In today's global polycrisis, boards and executive teams alike must integrate a wider array of perspectives into their decision-making processes and align their businesses. A holistic approach that incorporates broader aspects of material risk is crucial for ensuring the resilience and sustainability of business operations. Here are key recommendations:
1. Expand Risk Assessments to Include Geopolitical Risks
Risk assessments must evolve to include geopolitical risks even if they seem outside of the normal scope of what would be considered. Traditional assessments may gloss over certain facets of political instability or international trade tensions, focusing more traditionally on sectoral, internal or regulatory issues.
But this scope can be too narrow in an interconnected world that is increasingly fragmenting. Consider the impact of the Russia-Ukraine War on sustainability strategies across Europe or the Houthi attacks on container ships in the Red Sea.
The impacts of these events have caused significant supply chain disruptions which amplified protectionism as well as near- and friendshoring. This may de-risk supply chains but creates new volatilities like inflation due to price increases of goods and services.
By widening the board’s risk aperture, directors can gain a more comprehensive understanding of potential impacts on investments and operations. This broader evaluation perspective is essential for anticipating and mitigating risks that could disrupt business continuity and resilience.
Importantly, the risk assessment must not stop at the organisation’s edge but should include the full lifecycle of key products or services, including suppliers. Geopolitical instability can significantly affect value chains and could jeopardise the viability of key suppliers, many of which are small and mid-sized enterprises in emerging markets, which may have invested less in their resilience. It’s vital to ensure that business operations, whether in urban centers or rural areas, are resilient to major disruptions. For example, supply chains in politically unstable regions might face interruptions that could jeopardise the financial stability of the entire value chain.
Polycrises do not just affect emerging markets, but even developed countries in new and sometimes unexpected ways - a 2016 study in the American Journal of Public Health has shown that when temperature rises, violent crime increases, emphasising the link between a changing climate and human behaviour. Proactively addressing these risks through strategic planning and diversification can help secure value chains against risks such as geopolitical and conflict threats.
2. Accelerate the shift towards sustainable investing
Current geopolitical situations, marked by unprecedented challenges, also reshape how investors assess risks and opportunities. Sustainability and the fight against climate change are reframed as a means of achieving immediate security goals, rather than just a long-term environmental objective.
The polycrisis has accelerated the shift towards sustainable investing, with global sustainable assets projected to exceed $53 trillion by 2025 and an annual investment of $6.9 trillion needed by 2030 to ensure infrastructure investment is on track to meet the world’s climate goals.
In this new economic paradigm, where ecological considerations are intrinsically linked to security, the companies aligned with the ecological transition and strategic autonomy may gain easier access to capital. Lenders are increasingly incorporating sustainability criteria into their lending decisions, reflecting both regulatory pressure and changing market dynamics.
This is why a forward-thinking approach is necessary and will enable businesses to remain agile and responsive to emerging threats, ensuring long-term stability and ultimately, increased sustainability.
3. Addressing Insurance Market Challenges
A comprehensive approach to risk management strengthens organisational resilience against both human-induced and natural threats. Just as wars may impact business strategy and continuity, the increasing frequency and severity of climate-related events, such as floods, rising sea levels, and wildfires, have rendered many areas uninsurable. Businesses must reassess their risk mitigation and investment strategies considering these developments given that some areas may soon be uninhabitable or subject to managed retreat.
Long-term scenario planning and strategic data modelling becomes indispensable here, allowing businesses to test and refine adaptation plans for various climate-related scenarios so that they can make proactive decisions. These include evaluating the long-term viability of protecting and insuring assets located in high-risk areas and exploring alternative risk transfer mechanisms to include appropriate insurance coverage, indemnification in contracts, reciprocal agreements within industry, or risk shifting via credit derivatives.
Conclusion
Boards and executive teams must adopt a holistic approach to integrating risk and sustainability to build greater organisational resilience in an uncertain and complex operating environment. By doing so, they can ensure that their businesses are prepared for a wide range of potential disruptions.
In Summary:
1. Integrating Geopolitical Perspectives
Broaden Evaluation Criteria
Securing Value Chains
Adaptation Planning
2. Addressing Issues
Reassess Risk Mitigation Strategies
Scenario Planning
Broaden Risk Perspectives
3. Enhancing Organisational Resilience
Insurance as a Tool
Robust Adaptation Measures
Reporting and Transparency
You can download the memo in pdf below:
About the Authors
Chloe Demrovsky is the President of Edgewood Insights, Executive in Residence at NYU SPS Center for Global Affairs, and Senior Advisor at The Sustainability Board
Fatima Hadj is a Member of the Net Zero Asset Management Advisory Board, and Chair of Securitised Products at PRI
Frederik Otto is the Founder and Executive Director of The Sustainability Board
About The Sustainability Board
The Sustainability Board (TSB) is an independent think tank and advisor, advancing sustainable leadership and corporate governance through research, thought leadership, executive education programmes, and an Institute for Sustainable Family Business.
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Keywords: Geopolitics, Sustainability, Leadership