Climate Risk: A New Frontier for the Corporate Sector

For millennia climatic factors have threatened humans. Farmers have been at the mercy of droughts, storms and floods. Harsh climates such as rainforests, deserts and tundra have shaped human development forcing people to move or adapt.

The modern world appeared to offer some deliverance from harsh climatic conditions. People can build huge cities in the desert or snow thanks to central heating, air conditioning and modern technology. Infrastructure can now be built to withstand extreme weather and technology such as early warning systems can effectively assist in managing disasters.

But now the steady but certain onset of climate change has changed these old assumptions. The world’s rapidly changing climate throws up a host of new risks and uncertainties. Climate change can be understood as a giant lens, which magnifies existing risks making them more frequent and more deadly.

Hurricanes have always posed a threat to humans, climate change will make them stronger and more regular.  The deadly effects of droughts have been around for millennia, but climate change and overuse of water supplies is already shrinking places like Lake Chad, the Aral Sea and many other lakes and rivers.

Rising sea levels will drown mega cities like Jakarta, Mumbai and Shanghai. Despite billions being spent on sea defences, the sea will eventually simply overwhelm urban areas, forcing people inland. The destruction of so much infrastructure will dwarf previous economic losses.

Climate risk is the impact of the environment on humans. For many years we have been concerned with our impact on the environment and infrastructure, pollution and all the other activities of humans will damage the environment. The world’s fast changing climate over the next few decades will make profound changes to our existence.

Climate Risks

  • Higher sea levels as ice sheets melt and oceans warm.
  • Stronger and more frequent cyclones, typhoons, and extreme weather.
  • Drought and famine, higher temperatures & lack of rain will result in mass crops failure.
  • More deadly wildfires, with higher temperatures and drier weather this provides the conditions for fire.
  • Flooding, this seems to be in contradiction with drought, but more unpredictable and sudden heavy rainfall is likely, creating the conditions for devastating floods.

Organisations must now face up to climate change and act to preserve the planet as well as their themselves.

Below I explain climate risk and how it will impact businesses and organisations. I look at how the Task for Climate related Financial Disclosures (TFCD) framework can help banks and other organisations identify how they will be hit by climates risk.

Topping the Global Risk Charts

Authoritative think tanks such as the World Economic Forum placed climate related risks in the top four places of the top ten risks in their landmark 2021 global risk report.

Extreme weather, failure on climate action, natural disaster and biodiversity loss were selected by respondents as the key long-term risks facing the world.

For both businesses and individual’s climate change is often viewed a slow burn threat that always appears to be in the future and that will happen to someone else. Some detractors claim that organisations will be able to adapt to the new conditions.

Companies that fail to act on climate change will face a major backlash from investors, the public and consumers.

Firm’s emissions and supply chains will be identified in close detail for risk. Labels that detail the carbon footprint of products like food labels measure sugar and fat could become a feature of new products.

Companies still require consistent, reliable data on climate risk to finance climate resilient projects and to price climate risks correctly. There are also opportunities for firms that act to identify climate risks. These firms can gain advantages over rivals and pre-empt many threats and even offer products and services for a decarbonising world which faces huge unprecedented threats.

How Climate Risks will materialise

Shrinking ice sheets in the Arctic, Antarctica and the “third pole” the Himalayas where glaciers are melting. Shrinking glaciers in the Himalayas endanger the two billion people that rely on the glacier fed rivers. The melt of the glaciers will reduce the flow of the rivers cutting available water for agriculture and for dams.

The result will be a crash in agricultural productivity and in heavily agricultural economies like India and Bangladesh, as well as much of sub-Saharan Africa this will lead to widespread social unrest, migration and political anger.

The shrinking of ice sheets in the poles will feed sea level rises. Many of the world’s mega cities have exploded in size but will with little thought or preparation towards changes in sea levels.

Shanghai, Karachi, Dhaka, Miami are just a few of many cities threatened by rising seas. Jakarta the already sinking into the sea and the Indonesian government are looking at moving the nation’s capital to a new purpose-built city.

The Risk Multiplier

None of these risks are new, humans have dealt with them for millennia, but climate is best viewed as risk multiplier. It will increase the number and size of these climatic risks.

How far and fast climate risk will impact us is partly down to how fast humans can stop carbon emissions and therefore runaway climate change. Right now, there are signs that mitigation efforts or decarbonisation are taking hold.

