Environmental, Social, Governance: ESG
Lessons from Ukraine on Managing Geopolitical Risks
The war in Ukraine has brought to light the challenging reality businesses face when attempting to navigate the complexities of geopolitical risk. Supply chain disruption in eastern Europe sparked by Russian sanctions at the start of the conflict quickly escalated into a global withdrawal from that country and opened a Pandora’s box of risk for unprepared organizations.
Companies, in the short term, have responded by shifting operations to other regions. In the long term, the realization that geopolitical shocks will likely increase should spur better planning to future-proof supply chains and businesses.
Fallout from the invasion
The global community’s reaction to the invasion of Ukraine was sudden and severe, leaving companies in crisis management mode. According to Dun & Bradstreet’s report on the conflict, there are 7.6 million Tier 2 supplier relationships with Russian entities around the globe and these have put companies in the crosshair of sanctions. These include restrictions that apply to new equity investment and financing for those entities in Russia’s financial sector. Financial institutions have been particularly hard hit with Goldman Sachs reporting that its Russian credit exposure had suffered a net loss of $300 million and BlackRock funds reportedly taking a $17 billion loss because of the conflict.
In addition to sanctions sparked by on-the-ground conflict, there are numerous other issues companies must be aware of when managing geopolitical risk today.
- Supply shortages –Automakers, who had believed themselves relatively insulated, have been forced to slow production due to a reliance on xenon and palladium from Russia that has now dried up.
- Cyber security risks – The U.S. Cybersecurity and Infrastructure Security Agency (CISA) issued a warning about the increased risk of Russian cyberattacks. Companies need to evaluate the strength of their security measures more than ever.
- Business continuity risks –Russia has already drawn up plans to seize the assets of Western companies leaving the country. This has forced companies to consider how to manage those employees, locations, and vendors in-country.
- Regulatory changes – The energy sector has been tumultuous since the beginning of the conflict and the international community has had to significantly rethink how they approach filling their energy needs. The United States’ ban on Russian oil imports alone has thrown gas prices into flux which has affected costs across industries.
While geopolitical events can be unpredictable and develop rapidly, there are ways in which companies can better position themselves.
- Conduct a company-wide risk assessment – Begin by involving all the right people. Risk assessment should engage a wide variety of employees beyond risk officers. Establish strategic groups that can understand and assess the company’s entire risk landscape.
- Lean on government & NGO sources to assess global risk spots –Embassies and nonprofit organizations can provide useful perspectives for companies looking into changing political landscapes.
- Develop an integrated resilience program –It takes a concerted effort by a company to create and connect its crisis response procedures, emergency response program and disaster recovery function. A robust business continuity program can pay dividends in situations such as the Ukraine conflict.
- Examine your supply chain –The years of being able to ignore the length of your supply chain are long gone. Companies need to consider their vendor and supplier locations and the potential risks these pose to their own success.
- Connect your teams –IT isn’t solely responsible for managing the increased risk in cyberattacks brought on by geopolitical events. Fostering communication between IT, the compliance team and risk officers can help ease the burden on all three.
Perception plays a part in managing geopolitical risks
Unlike in previous decades, the consequences of abstaining from taking a formal stance on a geopolitical event can hurt the company’s image and lead to employee unrest and public protest. Navigating the often murky waters of international and internal politics isn’t impossible. While some have been quick to label the demands from consumers as “cancel culture,” what they actually represent are the beginnings of a negotiation. Only companies that completely ignore these requests suffer.
Part of the solution to maintaining the respect of customers and employees is to have your company remain ESG compliant. As part of the E, businesses are asked to be responsible for their own as well as their supply chain’s environmental impact and this can do much to improve the public’s perception. As part of the S, businesses are asked to focus on employee wellness and serve the community. While neither are the stances that are asked for, both build a better reputation and can improve that community negotiation mentioned above.