Geopolitical risk:

why it matters to power companies

Geopolitical risk: why it matters to power companiesur content here…

Introduction – geopolitics high on the
C-suite agenda

The world is an increasingly complicated and complex place, with multiple factors driving risks globally. A survey of 350 executives in the natural resources industry conducted by Willis Towers Watson revealed that geopolitical instability and regulatory change ranked as the top concern among CEOs, CFOs, and CROs¹. The latest research from the Cambridge Centre for Risk Studies indicates that the risk to cities’ GDP from geopolitics and security has risen by some 40% in the past 4 years to almost $140bn, the biggest increase out of any risk factor.²Four global issues driving geopolitical risk

Geopolitical drivers of risk are varied and interrelated, but four stand out as the most impactful:

Geopolitical instability – powers in flux. The risks of interstate and intrastate conflict remain high. There are multiple tension points around the globe, such as the South China Sea, which, were they to manifest in dispute or war, would have effects beyond their immediate geographic locale.

Climate change – a world of (dis)agreements. The physical risks associated with climate change are well-documented (rising sea levels, increased storm severity) yet the geopolitical processes which underpin these risks are less understood. International emissions agreements, such as COP 21 and COP 24, are not purely based on science, but on political and economic imperatives.

Cyber – more devices, more regulation. An exponential growth in connected devices, especially in industrial settings, has led to greater efficiency, but also introduced new attack vectors on a larger attack surface. Industry’s inability to control these has generated impetus for governments to introduce regulations and legislation, such as NISD, with stiff penalties for infringements.

Trade – uncertainties and shifts. With globalisation seemingly losing momentum, giving way to conservative trade relationships and protectionism, the trade policies of some of the world’s biggest economies come under closer scrutiny. This results in shifting business opportunities as some markets become more restrictive while others open up for participation.

So what? Three potential effects on power industry assets and people

In an increasingly connected world, geopolitical drivers of risk are interrelated and effects often cascade beyond local geographies or individual industry sectors. For the power market in particular, there are effects of critical importance stemming from key geopolitical drivers.

The regulatory landscape. Driven partly by climate change imperatives, the regulatory landscape for the power industry is likely to shift. In some countries, increased power consumption will be tempered by public demand for assurances about the sustainability of power generation, and regulation severely restricting non-renewables will follow. In other respects, as the international geopolitical balance shifts from West to East and North to South, the countries who assume global leadership may have fewer environmental regulations, enabling investment in traditional power sources.

Supply chain risk. A diversified international supply chain presents significant, often unmanaged, risk. For the power industry, an expansion of internet-enabled devices – the “Industrial Internet of Things” – introduces cyber security problems and exposes companies to supply chain risks. In the past six months we have seen countries restrict imports of devices or components from other countries on grounds of national security, which creates supply constraints and drives up prices.

Workforce availability. Access to a highly skilled workforce is critical to the power industry. When the world’s geography feels the impact of climate change, security turmoil creates unsafe areas, and the political will to embrace migration decreases. Large population movements will occur, potentially altering the availability of suitable workers. Anticipating, rather than reacting, to such shifts will be key to human resources business resilience.

In an increasingly connected world, geopolitical drivers of risk are interrelated and effects often cascade beyond local geographies or individual industry sectors.

Four ways to manage geopolitical drivers of risk and their impactSo what can power companies do to mitigate these geopolitical risks? Research conducted by Willis Towers Watson in 2018, integrating expertise from business, government and academia, has revealed four
themes crucial to managing risks associated with geopolitical drivers:

Interrelated risks require an integrated response. Geopolitical risks are complex, fluid and, above all, interrelated. Each component risk needs to be considered holistically in the context of other risks and the wider political landscape. Only by considering risks together is it possible to unpick the best ways to manage and mitigate.

Credible information from trusted partners is key. Credible and accessible risk information is essential in getting the buy-in needed for an effective risk management strategy. Generalisations won’t achieve this; together, those of us concerned with risk will succeed when we help senior decision makers understand the impact that political, ideologically driven events can have on the strategy and effective operation of their business.

Answer the question: ‘should we do the deal”? Decision makers are often surrounded with data that tells them if they can do the deal – for example, information from credit agencies. But it’s much tougher to answer the question: should we do the deal? Effective geopolitical risk management must help businesses to “move beyond strategy to direction”.

Geopolitical risk management requires innovation. As the geopolitical landscape changes, so must the way in which we respond. Innovation is critical to help prevent and protect against business risk events. Innovation has to go beyond enhancements to traditional insurance coverage. That means new ways of working, financing, protecting and responding.

The most sophisticated power companies are now considering integrating their geopolitical risk management strategy along six pillars, helping people understand, protect, prevent, and respond to risks.

Six pillars – an integrated approach to geopolitical drivers of riskThe most sophisticated power companies are now considering integrating their geopolitical risk management strategy along six pillars, helping people understand, protect, prevent, and respond to risks:

People risk. Safety and security issues can pose clear risks to employees. However, there are also risks associated with workforce management, including recruitment and retention, which must be understood and managed.

Investment and return. Exposure across multiple geographic locales means geopolitical drivers of risk can be diverse. In order to protect assets and investments this diversity of risk must be critically considered and appropriate risk management tools deployed.

Business resilience and value chain. When risks materialise as incidents and events it is crucial to have effective business continuity practices implemented. Response and recovery plans, which have been properly tested and exercised, can limit the impact of incidents and help companies quickly resume business operations.

Climate and environmental. The risks presented by climate and environmental factors, including storms and earthquakes, can be better understood with advanced analytics. By modelling environmental events and physical assets, risks to property and people can be quantified and managed.

Cyber risk. Digital ecosystems and connected devices fundamentally underpin the modern power sector. Having a comprehensive understanding of a company’s cyber footprint is critical to managing this source of risk, including network outages and regulatory impositions.

Reputational risk. Impacts on brand and reputation can affect the ability of a company to attract customers, recruit talent, or even gain operating license in a country. Being attuned to the relationships between geopolitical drivers and reputation helps anticipate and mitigate these risks.

Conclusion – need for a holistic approachGeopolitical drivers of risk are recognised as a priority risk area because they have potentially wide ramifications for assets and people. By understanding these risks holistically and approaching them with an integrated toolkit, appropriate measures to manage the risks can be implemented.

Andreas Haggman is an emerging risk analyst heading up our newly-established Emerging Risks research hub at the Willis Research Network.

¹ The View from the Boardroom: Willis Towers Watson Natural Resources Risk Index, April 2016
²https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/risk/downloads/crs-global-risk-index-exec-summary-2019.pdf