Renewable energy continues to fall in cost and investment in the sector continues to grow. But the oil and gas sector’s hold over the energy sector is strong and modern economies remain wedded to oil, at least for now.

The increase in global temperature appears to be minor, ranging between 1.5 C to 4 C. However, it is important to consider this is an average and many critical areas (such as the Antarctica) warming much faster than the average. Even small temperature changes can lead to a catastrophic impact.

The effects of climate risk can be non-linear, so a 1 C temperature increase may reduce crop yields by 5%, but a further 1 C increase in temperature may see a dramatic fall in yields.

However, there are other emitters of greenhouse gases such as agriculture (particularly cows), deforestation and transport. It will take major political change and technological advancement to decarbonise these sectors.

Even if carbon emissions stop or peak now, we will all face unprecedented climate change and all the devastation that goes with that. The longer carbon emissions continue, the worse the risks we will face.

How Should Companies Act?

For companies it means two things: First they need to do more to reduce their own emissions which is the central plank of the 2015 Paris Agreement. Reducing emissions will mitigate climate change slowing the rate at which climate changes.

Secondly: Organisations need to consider their own exposure to climate change. The impacts described above will affect entire societies but will also hit companies and organisations in a variety of different ways.

Climate risk is fast growing discipline. The Intergovernmental Panel on Climate Change (IPCC) outlined many of the climate risks faced by world in various reports.

The Task Force on Climate Related Financial Risks (TCFD) was created in 2017 to create a framework for banks to assess the climate risks they face. Above all the TCFD was set up to make banks realise that climate is a financial risk. Companies and banks could lose billions if they fail to take climate risks seriously.

For manufacturers considering their investments, existing factories will be emitting carbon in 10, 20, or 30 years’ time, Decisions need to made now to cut emissions or companies will be left with outdated infrastructure designed for a fossil fuel world.

Planning new investments and projects should be viewed in the context of changing climate. When water shortages, desertification and sea levels rise become the norm, companies need to adapt to this reality. Within a decade all major companies will report on climate risks.

Climate risk will intensify and compound existing threats and twisting them into tangible threats. Climate risk can broadly split into two areas: Physical climate risk and transition risk.

What are the Hurdles?

Climate risk is making waves in the corporate sector leading firms scour their portfolios for climate related risk. It has taken a time for organisations to understand, accept and implement the principles.

For many businesses’ climate risks are too far in the future, are too uncertain, others many feel they can mitigate against the risks. For most businesses planning 2,3 or 4 years ahead is the norm.

Beyond that time frame risks become too abstract and difficult to predict. Companies are often dealing with a raft of urgent issues so the problem of climate change can seem distant and unimportant.

Applying the TCFD

How can my firm discover its climate risks ?

Financial organisations can apply the TCFD principles, in practice this is difficult, given it is such a new set of principles in a new area of risk. But over time its application will become easier as firms become more experienced and skilled at applying the principles.

How does the TFCD work?  

The TCFD was driven by Mike Bloomberg, founder of the financial information firm and ex-Mayor of New York.  The framework is a set of recommendations and principles which will allow organisations to understand and measure the concentrations of carbon related assets in portfolios and the financial sectors exposure to climate risks.

Many banks and financial institutions have signed up to the principles. However, it is not yet clear how it will work in practice. Whether there will be a unified approach and standardisation or will organisation diverge and use their own approaches.

The TCFD process includes a disclosure of climate related risks. They should be adoptable by all financial organisations, which will provide useful forward-looking information, will focus on the risks and opportunities related to a low carbon economy and that recommendations should have a financial impact.

There are four pillars:

Governance

Disclosures around climate related risks including the role of management and the board.

Strategy

This should disclose the actual and potential impact of climate related risk and opportunity. Describe the impact on climate risk on the organisation’s strategy, financial planning and overall resilience.

Risk Management

This should identify the organisation’s processes for identifying and assessing climate related risks. It should also describe how these are integrated into overall risk management.

Metrics and Targets

This should disclose the metrics used by the organisation to measure climate risk. Disclose scope 1,2 and 3 greenhouse emissions and describe the targets used to manage climate risks as performance against these targets.

Scenario Planning

The TCFD also recommends scenario analysis, this provides the “what if” analysis which can help a firm tease out what might happen in a significantly warmer world, or one where there is rapid transition. Scenarios are not predictions, but rather a plausible narrative of what might realistically occur.

