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EY teams provided strategic consultancy to a financial services firm that needed to know the likely outcomes of regional political instability.
The better the question
An Asia-Pacific financial services firm needed to understand the business implications of various scenarios resulting from US-China tensions.
Recent years have seen an almost unprecedented series of seismic events with global consequences. Organizations around the world have had to deal with the socio-political and economic fallout of everything from Brexit to the COVID-19 pandemic to the war in Ukraine, and there have inevitably been many surprises and disruptions as many organizations struggled to adjust.
In the current volatile geopolitical environment, the ability to anticipate and mitigate risk is more essential than ever. Irrespective of the industry sector they operate in, companies can face risks in a wide range of areas, including revenue, investment, supply chain, operations, finance, tax and reputation. But there is only so much time and resource that even the largest organizations can devote to risk management, and some are turning to specialist consultants for help.
This was the situation a financial services provider based in the Asia-Pacific region found itself in. It needed help to understand how geopolitical tensions between the US and China might escalate in different scenarios, and how each of these would affect its business. In particular, the board wanted to be able to assess the implications of the various scenarios for capital flows, liquidity and currency volatility in the short and medium term.
So, in early 2022, the firm asked the EY Geostrategic Business Group (GBG) for help to develop these scenarios. The GBG – part of EY Strategy and Transactions – helps translate geopolitical insights into business operations and strategy. Its team is made up of people from across the globe, with a mixture of academic and professional backgrounds in strategy, political risk, government policy and the public sector.
In this case, their role was to help the client understand the most likely scenarios and turn unexpected events into expected ones that the firm could plan for.
The better the answer
A combination of qualitative research and in-depth experience enabled EY teams to provide insights to help the client plan for the future.
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The GBG team assigned to the project carried out some initial research to identify different ways in which the geopolitical relationship between the US and China might evolve. They then carried out interviews with professionals experienced in the subject matter, both inside and outside the EY organization, as well as further desk research, looking at historical cases that might inform how financial markets would react to a particular situation, and how that would impact the client’s liquidity and financing.
“Scenario development is primarily a qualitative methodology, not a quantitative one,” explains Courtney Rickert McCaffrey, EY Global GBG Insights Leader. “But we like to say we each have a sophisticated algorithm in our heads, from having collectively done this kind of work for several decades.”
She also notes that on this engagement, the team reached out to colleagues in the wider global EY organization in areas such as financial markets, financial risk and business continuity, who were able to recommend actions the client could take to mitigate some of the potential risks.
One challenge with this kind of consultancy is that the geopolitical landscape is constantly evolving. It was during the initial research phase that the war in Ukraine rapidly escalated, an event which added a new urgency to the work. While the conflict was not directly related to the US-China tensions that were the focus of the research, there were certain parallels between the two situations that needed to be borne in mind.
The result of this intensive research, completed in just a few weeks, was the development of five potential scenarios, three of which the client asked EY teams to explore in detail. For each of these three key potential scenarios, they set out what might happen, the key drivers and signposts of the scenario, likely international responses, the financial and capital impact, and the likelihood of the scenario materializing.
The next step for the EY team was to run two workshops with the senior leadership team at the financial services firm. The purpose of these was to explain the scenarios they had developed from the geopolitical perspective, jointly explore the broad global financial market implications, and stress-test those conclusions.
“EY teams then worked with them to talk through what this would mean for their business,” explains Douglas Bell, EY Global Trade Policy Leader. “What risks might they face? And then EY teams helped them to start thinking it through in detail; given those risks, what could they do today to position themselves differently? How could they change the way they were doing business in certain ways so as to be more resilient if one of these shocks did occur?”
The better the world works
Preparing for the likely consequences of geopolitical events makes companies and their wider networks more resilient.
While the GBG team's work analyzed these scenarios at a particular moment in time, identifying key drivers and signposts relating to a scenario makes the research relevant for a longer period by giving the financial services firm a tool they can use to track ongoing developments. These signposts may be particular economic indicators or political or military actions, for example, which act as a signal that a particular scenario is materializing and enable the company to activate mitigation plans as necessary.
The financial services company that the GBG advised was able to use the identified signposts to monitor US-China geopolitical tensions. This helped them determine if and when certain thresholds were crossed that meant they should adjust their financial structure or capital portfolio.
Of course, there is no guarantee that any of the scenarios the GBG team develops for a client will pan out exactly in the way envisaged, but Rickert McCaffrey points out that there are wider benefits to organizations engaging with them.
“Even if the particular scenario you explore doesn’t occur, it’s important to prepare for those types of events and think through how your strategy would shift, or you how you would have to change things in response,” she says. “Just building that kind of ‘muscle memory’ makes your company better at responding to any potential shock.”
The GBG team have been engaged to help companies such as this financial services organization with the governance and processes around political risk management; helping them to set up internal committees or teams that can then manage geopolitical risks more effectively on an ongoing basis.
“Helping companies prepare for these kinds of potential shocks makes them more resilient if they do occur,” Rickert McCaffrey concludes, “and if that company is more resilient, it benefits their ecosystem of customers and suppliers. Ultimately, it’s better for the economy overall if companies are prepared for political risk events in advance.”
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