Global multinational risk management, insurance brokerage and advisory company Willis Towers Watson and global analysis and advisory firm Oxford Analytica conducted interviews with executives at a cross-sector group of leading global firms with a strong track record in political risk management, to discover how leading companies are responding to recent tumultuous political events. The findings showed that many had been blindsided by recent political events. “Political risk in the US and Europe has been a big surprise and, in many ways, we were not prepared for it,” said one executive. Nearly nine in 10 of the panellists reported that geopolitical risks had risen over the past five years, and six in 10 reported having experienced a financial loss from political risk.
The report also found that the most frequently mentioned geopolitical threat was US sanctions against Russia – a regional concern elevated to a global priority based on the possible implications for the US-Russia relationship. Meanwhile, in a dramatic sign of the changing times, the US was named most frequently as the country or region where political risk is rising the most, ahead of the Middle East, Latin America, Venezuela, Sub-Saharan Africa and Russia. The standoff between Saudi Araba, other gulf states and Qatar, which one panellist from the energy sector termed an ‘Arab Cold War’, was frequently named as a possible source of near-term political risk losses. Elsewhere, the inclusion of cyber-attacks – not a traditional type of political risk – was identified as one of the key risks listed in the study, highlighting the increasing trend for cyber-attacks to have political origins.
But perhaps the most profound change to the risk landscape was what might be termed the ‘end of the globalisation consensus’. As one panellist put it, ‘there is major uncertainty among the major industrial territories and how they will interact with each other’. International allegiances are shifting rapidly and global trade agreements are increasingly under threat. Associated risks include protectionism and unfavourable regulatory changes.
The survey found that companies are taking active steps to mitigate political risk as they understand it, and that investors are increasingly holding management accountable for losses experienced due to political risk exposure. Importantly, growing investor pressure to account for political risk exposure is likely to mean that companies will increasingly be compelled to benchmark such capabilities against their peers.
The study found that leading global companies are responding by developing new risk mitigation strategies. For instance, one company has created a central risk forum that addresses macro and interconnected threats. Another noted that the risk management function was no longer simply a source of intelligence and advice but now played an active role in devising solutions and reported to the board of directors. Another panellist noted that the executive board had now been made directly responsible for political risk.
Technology is an increasingly important element of these companies’ risk mitigation strategy, with another common theme being a growing pressure, both from internal and external stakeholders, for companies to find robust ways to quantify political risk. Many of the panellists complained, however, that even accurate and timely analysis of political risk is often not acted on in the short term; a major challenge remains improving not just the accuracy of political risk reporting, but also its persuasiveness.
Paul Davidson, chairman and CEO of Willis Towers Watson Financial Solutions Division, commented on the report: “Today’s political unstable business environment is causing many of our clients to reassess their risk mitigation strategies. Today’s report highlights the current concerns facing today’s businesses and the increasing importance of the risk culture of an organisation in navigating through geopolitical and emerging risk. It is essential that businesses fully understand the importance of risk management and mitigation strategies at board level.”
Simon Coote, deputy director at Oxford Analytica, said: “Political risk has always existed but, particularly in Europe and the US, political change has historically been relatively predictable and transparent. This certainty has evaporated, resulting in a new and more difficult to navigate global business environment. Companies have been caught off guard and, given the financial impact, investors are increasingly concerned about financial loss due to political risk. Leading corporations are responding and beginning the process of strengthening the capabilities of relevant internal risk management functions.”