Physical Climate Risk

Climate change is predicted to result in more extreme weather, rain, typhoons, as well as longer term conditions such drought, flooding and sea level rise. None of these things are new, but what will change is the intensity of impact.

The devastation caused by these changes will result in political instability, economic damage and migration as people move in search of better conditions. This can be internally or across borders. Although poorer less resilient countries will be hit harder, more developed cities such as Shanghai, New York and Hong Kong will be under threat from sea level rise.

Water stress could spark conflict in places such as North Africa and Iraq. As droughts and water shortages become more common, problems with food supply and production will result.

Drought, water shortages and crop failures are as old as time, but the speed at which they happen will be shocking. Mass migration started by long term collapse of countries especially in the Middle East, Africa and South Asia will send millions of people in search of food.

Physical climate risks can be divided into two types, acute and chronic:

Acute physical climate risks:

  • Extreme heat/heatwave
  • Flood
  • Drought

Chronic Risks

  • Higher long term temperatures
  • Lower rainfall
  • Drier climate

Some examples of physical climate risks impact on businesses:

  • Supply chain interruption and damage from extreme weather
  • Higher insurance costs due to high risk of assets being damaged
  • The recommendations should lead companies to be able to identify what assets in their portfolio are threatened by climate risks. For example:
  • A power plant which relies on rivers and streams for cooling may find that if the river dries up and the average temperature rises the cooling system does not work and the factory is untenable.  
  • Rising sea levels will mean many ports are unusable as the ocean engulfs the infrastructure due to rising sea levels, any new infrastructure should take this into account.
  • For an agribusiness reliant on food products, more frequent droughts will reduce crop yields making the business less profitable.
  • Along with physical climate risk there so called second order impacts meaning that one impact will result in further often unpredictable events and impacts:

Some examples of second order impacts:

  • Droughts and famines will result in millions of migrants as marginal land in hot countries becomes arid wasteland.
  • Many coastal towns, cities and communities become untenable due to sea level rise and flooding (Florida & Jakarta for example).
  • Poorer more vulnerable communities/countries will be hit hardest as they have fewer resources, and less ability to adapt to a changing climate.
  • Ecosystem collapse which will result in fish or food supply failure.
  • Communities in hurricane zones are devastated with ever more frequency making their existence untenable.
  • Crop failures due to a failure of rains, excess heat or even pests (able to breed faster due to increased temperatures) could result in shifts in the food chain, food price increases for some and starvation for others.
  • Epidemics – rising temperatures will make it easier for disease to spread, making the spread of viruses and diseases more likely.

Transition Risk

Transition risk is the threat that policy shifts around climate change will result in losses for companies and banks. As economies decarbonise to mitigate against climate change, what is the risk to your firm. Germany closing its coal plants is a transition risk for the owners of the coal plant.

In oil dependent countries like Saudi Arabia the risk is probably lower as the government will stick with fossil fuels for longer. But energy is not the only sector at risk, changes in technology are also a factor.

The move from petrol cars to electric will see many car companies change production models. However, not all will be successful and doubtless go bankrupt. This shift is already visible, Tesla which makes exclusively electric vehicles is the world’s most valuable car manufacturer by market capitalisation.

Other disruptions could be the move towards vegan diets which is already threatening meat processors and farmers. Other shifts driven by social change could be tricky to predict but could include a widespread boycott against flying or at least people cutting back on flying (the covid pandemic could accelerate this by making remote meetings the norm).

Somee examples of transition risk are:

  • Early write of equipment due to policy changes
  • Increased compliance costs due changes in law and policy
  • Falling demand for carbon intensive products
  • Increasing costs due to rising input prices in water, fuel and other raw materials

Disorderly Transition

Transition can be orderly or disorderly. An orderly transition is a well-planned decarbonisation of the economy with the broad backing of society, government, and the private sector. Germany is a good example, the government has steadily shifted its power production towards renewable energy.

Disorderly transitions will be seen where countries that have stuck with fossil fuel dependent economies.The country is then faced with a need to decarbonise very quickly to meet obligations under the Paris Agreement, national legislation, or peer pressure from other countries.

This could well translate into geopolitical risk as sectors of the economy such as coal mining are threatened and unable to adapt, they collapse resulting in energy shortages.  

