Few businesses bestride the globe like those in the power industry, so it’s unsurprising they should feel the winds of geopolitical risk more strongly and earlier than most. Indeed, C-level executives from industries such as power recently ranked geopolitical instability and regulatory change as their top concerns, according to a recent World Economic Forum report.
What can we learn from how the most sophisticated power companies on the planet are integrating geopolitical risk management into their strategies and operations? We’ve been researching the latest thinking from business, government and academia on managing geopolitical risks, and four key steps have emerged. But first, what are the key geopolitical drivers of risk?
Geopolitical risks and their impact on power companies
The key drivers are:
- Geopolitical instability – and the risk of interstate and intrastate conflict
- Climate change
- Cyber risk
- The swing from globalization to conservatism and protectionism
Each risk is related to the others and their effects are often spread way beyond local geographies or individual industry sectors. Global power companies feel their effects in fundamental ways.
The regulatory landscape
In many regions, the regulatory landscape for the power industry continues to shift – driven partly by climate change. Increased power consumption is tempered by public demand for more sustainable power generation, restricting the use of non-renewable sources. However, as the global economic balance shifts from west to east and north to south, the new global powers may have less stringent environmental regulations, enabling investment in traditional power sources.
Supply chain risk
Most power companies rely on diversified international supply chains that can present an array of significant risks and the Internet of Things introduces cybersecurity risks. Meanwhile we only have to look at how some nations have restricted imports of devices and components on the grounds of national security to see how geopolitical risk can constrain supply and drive up prices.
Geopolitical factors can reduce access to the highly skilled workforce that is critical to the power industry. Climate change may lead to conflict and turmoil that creates unsafe areas where workers can’t be recruited. Population movements can reduce the availability of suitable workers and, in some nations, political opposition to migration severely limits the pool of skilled workers.
3iD – the four key steps to mitigating geopolitical risks
So what can power companies do to mitigate the geopolitical risks they face? We’ve identified four key steps.
1. Integration: Make an integrated response to interrelated risks
Geopolitical risks are complex and fluid; above all, they are interrelated. Respond to your risks holistically by considering each component risk in the context of other risks and the wider political landscape. This is the most effective route to managing and mitigating your risks Power companies that are leading the way are already integrating their geopolitical risk management strategies along six pillars: people risk, investment and return, business resilience and value chain, climate and environment, cyber risk and reputational risk.
2. Information: Source credible information from trusted partners
Credible and accessible risk information is essential in getting the buy-in needed for an effective risk management strategy. Generalizations won’t work.
All of us concerned with risk will only succeed when we enable senior decision makers to understand the impact that events driven by politics and ideology can have on the overall strategy and effective operation of their business.
3. Innovation: Find new ways of working, financing, protecting and responding
As the geopolitical landscape changes, so must the way in which we respond. Innovation is critical to help prevent and protect against risk events. Innovation has to go beyond enhancements to traditional insurance coverage. That means new ways of working, financing, protecting and responding.
4. Direction: Focus on whether you should do the deal, not whether you could do the deal
Decision makers are often surrounded with data that tells them if they could do a deal; for example, whether they have sufficient finance. But it’s much tougher to answer the question: “Should we do the deal?” Effective geopolitical risk management helps businesses to move beyond strategy to direction.
Geopolitical risks are here to stay
Geopolitical risks are set to remain a priority risk area for the foreseeable future. Only by taking a data-driven and holistic approach to understanding these risks will it be possible to develop an integrated toolkit that offers actionable direction for senior leadership. It’s clear that the most sophisticated power companies are already starting to do this.
Read the full Power and Renewable Energy Market Report.