The hardest part of political risk management

More than 90% of executives in the EY Geostrategy in Practice 2021 survey say that their company has been impacted by unexpected political risks in the past 12 months. About one-third of companies did no better than a coin flip in terms of identifying political risk events that would impact them — that is, they were surprised by political risks about half the time. While better identification of potential risks is part of increasing political risk resilience, executives point to improving impact assessments as their biggest challenge. The hardest part of political risk management appears to be figuring out where and how political risks will hit a company’s operations and financial performance.

Executives expect political risk impacts across company functions…

For the political risks the C-suite is most concerned about in the coming year, executives expect the largest impact to be on companies’ growth and investment, operations and supply chain, and revenue. Geopolitical risks are expected to overwhelmingly hit companies on the top line strategic areas of growth and investment, and revenue. In contrast, business operations and supply chains will be most affected by country and regulatory risks, which have been on display throughout the COVID-19 crisis. Societal risks similarly are expected to have a large impact on operations and supply chains.

…but executives point to the need for better impact assessments

When we asked executives which areas of political risk management are most in need of improvement, there was a definitive consensus. The majority of executives (58%) identify the need for enhancements in assessing the impact of political risk as key to overcoming challenges and seizing opportunities associated with political risks — a focus that holds across all geographies and sectors. This focus is not surprising: Many companies have strong capabilities at identifying political risks and there is a vibrant political risk analysis consulting industry to support these efforts. But most companies (and political risk analysts) struggle to translate how these political risks will impact the business across specific functions and performance metrics.

Among the executives that prioritize improvements in risk assessment, the focus is on wanting to improve how they model the financial impacts of political risks (47%) and developing a better understanding of the exposure of the business to political risks (39%). These more quantitative aspects of assessing impact are the most common area executives see for improvement – which aligns with a broader focus on the quantitative aspects of political risk management in the EY Geostrategy in Practice 2021 results overall.

It is easy to see why so many executives are seeking improvements in political risk impact assessment: Companies’ current assessment of political risk impacts are mostly ad hoc and overly centralized. For instance, only one-third of companies currently model the financial impact of potential political risk events on a regular or proactive basis. And a similarly small share of companies include business units or functions in modeling financial impact. This raises questions about whether this impact analysis includes adequate business context.

How to tackle the impact assessment challenge

To improve their political risk resilience, companies should develop or acquire the ability to assess the business impact of political risk. They should invest in this ability at the functional or business unit level and verify that these assessments are shared in aggregate with the C-suite on a regular basis. These functional or business unit impact assessments should also inform an enterprise-wide assessment of potential political risk impacts on a regular basis. Both levels of assessment should seek to incorporate the quantitative political risk indicators that the company monitors into their models and to report impact assessments in a tangible way (e.g., financial impact on revenue) to the C-suite and the board. Taking these steps will help executives determine how the political risks they are monitoring are likely to impact their business – and take more proactive, strategic steps to manage them.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.