Geopolitical Risk and disorderly transition

Countries that fail to meet decarbonisation objectives will be put under pressure by those countries that have achieved their goals. As climate risks intensify, the political pressure on the worse greenhouse gas emitters will grow. Naturally a blame game will emerge where developing countries will accuse developed ones of carbon debts and hypocrisy.

This could escalate as the carbon sinners; countries that continue with deforestation or expanding fossil fuels use and those who have decarbonised. As climate risks engulf the globe the pressure on sinners will become acute.

Already politicians and others launch political attacks on Bolsonaro and Trump due to their lack of environmental credentials. While Trump could afford to largely ignore them, Brazil faces its trade deal with the EU being derailed thanks to disregard of the environment.  

Climate Risk Analysis

Climate risk means each organisation will analyse their assets for physical and transition risks. This can be a time consuming process using climate models or policy analysis to identify risks, but also taking into account time scales and the criticality of asset locations. Assets with a short tenor do not pose so much of a risk, whereas those with a 20-year life span are far more likely to be impacted.

Locations such as distribution hubs or HQs are likely more critical to companies’ operations than a small branch office. Therefore these key locations should be analysed for climate risk ahead of less critical locations.

Eventually organisations should analyse their assets for exposure of both physical and transition risk and quantify that in their financial statements. For many this will involve a painful and frank analysis of their company. For those will heavy exposure to climate risks – this could involve major losses or at least a reduction in the value of the firm.

The key objective of the TCFD is to ensure that banks avoid investing in assets with climate risk.

The TCFD outlines some key principles for effective disclosures.

Principles for Effective Disclosures

1 Disclosures should represent relevant information.

2 Disclosures should be specific and complete.

3 Disclosures should be clear, balanced, and understandable.

4 Disclosures should be consistent over time.

5 Disclosures should be comparable among companies within a sector, industry, or portfolio.

6 Disclosures should be reliable, verifiable, and objective.

7 Disclosures should be provided on a timely basis.

Climate Opportunities

Climate risk is a significant risk for companies and the analysis should consider and mitigate against these risks. For the most resilient and nimble firms there will be opportunities.

Adaptation measures

Some countries and regions may see benefits, such as wine growers in the South of England to Russian farmers who may enjoy longer warmer growing seasons. While overall the risks of climate change will outweigh the benefits, there will be advantages for some.

Resource efficiency

By reducing the amount of material or energy used in production and distribution processes companies can save a great deal of money, as well as curb emissions. Innovative ideas such as using electric vehicles, retrofitting buildings, embedding circular economy ideas, introducing LED lighting can all assist the transition to a low carbon future.

Products and Services

By offering low carbon products and services companies can enhance their competitive position against rivals. Any product that reduces emissions whether this is because of local production, low energy consumption or reduced materials has the potential to be attractive to consumers who increasingly favour goods that do not damage the environment.

The A – Z of Global Risk

All companies and organisations face a host of risks that threaten their strategy, staff, profits and supply chains. Some risks are internal such as talent management (strikes, high turnover), others are external such as market and macro economic risks.

Below is a guide to the global risks and the tools such as business continuity which can manage these issues. Some of the risks be relevant for all organisations, while others will have just a narrow impact.

Belt and Road Initiative

China’s Belt and Road Initiative has been the most significant foreign policy initiative of the last decade. There have been countless reports, articles and books all trying to track, analyse and define the true meaning of the Belt and Road and what it means for the world.

The Belt and Road Initiative is intentionally flexible and vague allowing China to adapt it to different circumstances.

China has signed numerous Belt and Road agreements with countries which demonstrate alignment with Beijing.

But in reality the term has become shorthand for China’s overseas trade and investment and in particular the way in which Beijing uses its commercial might as a foreign policy tool.

Many countries have remained wary of China’s motives and have avoided signing any Belt and Road agreements. The US has made a point of avoiding the initiative but most remains China’s biggest investment target and its largest trade partner. India and many European countries have also resisted signing the Belt and Road agreement fearing it signals a close alignment with Beijing.

China (like other countries) uses investment as a tool the threat of cutting trade ties and the promise of increased investment to create compliance with other countries.

Australia has become a major exporter of coal, natural gas as well as agri-produce such as wine and barley to China. When Beijing started placing tariffs on these goods and starts a trade war it forces Australia to sit up and listen as well create risks for companies on both sides.

