Building geopolitical resilience: the focus of new Airmic report

Published on Mon, 27/02/2023 - 21:25

Airmic and the Chartered Institute of Internal Auditors (CIIA) have worked together to issue a study into building resilience through collaboration in a challenging world.

The new research report is titled ‘Navigating geopolitical risk: Building resilience demands collaboration in a challenging world’, and is available to read in full on the Airmic website.

The report aims to demonstrate why risk and internal audit professionals need to relook at the way they collaborate, as their organisations build resilience amid a maelstrom of geopolitical risks.

The February 2023 release date of the report coincides with the one-year anniversary of the launch of Russia’s invasion of Ukraine.

The rise of geopolitical risk perceptions has been sudden. Geopolitics did not feature anywhere in the top 10 risk rankings for 2020 or 2021 in Airmic’s annual surveys of risk professionals, but rose to the second-place spot in 2022, behind only cyber threats.

“We are at an inflection point in geopolitics,” says the Airmic-CIIA report’s introduction, co-authored by Hoe-Yeong Loke, Airmic’s head of research, and Gavin Hayes, head of policy and external affairs, CIIA.

“The spectre of war has returned to Europe. Decoupling between the economies of the US and China, the world’s two largest economic blocs, is reversing globalisation as we have known it. The International Monetary Fund’s World Uncertainty Index readings have hit elevated levels in recent times,” the report observes.

The main body of the report is split into three sections: Identifying geopolitical risks; What’s different today in geopolitics; and Risk and internal audit professionals in collaboration. These sections are followed by the conclusion and an appendix of supporting case studies.

Seven ‘key takeaways’ towards building resilience to the geopolitical environment are offered.

The first of these is to be agile in responding to the challenges of ‘once-in-a-generation events’ occurring with regular frequency. This encompasses not just Vladimir Putin’s invasion of Ukraine but the Covid-19 pandemic – as the report notes that the scope of geopolitics includes any events, domestically or internationally, that influence foreign relations.

With Russia’s invasion of Ukraine happening on the back of the pandemic, there is the danger of organisations making long lists of all the things that could go possibly wrong in geopolitics. But geopolitics is not a game of predicting the future,” says the report.

“Some political observers have been chided for advising organisations that Russia had no rationale to invade Ukraine, but geopolitics is predicated on human behaviour – of leaders and citizens – which does not always go to script.

“All of this calls for organisations to be agile in responding to geopolitical crises and to be in a permanent state of readiness that recognises the nature of the crises we find ourselves in today,” the paper adds.

Secondly, scenario planning and horizon scanning are noted as the keys to preparing for geopolitical risk. This is led by a warning that the tail should not wag the dog: organisations should resist being led by events, but “retain agility for when crises may strike”.

The paper continues: “But agility is not a licence for them to improvise their response on the fly. They have to constantly challenge, stress test and update all of their baseline assumptions about the likelihood and impact of the risks they face.

“Meanwhile, horizon scanning should focus on assessing the velocity, impacts and likelihood of major trends. A key output from this process would be a shortlist of risk scenarios captured in an emerging risk register, which is used to stress test the business planning cycle and development of future strategy,” the report says.

Thirdly, stereotypical profiles of risk and internal audit professionals need to be reviewed to ensure they will meet future needs, according to the Airmic CIIA paper. Risk management and internal audit have distinct responsibilities, the report argues, but they must work together and at the same pace.

“Synchronicity is critical to the successful use of the Three Lines Model as adopted by the Institute of Internal Auditors (IIA), to achieve effective alignment, communication, coordination and collaboration. Professional education needs to balance soft and technical skills. The talent pool for the professions needs to be adequate for the needs of the future,” said the report.

Next, the paper advises taking a long-term view of geopolitics, which might mean five years for Financial Reporting Council (FRC) guidance, or 30 years in certain contexts for the energy and infrastructure sectors.

“Nevertheless, organisations need to bear in the mind the geopolitically-related risks relevant to them and their supply chains, and not only in the short- to medium-term – reliable countries may no longer be friendly ones further down the road,” the paper warns.

This is followed by a call to be true to the purpose of an organisation, noting that after Russia’s invasion of Ukraine, Western organisations were forced to make decisions as to whether to withdraw their operations from Russia – in some cases, after decades of investment within the country.

“It is imperative for organisations to be clear about their purpose, risk appetite and strategy, while also being agile in their responses to crises,” the report says.

Next comes a warning to focus not just on geopolitical risk, but also to recognise geopolitical opportunities.

“Geopolitics is not just all about downside risk. Organisations must have the agility to seize upside opportunity, to cushion the impact of geopolitical crises, and enhance upside growth potential where possible,” the report advises.

Last among the key takeaways, the strategic advisory role of risk managers and internal auditors to the executive level is emphasised.

“Risk and internal audit need to operate as strategic enablers, and by providing executive decision makers in their organisations with information that is appropriate and timely as they make difficult decisions in a challenging environment,” the paper says.

Geopolitical uncertainty is here to stay and will contribute to a more risky and volatile business environment for the years ahead, noted the report’s conclusion.

“Therefore, geopolitical risk should matter to both risk and internal audit professionals alike. They need to relook the way they collaborate, as their organisations build resilience amid the maelstrom of geopolitical risks,” the authors add.

To find out about the report’s conclusions, and to read it in full, please click here.