Meanwhile, decoupling between the economies of the US and China, the world’s two largest economic blocs, is reversing globalisation as we have known it.
It is not all bad news though. The UK reached a crucial deal with the European Union on 27 February on post-Brexit trading arrangements for Northern Ireland – which the UK Government called the “Windsor Framework” – in what promises to be the best resolution yet to the long-running saga over the Northern Ireland Protocol.
Even that brings a certain dose of peril for Rishi Sunak’s four-month-old government, as the prime minister faces up to rebels within his party battling for a more unyielding version of Brexit.
But such is the tumultuous nature of geopolitical risk, which often lies outside the bounds of what businesses can control. This transforms an operational challenge into a strategic one.
Airmic, in partnership with the Chartered Institute of Internal Auditors, launched a report on ‘Navigating Geopolitical Risk’ at the House of Lords in the week which marked the one-year anniversary of the invasion of Ukraine. The joint effort between the two associations mirrored the greater collaboration needed between risk and internal audit professionals, which the report called for to build resilience amid the heightened uncertainty and volatility of the new geopolitical era.
Risk management and internal audit have distinct responsibilities, as the Three Lines Model strenuously highlights. But unless they work together and do so at the same pace, one of the key purposes of the Three Lines Model – of protecting and creating long-term value for organisations – would remain elusive.
Large organisations may be adept at addressing geopolitical risk. They have the benefit of having specialised teams focused on specific risks, though that is where collaboration becomes even more critical, because of the dangers of silos and blind spots.
Risk and internal audit professionals can work together by identifying geopolitical risks on the horizon, mapping their potential impact on their organisation and then running crisis simulation programmes to test the organisation’s responses.
Collaboration should not end there. When it comes to issues relating to security and energy supply, for instance, risk and internal audit professionals should also work with governments and regulators where possible. They need to recognise that government policy will dictate or influence quite significantly some of the potential outcomes from these issues.
The availability of information on geopolitics is not a problem today. It does still take a certain specialism to follow developments in this space and get to grips with them, but the key principle is being able to tie geopolitical risk back to the organisation’s business.
While the era of free-wheeling globalisation seems to be drawing to a close, addressing those challenges should not come as shock therapy to risk professionals. Geopolitical risk is something we have been living with for a long time. Governments often change, whether as a result of elections or revolutions. That in turn impacts foreign policy and economic policy. Industries also evolve all the time, whether the outcome of government policies or boom-and-bust economic cycles.
The tools, techniques and skills for us to tackle geopolitical risk have been around for some time. We may need to adapt these for their contexts and to the present age, rather than to reinvent the wheel.
Agility is ever more important during the permacrisis organisations find themselves in, where they lurch from one unprecedented event to another – events such as the pandemic or the invasion of Ukraine which were thought of as ‘once-in-a-generation’. We need to ensure the agility of risk assessments and assurance, and that the risk management and internal audit functions have spare capacity, so organisations can react to events more nimbly and flexibly to meet the volatile risk universe of the 2020s.
By Hoe-Yeong Loke, head of research, Airmic, and David Benyon, editor, Airmic News
How Secure Is Your Supply Chain?
In an ever more complex world with challenges ranging from geopolitical conflict to severe weather events and from labour and energy shortages to pandemics, how should board members maintain appropriate oversight of an organisation’s mission critical supply chain? Following the publication of AIRMIC’s 2022 guide on “Supply Chains: Keep up with the pace”, a panel of experts from Herbert Smith Freehills and McGill and Partners will examine this highly topical issue as well as considering the insurance industry’s response to the growing challenge of supply chain risk.
29 MARCH 2023
9AM–10AM SEMINAR, BREAKFAST SERVED FROM 8.30AM
HERBERT SMITH FREEHILLS, EXCHANGE HOUSE,
PRIMROSE STREET, LONDON EC2A 2EG CLICK HERE
WE WILL COVER:
• Key supply chain risks that organisations are facing today
including ESG, cyber, and geo-political risk
• How does an organisation assess its supply chain risk?
• What forms of insurance are relevant to supply chain risk?
• How best to select and improve insurance products to account for
supply chain risks
• Greig Anderson, Partner, Herbert Smith Freehills
• Francis Kean, McGill and Partners
• Antonia Pegden, Partner, Herbert Smith Freehills
• Shannan Fort, McGill and Partners