10/03/2021 Geopolitics: Risks and Opportunities

- CRO Outlook -

Geopolitics: Risks and

Opportunities
Geopolitical events like COVID-19 are now a factor behind many
other risks. How are geopolitics influencing risk types such as
people risk and environmental risk, and how might they actually
benefit financial institutions?

Friday, February 19, 2021

By Brenda Boultwood

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Whether we’re talking about the U.S.-China trade war or Brexit or climate change or
the COVID-19 pandemic, the events of 2020 have highlighted that it’s impossible to
separate geopolitical and political risks from other hazards in a typical enterprise
risk management (ERM) framework. But how, exactly, are these risks connected
with other types of exposure – including people risk - and what steps can a firm
take to take advantage of geopolitical opportunities?

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10/03/2021 Geopolitics: Risks and Opportunities

Before we delve further into these issues, it’s important to

explain what we’re discussing. The Federal Reserve defines
geopolitical risk as “the risk associated with wars, terrorist acts,
and tensions between states that affect the normal and
peaceful course of international relations.” Political risk, on the
other hand, can be viewed as “a political event that alters the
expected value of a business investment or economic
Brenda outcome.”
Boultwood
These is certainly some overlap between these risk types, and
in some circles they are considered interchangeable. While geopolitical risk
occupies its own risk category, it can also be a significant factor in other risk
categories. People and environmental risks are good examples (see Figure 1).

Figure 1: ERM Risk Categories

The Geopolitical-People Risk Connection

As we have learned since the start of the pandemic, geopolitical risks (like COVID-
19) heavily influence key people-risk drivers. It’s important to understand this link,
because a comprehensive risk assessment must consider critical people risks
(https://www.garp.org/#!/risk-intelligence/operational/all/a1Z1W000005xlJ7UAI).
Based on the COVID-19-influenced risk factors listed below, people-risk levels may
be increasing because of unintended attrition and lower-than-planned diversity and
inclusion.

Figure 2: People Risks – Risk Factors Should Reflect Recent Geopolitical Events

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10/03/2021 Geopolitics: Risks and Opportunities

Opportunity Knocks

When assessing geopolitical events – like COVID-19, climate change and social
unrest – it’s important to keep in mind that they present opportunities, as well as
risks. Indeed, Amazon, Salesforce, Google and Pfizer, among others, have
successfully responded to the COVID-19 challenges to create stronger companies
(https://www.ft.com/content/844ed28c-8074-4856-bde0-20f3bf4cd8f0).

Of course, this is not just about the present but also the future. Down the line,
environmental risk mitigation, for example, will require significant investments by
households, companies and countries. If properly coordinated, moreover, country-
level environmental risk mitigants will have a significant impact – sooner rather than
later.

In pursuit of geopolitical/environmental opportunities, businesses that want to

lighten their carbon footprint can take a number of steps. For example, greenhouse
gas emissions can be reduced by phasing out fossil fuels, increasing energy

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10/03/2021 Geopolitics: Risks and Opportunities

efficiency, adopting renewable energy sources and improving land use and
agricultural practices.

PPP: Advancing the Cause

When attempting to manage geopolitical risk, going it alone is not the best
approach. Rather, it makes more sense to join a consortium or support a
government initiative in a public private partnership
(https://www.bloomberg.com/cfli/) (PPP).

Public investment multipliers are higher and tend to stimulate private investments in
firms with less leverage. Through investments in human health, climate change,
education and digitization, PPPs can push the needle forward in areas like
inequality, resiliency and greenhouse gases.

Parting Thoughts

To mitigate today’s most pressing geopolitical risks, financial institutions must

properly train their employees about these threats and take actions to manage
climate-change risk and COVID-19 hazards more effectively.

One strategy for achieving this is to re-evaluate your organization’s ERM categories
— particularly with respect to the most significant geopolitical factors that drive
each risk type. When geopolitical risks are high, joining a PPP and supporting your
country’s multilateral engagement will accelerate progress and, ultimately, reduce
your organization’s overall risk.

Brenda Boultwood is an independent risk management consultant and company

advisor. She is the former senior vice president and chief risk officer at Constellation
Energy, and has served as a board member at both the Committee of Chief Risk
Officers (CCRO) and GARP. Previously, she was a senior vice president of industry
solutions at MetricStream, where she was responsible for a portfolio of key industry
verticals, including energy and utilities, federal agencies, strategic banking and
financial services. Before that, she worked in a number of risk management, business
roles and as the global head of strategy, Alternative Investment Services, at
JPMorgan Chase, where she developed the strategy for the company's hedge fund

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services, private equity fund services, leveraged loan services and global derivative
services. She currently serves on the board of directors at the Anne Arundel
Workforce Development Corporation.

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