What elevated levels of political risk mean for business in 2021

Companies will also face several significant trends in regulatory and policy changes. The world will enter an era of neo-statism as COVID-19 continues to heat up the debate on self-reliance, causing many countries to launch efforts to reshore manufacturing or diversify supply chains. In addition, ambitious climate policy agendas are likely, as part of COVID-19 stimulus plans. As more countries announce carbon neutrality targets, it will put pressure on the laggards and raise the stakes for the 2021 United Nations Climate Change Conference (COP26) in November. The geopolitics of technology and data will be shaped by the increasing divergence of technological standards, proliferation in data privacy and localization rules, digital taxation efforts and antitrust enforcement will shape geopolitical competition.

The incoming Biden administration will realign US policy in 2021. President-elect Biden has declared a focus on strengthening industrial and environmental policies, and volatility is also likely in immigration, anti-trust and trade policy. Companies should expect supply chains and production in strategic sectors to shift more to the US economy, while green industries will have expanded growth and investment opportunities.

The sustainability of emerging market debt will likely hit a tipping point in 2021. Across large emerging markets, funding vulnerabilities are expected to be highest in Brazil, India, Mexico and South Africa. Despite international efforts at debt relief, debt resolution is likely to be complicated by COVID-19 and geopolitical dynamics. Growth prospects in key markets could suffer even as companies’ financial and tax burdens may rise.

The Indo-Pacific is becoming the main arena of global competition in the 21st century, underscored by recent tensions between India and China and Australia and China, among others. Geopolitics in the Indo-Pacific will likely be even more volatile in 2021 as the major and middle powers become more assertive in shaping geopolitics while balancing between the US and China. Government interventions will affect growth and investment strategies in the region, while trade agreements and maritime policies could reconfigure supply chains.

Geostrategic priorities to manage these risks

How should companies manage these political risks? While the specific geostrategy considerations differ for each, there are five overarching actions leaders should take to manage political risk in the year ahead:

1. Dynamically monitor your company’s political risk environment.

Include political risks as part of your company’s risk register or other risk identification processes and then dynamically monitor them throughout the year. This will be especially important in 2021, given the high levels of political and policy uncertainty generated by COVID-19. Two key risks that bear monitoring, as they are likely to evolve as the year progresses, are US policy realignment and the debt situation in a variety of emerging markets.

2. Assess how these political risks could affect your company.

Model the impact of potential political risk events across key business functions, such as revenue, supply chain, data and intellectual property. A regular assessment of how evolving US-China relations affects your company is prudent. And the geopolitics of technology and data also warrants close assessment, as some executives may be unaware how widespread the impact of this risk could be on their business.

3. Incorporate political risk analysis into strategic decisions.

Use scenario analysis about political risks to capture the uncertainty associated with their trajectory in the coming years and inform strategic decisions — including market entry and exit, M&A, and other transactions. This is particularly important in the current environment, in which COVID-19 is acting as a great accelerator for geopolitical trends. For instance, how geopolitical dynamics in the Indo-Pacific and the EU’s pursuit of strategic autonomy play out in 2021 is likely to affect the global business environment for years to come.

4. Communicate and coordinate political risk management across the company.

As revealed in our Geostrategy in Practice 2020 survey of global executives, too often political risk identification, assessment, and management is siloed within various business functions. Companies should leverage the cross-functional teams and lessons learned from COVID-19 crisis management to enable better communication on the political risks stemming from the pandemic. Such coordination should also help foster greater agility and flexibility in company operations — another capability sharpened by the pandemic.

5. Leverage stakeholder relationships to manage political risk.

Public opinion and political intervention will continue to target companies on a variety of issues. But your company’s relationships with policymakers, employees, customers, non-governmental organizations (NGOs), community groups, and other stakeholders can be leveraged to manage political risks — often turning potential challenges into opportunities. This is particularly true for shifting climate policies, neo-statism shaping domestic economies, and the rise in social unrest in a variety of markets. Companies should proactively engage stakeholders on these issues.