6 minute read 9 Dec 2020
Mountain climber on the summit of a peak watching sunset

What elevated levels of political risk mean for business in 2021

Authors
Jon Shames

EY Global Geostrategic Business Group Leader

Helping businesses understand the implications of geopolitics. EY lifer (35 years!) Washington Capitals fan. Competitive tennis player and bad golfer. Arts and travel lover. Father, husband and son.

Mary Cline

EY Office of the Global Chairman, Director and Senior Policy Advisor

Intrepid business and political strategist. Passionate about connecting the dots between politics, economics and business. Committed to delivering insights on critical global challenges.

6 minute read 9 Dec 2020

In nature and scale, it promises to be a year like no other. Executives should prepare for 10 key risks, from COVID-19 geopolitics to social unrest.

In brief
  • The geopolitics of COVID-19 will shape many political risks around the world, including emerging market debt and new industrial policies.
  • The three leading geopolitical powers — the US, EU and China — will compete for greater self-reliance, particularly in digital technologies.
  • While 2021 may be challenging, companies can leverage the enhanced agility and resilience exhibited in response to the pandemic.

Global political risk hit a multi-year high in 2020 and is set to persist in the year ahead. A combination of the COVID-19 pandemic, trade tensions, climate change, and a range of other factors means the probability that the performance of companies, markets or economies will be impacted by political decisions, events or conditions is at post-World War II highs.

It should come as no surprise that the top political risk we’re watching in the year ahead is COVID-19, which has already prompted unprecedented government policy responses. Pandemics are inherently geopolitical, involving issues such as national security, global leadership, and international cooperation and competition. In many countries, COVID-19 has also exacerbated tensions around economic inequality, access to healthcare and social justice. The pandemic has become a political-risk event on a global scale in addition to being a public-health crisis. It influences all of the EY Geostrategic Business Group’s top 10 political risks for 2021:

  1. Geopolitics of COVID-19
  2. Disentangling US-China interdependence
  3. Toward European strategic autonomy
  4. Neo-statism on the rise
  5. Reinvigorated climate policy agendas
  6. Geopolitics of technology and data
  7. US policy realignment
  8. Tipping point for emerging market debt
  9. Geopolitical dynamics in the Indo-Pacific
  10. Another wave of social unrest 

COVID-19 will not only influence these discrete political risks in 2021 — it will also generate high levels of uncertainty about the policy environment that companies face. Governments are developing pandemic response policies rapidly and innovating on them in real time. The uncertainty associated with such a dynamic policy environment across virtually all countries around the world simultaneously will challenge companies’ strategy development and execution. It has therefore never been more important for companies to dynamically monitor political risks for potential opportunities and challenges in the year ahead.

Political risks to monitor in 2021

The geopolitics of COVID-19 will shape the global operating environment for companies in 2021. Vaccine nationalism, export controls, restrictions on cross-border people movement and the domestic political consequences of the pandemic will create political risks in markets around the world. The pandemic therefore underpins the need to re-evaluate supply chains, talent decisions and approaches to building enterprise resilience.

Great power politics – particularly among the US, EU and China – will also be at play in 2021. China and the US will continue to try to disentangle their strategic interdependence amid an acrimonious trade relationship, technological competition, rival industrial policies and friction in areas of Chinese sovereignty. Meanwhile, the EU will wield its trade, investment and industrial policies and its ability to shape global norms and standards to move toward strategic autonomy.

Companies will also face several significant trends in regulatory and policy changes. The world will enter an era of neo-statism as COVID-19 continues to heat up the debate on self-reliance, causing many countries to launch efforts to reshore manufacturing or diversify supply chains. In addition, ambitious climate policy agendas are likely, as part of COVID-19 stimulus plans. As more countries announce carbon neutrality targets, it will put pressure on the laggards and raise the stakes for the 2021 United Nations Climate Change Conference (COP26) in November. The geopolitics of technology and data will be shaped by the increasing divergence of technological standards, proliferation in data privacy and localization rules, digital taxation efforts and antitrust enforcement will shape geopolitical competition.

The incoming Biden administration will realign US policy in 2021. President-elect Biden has declared a focus on strengthening industrial and environmental policies, and volatility is also likely in immigration, anti-trust and trade policy. Companies should expect supply chains and production in strategic sectors to shift more to the US economy, while green industries will have expanded growth and investment opportunities.