China accounts for around a third of Australia’s exports making it heavily reliant on its giant northern neighbour. Other countries such as Sri Lanka and Pakistan have taken on large debt burdens to build infrastructure which places them at China’s favour. The initiative is the ideal way for Chinese firms to expand overseas under the watchful eye of the government.

The Belt and Road has also been a major source of investment, particularly in infrastructure, power plants, road, rail, ports and pipelines helping to fill a huge gap in infrastructure.

For example the China Pakistan Economic Corridor CPEC has helped direct a reported USD 40 billion Chinese investment into roads, power plants and ports in Pakistan. However critics point out that through this lending Pakistan is becoming dependent on China.

Biodiversity

The rapid and catastrophic loss of the world’s wildlife over the last decades is a direct threat to humans. Thanks to habit destruction, pollution, overfishing, hunting and climate change many species have been wiped out or are close to the edge of extinction.

While the threat to large charismatic animals such as tigers, rhino’s and pandas receive headlines the mass loss of billions of insects is just a serious.

If crops are not pollinated by insects it will leave vast swathes of land unusable for agriculture. This combined with the impacts of climate change means the consequences for humans are dire.

The corporate sector is starting to consider biodiversity risk. Recent global conferences have looked at how to measure biodiversity risk. The global move to incorporate environmental and social indicators in the corporate sector will  help organisations identify where biodiversity losses can be prevented.

However much of the damage and destruction of the natural world is linked to a relatively small number of firms involved in deforestation, illegal fishing and other destructive practices.

Business Resilience

Resilience has become a major buzzword in recent years. In a business context it means the ability of a business to survive and adapt to shocks, crisis and disasters. Resilient companies can cope with extreme change and internal and external shocks.

The key to a resilience is often described as preparedness for crisis, agility in strategic and tactical decisions as well as strong communications within key internal teams.

A truly resilient organisation can both adapt and thrive in seemingly hostile environments. Building resilient organisations is important but often difficult to measure until the resilience is tested.

Business Continuity

Business continuity is the plan and preparations in place for a disaster befalling an organisation. Planning for disaster can include provision of alternative IT facilities, office building and deciding on key staff to ensure the business can survive any set backs. Plans and preparation need to be tested through scenario planning and exercise.

Business Intelligence

Business intelligence concerns itself with gathering information either covertly or overtly on the strategies, condition and changes of business operations. Business intelligence is usually divided into data gathering, data storage and knowledge management.

When using business intelligence the ability to collect and act on information is critical. Perhaps the most valuable business intelligence is exclusive or prior information about the activities of competitors can provide an important edge over those rivals.

Climate Risk

Climate risk has only recently become recognised as a global risk. Climate risk can be divided into two main areas:

Physical risk is how the changing climate will wreak havoc on organisations across the globe. Rising sea levels, more frequent and deadly natural disasters, widespread crop failures, flooding and heatwaves will all disrupt and, in some cases, devastate cities, agriculture and society.

Cities sinking into the sea, whole regions drying up and experiencing mass crop failure and infrastructure failing due to excess heat. The corporate world is only belatedly recognising this reality and is taking measures to measure the risk through initiatives like the Task Force for Climate Related Financial Disclosures which attempts to measure climate risk in financial portfolios.

Transition risk means that policies and trends such as carbon taxes, emissions targets, legislation to decarbonise the economy will impact organisations. Increasing concern about climate change could see governments introduce punitive carbon taxes which make industries like coal mining financial unsustainable. Another example is the possibility of air travel becoming socially unacceptable as concerns about climate change rise.

Above all climate risk is a threat multiplier. Natural disasters, crop failures and flooding are not new. Neither are new laws and taxes impacting organisations. Climate change just makes all these things more frequent and with greater effect.

Climate Geopolitics

Climate change is leaving its mark on the world through increased natural disasters, rising sea levels and a collapse in crop yields. The fundamental changes that climate change represent will shift global power balances.

The shift away from fossil fuels and towards clean energy will reduce the power of oil and gas giants like Saudi Arabia toward renewable energy producers. The worst effects of climate change are predicted to hit South Asia, the Middle East and Africa.

Collapsing freshwater supplies, extreme weather and failing crops will create hostile environment in many parts of the world which will be impossible to develop resilience against. The result will be economic collapse, an angry populace and severely weakened state capacity.

