Why geopolitical risk management is a strategic opportunity

Many executives don’t pay enough attention to political risk management. This provides companies an opportunity to outperform competitors.

In brief

• How are political risks affecting your company’s M&A, market entry strategies and international footprint?
• Did your company outperform competitors in terms of identifying, evaluating and responding to emerging risks in real time during the COVID-19 pandemic?
• Is your organization effectively managing the potential impact of changing geopolitical and regulatory risks?

The latest EY Global Capital Confidence Barometer (pdf) explores how executives are reframing corporate strategies and planning to use M&A to accelerate growth in the wake of the COVID-19 crisis. This survey of more than 2,400 C-suite executives globally also reveals the crucial role that geopolitical risks are playing in shaping business strategy. More than three quarters (81%) of executives said that geopolitical challenges are forcing their company to alter strategic investments. And almost two-thirds of these executives said they are delaying a planned investment until they get further clarification on geopolitical risks. This wait-and-see attitude provides a strategic opportunity for companies that proactively manage political risks because they will be able to move faster and be more resilient than their competitors.

Political risks will affect strategic decisions

It isn’t only geopolitical challenges that are affecting companies strategic investments — executives also expect a variety of country-level policies to have a big impact on strategies and transactions in the year ahead. As explored in the 2021 Geostrategic Outlook, the COVID-19 crisis is pushing many governments to boost self-reliance in strategic sectors, leading to policy initiatives to reshore manufacturing or diversify supply chains.

Global executives recognize the potential effect that such industrial policies will have, with 71% expecting implications for their company’s international footprint and 69% expecting impacts on market entry strategies. And about two-thirds of C-suites point to industrial policy influencing M&A — both cross-border and domestic. Relatedly, responding to regulatory or tariff changes is expected to be one of the primary strategic drivers of acquisitions in 2021.

Political risk is shaping the external risk environment

It is no wonder C-suites assume political risks will shape their strategic decisions. Political risk affects all the key external risks that companies face in the EY Capital Confidence Barometer survey (see graph below). The geopolitics of COVID-19 will generate political risks in markets around the world, while government stimulus policies will have consequences for economic performance. In addition, reinvigorated climate policy agendas will shape the global business environment in 2021 and beyond. And technology has become central to geopolitical competition — a trend that has been accelerated by COVID-19 as more aspects of work and life have moved online. Finally, great power politics — particularly among the US, EU and China — will drive greater regionalization of the global economy and geopolitical tensions between these major markets.

More C-suite attention is needed on political risk

Despite the significant effects that C-suites expect political risk to have on their companies strategic decisions, only a minority of executives (14%) said that managing the potential impact of changing geopolitical and regulatory risks is a main strategic consideration today. Executives deprioritizing these issues is worrying in the current environment of heightened global political risk levels — but also presents a great opportunity for companies to use proactive geopolitical risk management to gain competitive advantage.

This lack of attention to political risk is part of a bigger area of strategic opportunity: improving companies identification of and response to emerging risks. About half of C-suite executives said they have performed the same as their competitors in terms of identifying, evaluating and responding to emerging risks in real time during the COVID-19 pandemic. Only about one-third believed their company has over-performed in this area. Despite this, less than half of executives plan to increase investment in this area. It appears risk management has been more about surviving than thriving.

Companies that implement a geostrategy will have a competitive edge

The 45% of companies that do plan to invest in identifying, evaluating and responding to emerging risks have a clear opportunity to outperform their competition in the years ahead. A crucial part of this should be investing to improve political risk management. This requires actively monitoring the political risk environment, assessing the impact of potential political risks across company functions and managing political risk as part of a broader enterprise risk management (ERM) process. Doing so will enable companies to better account for political risks when pursuing M&A and making other strategic decisions, giving them a crucial advantage vis-à-vis competitors.

Conclusion

In the latest EY Global Capital Confidence Barometer, global executives recognized that geopolitical risks are impacting their strategic investments. But only a minority of C-suites see political risk management as a strategic priority. This creates a competitive opportunity for companies that adopt a geostrategy.