The sustainability of emerging market debt will likely hit a tipping point in 2021. Across large emerging markets, funding vulnerabilities are expected to be highest in Brazil, India, Mexico and South Africa. Despite international efforts at debt relief, debt resolution is likely to be complicated by COVID-19 and geopolitical dynamics. Growth prospects in key markets could suffer even as companies’ financial and tax burdens may rise.

The Indo-Pacific is becoming the main arena of global competition in the 21st century, underscored by recent tensions between India and China and Australia and China, among others. Geopolitics in the Indo-Pacific will likely be even more volatile in 2021 as the major and middle powers become more assertive in shaping geopolitics while balancing between the US and China. Government interventions will affect growth and investment strategies in the region, while trade agreements and maritime policies could reconfigure supply chains.

Finally, conditions are ripe for another wave of social unrest. Five primary issues are likely to motivate protestors in 2021: pandemic restrictions, inequality, social justice, climate change and governance issues. Protests are likely to pose a risk of disruptions to business operations. In addition, heightened stakeholder expectations could magnify reputational risks for companies.

Geostrategic priorities to manage these risks

How should companies manage these political risks? While the specific geostrategy considerations differ for each, there are five overarching actions leaders should take to manage political risk in the year ahead:

1. Dynamically monitor your company’s political risk environment.

Include political risks as part of your company’s risk register or other risk identification processes and then dynamically monitor them throughout the year. This will be especially important in 2021, given the high levels of political and policy uncertainty generated by COVID-19. Two key risks that bear monitoring, as they are likely to evolve as the year progresses, are US policy realignment and the debt situation in a variety of emerging markets.

2. Assess how these political risks could affect your company.

Model the impact of potential political risk events across key business functions, such as revenue, supply chain, data and intellectual property. A regular assessment of how evolving US-China relations affects your company is prudent. And the geopolitics of technology and data also warrants close assessment, as some executives may be unaware how widespread the impact of this risk could be on their business.

3. Incorporate political risk analysis into strategic decisions.

Use scenario analysis about political risks to capture the uncertainty associated with their trajectory in the coming years and inform strategic decisions — including market entry and exit, M&A, and other transactions. This is particularly important in the current environment, in which COVID-19 is acting as a great accelerator for geopolitical trends. For instance, how geopolitical dynamics in the Indo-Pacific and the EU’s pursuit of strategic autonomy play out in 2021 is likely to affect the global business environment for years to come.

4. Communicate and coordinate political risk management across the company.

As revealed in our Geostrategy in Practice 2020 survey of global executives, too often political risk identification, assessment, and management is siloed within various business functions. Companies should leverage the cross-functional teams and lessons learned from COVID-19 crisis management to enable better communication on the political risks stemming from the pandemic. Such coordination should also help foster greater agility and flexibility in company operations — another capability sharpened by the pandemic.

5. Leverage stakeholder relationships to manage political risk.

Public opinion and political intervention will continue to target companies on a variety of issues. But your company’s relationships with policymakers, employees, customers, non-governmental organizations (NGOs), community groups, and other stakeholders can be leveraged to manage political risks — often turning potential challenges into opportunities. This is particularly true for shifting climate policies, neo-statism shaping domestic economies, and the rise in social unrest in a variety of markets. Companies should proactively engage stakeholders on these issues.

Summary

While 2020 was the year COVID-19 took the world by storm, the pandemic’s medium- to long-term effects on the geopolitical environment will begin to crystalize in 2021. Agility in decision-making, operations and strategy will be crucial for managing the fallout from COVID-19 and associated political risks in the year ahead. Companies need a geostrategy — the holistic and cross-functional integration of political risk management into broader risk management, strategy and governance.

About this article

Authors
Jon Shames

EY Global Geostrategic Business Group Leader

Helping businesses understand the implications of geopolitics. EY lifer (35 years!) Washington Capitals fan. Competitive tennis player and bad golfer. Arts and travel lover. Father, husband and son.

Mary Cline

EY Office of the Global Chairman, Director and Senior Policy Advisor

Intrepid business and political strategist. Passionate about connecting the dots between politics, economics and business. Committed to delivering insights on critical global challenges.