Today’s events in Ukraine serve to make a wider point. The US unipolar moment that followed the end of the Cold War is, if not fully over, coming under increasing challenge. Western political analysts have described a transition to a ‘more competitive’ global geopolitical environment over the next two decades. This will turn out to be masterly understatement if a wider invasion of Ukraine takes place.
Given the global significance of their economic relationship, deteriorating US-China relations are also geopolitically key, with trade wars, sanctions, financial and other geo-economic measures, driven by disputes about Hong Kong, Taiwan and maritime sovereignty in the South and East China Seas.
In the Middle East, new tensions drive the kind of volatility long associated with the region. The politics and fiscal arrangements of the Eurozone remain unsettled, while concern has risen in recent years about domestic politics in the US. Emerging markets elsewhere in Asia, Africa and Latin America remain characterised by political and socio-economic challenges.
This environment cut across the ESG landscape too, complicating supplies of critical raw materials for new green technologies, diminishing prospects for multilateral emissions reduction agreements and exacerbating often existing geopolitical friction driven by access to scarce resources such as water.
Company boards and management teams often pay scant attention to geopolitical issues, at best drawing on occasional briefing or seeing geopolitics through the prism of a single impact such as supply chain or cyber disruption. But as geopolitical conditions become more uncertain, impacts are widening, undermining macroeconomic and investment conditions, and often generating second and third order strategic, financial, operational, legal and reputational risk impacts – even for firms not in geopolitically sensitive industry sectors.
How can company boards ensure their organisation remains resilient amidst increasingly turbulent geopolitical conditions? Who in the organisation should have the leadership and oversight responsibilities in this area? What internal capabilities do businesses need to anticipate the wider impacts of geopolitical instability, including on ESG deliberations, and how should these be deployed?
Comprehensive guidance for boards that answers these questions has not existed before. But in a recent paper for KPMG’s Board Leadership Centre, we describe the main elements of our new guidance, entitled The Extra G – ESG2, setting out for the first time what an effective Geopolitical Risk Framework looks like.
The ESG2 framework sets out how boards can make better use of their risk oversight committees and risk functions to enhance geopolitical and related ESG risk oversight. It highlights ways to facilitate proactive and integrated consideration of risks and impacts, driven by the kind of specialised analytical capabilities needed to identify, monitor and anticipate geopolitical developments, that in turn feed into all relevant areas of strategy and risk activity.
In essence, there are a number of key things any board (or their risk oversight committee) should be doing, including ensuring that:
their oversight and challenge of management’s approach to principal and emerging risk issues have a geopolitical dimension – including focusing on second and third order impacts
its members amongst them possess the necessary specialist skills to understand the geopolitical dynamics – or that they have access to these skills externally
their organisation’s risk appetite is regularly reviewed and updated in the light of current or potential geopolitical dimensions
they ensure their risk information they receive takes into account geopolitical matters of concern to the group
their risk function and risk management activities consider geopolitical matters and their impact on the business.
These key areas of focus for a board are discussed in detail in the guidance, which is in turn supported by examples of emerging corporate practice in this area and links to a self-assessment tool (GABI-GEO). The self-assessment tool allows directors, management teams, heads of risk and other key stakeholders in firms to identify the practical actions that will enhance geopolitical risk approaches.
As the wider economic and corporate consequences of events in Ukraine start to be felt, regulatory and investor concern over the corporate impacts of geopolitical disruption will increase further. Adapting governance and risk approaches will become correspondingly more important. Details on how organisations can do so are also available at: www.riskcoalition.org.uk/geopolitical.
Derek Leatherdale is founder of GRI Strategies and an Associate Director of the Risk Coalition. Hanif Barma is Co-founder of the Risk Coalition and partner at Board Alchemy.