It is difficult to predict accurately how climate breakdown will impact global geopolitics, but it could spark a wave of conflict as states blame one another for the effects of climate change and huge levels of migration create tensions between states.

Conflict Risk

War is as old as civilisation but in the modern world conflict has entered into new domains. Guns, tanks and planes have been joined by cyber, hybrid conflict and drone warfare. New theatres such as the Arctic, social media or even outer space have become a reality.

Conflict creates massive risk, cost and uncertainty for businesses. Operating in warzones is undesirable as it puts lives and assets at great risk as well as destabilising countries making them on

The onset of conflict may be good for some firms such as weapons manufacturers, but for the most part war and conflict create huge burdens on economies which rarely benefit business. The spectre of conflict in places like Somalia, Sudan, Yemen, Afghanistan, and Palestine has repelled all but the most intrepid investors. Often only mining, NGOs, oil/gas plus fast-moving consumer goods are the only firms that will operate in such tough conditions.

However, there are rewards for those brave enough to invest in post-conflict or fragile states. Often these places will have been isolated from competition and ready to enjoy a post-conflict boom. Unfortunately, many post-conflict countries see war return after enjoying peace.

Cyber Risk

The world is becoming more connected. Internet usage grows each year as more people go online, particularly in developing countries. Increasingly the internet is connecting more to physical things, everything from cars to toasters to infrastructure.

Online crime is overtaking physical crime because of the anonymity afforded online. Criminals can easily hide their tracks, send phishing emails and start social engineering scams from the safety of another country.

All of this creates a huge risk to organisations who are dependent on the internet to sustain their business. A devastating cyber attack can destroy reputations, cost millions and at worst leave organisations without critical IT systems for extended periods.

Countries around the world have eagerly taken up the chance to use cyber war as a way to spy, attack and disrupt their enemies. A shadow war where it is unclear who could be attacking and where the attacks will land.

Corporate Espionage

Espionage is usually associated with stealing military or state secrets, but sensitive commercial information can be just as valuable. The theft of technology, knowledge of a rival’s strategy or theft of their intellectual property, or even sabotage of their assets can all provide a competitive advantage. Espionage can spill into the geopolitical sphere via companies as very often countries and corporations work in tandem to collect information that will help state and corporate sector.

The biggest data leak in history was discovered at Marriott Hotels in 2017 where over 8 million records had been leaked over 8 years. Despite all the credit card information that had been stolen, there were no recorded financial losses. Why? Because a state intelligence agency was behind the data leak. The movements, meetings and spending of politicians, diplomats and high profile businessmen is of enormous interest to intelligence agencies, this kind of knowledge can be leveraged for commercial gain.

Organisations need to have strong information security controls and if they are in a particularly sensitive industry counter-intelligence measures to ensure they do not fall victim to corporate espionage.

Crisis Management

When threats emerge rapidly and risks unfold in a rapid unpredictable manner we call this a crisis. When it happens to organisations, they need to be ready to react. Crisis management is the discipline that prepare organisations for any emergency. A well-prepared team with strong communication skills drawn from the key parts of an organisation the first step. Those that fail to prepare face the potential for chaos and unpredictable.  

Establishing plans, processes and protocols is the next step. While plans are rarely used in a crisis -the act of preparing and writing a plan is ideal preparation.

As Dwight Eisenhower said: “Plans are worthless, but planning is essential”

The next step is testing plans through scenarios or desktop exercises will help cement the team and test the effectiveness of the plans. Lastly it is important to remember that a crisis is by its nature highly volatile. Flexibility is key when creating plans and teams. Rather than plan for specific events make sure they are generic and able to deal with any crisis.

Disaster Risk

Natural Disasters are a major risk for organisations and people across the globe. Typhoons, hurricanes, earthquakes, volcanos, landslides and others kill thousands of people, destroy homes and businesses and disrupt lives across the globe. Much of the world has become better had predicting and preparing for disasters.

Early warning systems, resilient earthquake buildings, mass communication systems and rapid relief responses can all alleviate the worst impact. Countries can rebuild infrastructure with increasing speed.

Climate change is creating more frequent and more deadly disasters which even the most advanced and resilient countries will struggle to handle. The California forest fires are a good example of a natural disaster overwhelming an area making it difficult to recover and seeing widespread damage and destruction.

