’s recent carbon-neutrality pledge may raise the bar for other emerging markets, most notably India, among others. Hence, stakes will be high for the UN climate change conference COP26 (COP26 is also the first time that the Paris Agreement will be reviewed since 2015), scheduled for November 2021. Key business implications include:
  • An expanding patchwork of environmental policies will complicate regulatory compliance. There are close to 2,000 climate change laws and policies globally, compared with less than 200 just 20 years ago. Companies are confronted with a disharmonious regulatory landscape, at both the national and subnational levels. Divergent environmental standards will increasingly complicate cross-border supply chains, particularly if any major economies enact a carbon border tax. Different regulations affect product design standards as well, as companies could either voluntarily comply with the highest standards across all markets or differentiate the “greenness” of their product to match regulations in each market.
  • Climate policies could shift business models toward being based on long-term value. Carbon pricing will directly impact revenue streams for high-polluting industries such as oil and gas, mining and metals, chemicals, paper, and textiles and apparel. Some climate policies may upend business models. Companies in markets with more stringent environmental regulations may have a long-term competitive advantage from being first movers in renewable and sustainable business models, with respect to rooftop solar, vehicle fuel economy standards or CO2 emissions regulations, etc.
  • Corporate climate strategies can elevate or damage reputation. Environmental issues can threaten a company’s relationship with regulators, interest groups and the general public, affecting its social license to operate. Investors, consumers and employees are among the main stakeholders that are increasing pressure on companies to be more sustainable. Companies that do not act on these demands are increasingly at risk of losing customers and employees and facing higher costs on capital. For example, we have set targets to significantly reduce EY’s absolute emissions and will remove and offset more carbon than we emit, each year — making EY carbon negative in 2021 and net zero in 2025. Our ambition reflects the changing expectations of EY stakeholders, especially EY people, for building a better working world and creating long-term value.