Due Diligence

Due diligence is a process used by bankers, accountants and lawyers when considering a take over, merger or investment in another company. Due diligence but can easily applied to political risk situations. Any investment into a new country or new business or entry into a new sector is accompanied by due diligence.

Due diligence is looking under covers to look for any problems the company or investment target may be hiding. This could be bad loans, hidden legal problems or risky assets. Due diligence should also shed light on the future prospects of the company and how well it will fit with the acquiring firm.

Economic Risk

Financial crisis, currency, economic collapse, hyperinflation can devastate countries, spread globally and ruin companies. Emerging economies are particularly susceptible to financial risk, but the great recession of 2008 demonstrated that financial crisis can hit developed economies.

Organisations that want to protect themselves against global risk must consider their exposure to emerging economies, currency risks, inflation, interest rate changes and a host of other indicators which are typically complied by economists.

Emerging Markets

Emerging markets are countries which are experiening the shift towards a developed economy. Typically they are experiencing industrialisation and characteristics of developed markets. They usually enjoy growth potential but high volatility in terms of markets and currency fluctuations. Turkey, Russia, South Africa and Brazil are all examples of emerging markets.

For investors they represent risk but also reward as returns on investment will often be higher in these countries. There is an index of emerging markets MSCI but a good rule is that if politics is more important than economics when making an investment decision then its an emerging market.

Investing in emerging markets is not done likely a thorough understanding of the political and economic landscape as well as the market analysis. Companies are attracted to these markets for as they can often experience high economic growth and offer untapped markets. In recent years frontier markets have emerged as term for countries even more risky than emerging markets.

Emerging Risks

Emerging risks are those on trends, threats and even opportunities which are not yet fully understood or known. Typically, these can be threats which are recognised but not acted upon. In a different category are Black swans which are threats which can not be foreseen.

Gray rhinos is another term used for risks that are recognised but have been overlooked and little action has gone into mitigating against them. Organisations often miss out emerging risks and opportunities as they lack the flexibility to recognise

Energy Risk

Energy is a critical element in the global modern economy. Nearly every activity and economic activity depend on easy to access energy. Countries without widespread access to electricity remain underdeveloped. The widespread use of fossil fuels such as coal, oil and gas has powered modern economies, but at a heavy price in terms of climate change and pollution.

The adoption of oil and gas in particular created a new dynamic in global politics – handing massive power to oil producing countries, especially Saudi Arabia which the world relied upon for cheap energy.

The world remains reliant on fossil fuels and although some countries like the USA have become energy independent, others like China remain heavily dependent on imports. This dependency is a major issue for many countries costing them a great deal of money but also political capital.

The emergence of cheap clean energy such as solar and wind power has started to change the balance. Countries such as Morocco, Costa Rica and Germany have adopted renewable energy on a massive scale, reducing expensive imports and reducing carbon emissions. The success of these schemes sets a template for other countries.

However fossil fuels remain cheap and easily available and much of the world’s energy infrastructure, including subsidies and tax breaks, is based around them making change difficult. Fossil fuel firms have powerful political backing – making lobbying governments. As a result oil, gas and coal infrastructure continues to be developed and financed.

Environmental Social and Governance (ESG) Risk

Organisations are becoming more aware of their impact on the environment, whether that is through reducing to waste, carbon emissions or reducing the damage caused by infrastructure developments. Investors, employees and customers are looking more to companies they perceive as ethical and shunning those with poor track records of dealing with environmental and social issues.

Environmental, Social and Governance (ESG) focused investing is focused on avoiding harmful activities such as polluting (like oil and gas firms) or unhealthy things such as tobacco. Other firms like Leapfrog have gone further and have promise to make impact investments which make a positive impact on society (reducing carbon emission, expanding education, increasing financial access to the poor etc). Investors are increasingly keen to make sure their actions are “doing good” and.

This has created a vast and ever-growing market of ESG friendly financial products such as green ETFs (exchange traded funds) or Green bonds which promise demanding that firms are ESG friendly or compliant.

As the sector grows risks increase. Who determines what counts as ESG friendly way. How do we know if companies are in fact acting in an environmentally and socially manner. The EU took a major step in trying to standardize the sector by publishing a taxonomy of sustainable finance which allows firms to categorise their economic activities and how they will affect carbon emissions.

As ESG investments grow in popularity so will the risk inherent in this sector.

Fragile States

Fragile or conflict states are characterised by conflict, instability, and poor economic performance. Countries like Somalia, South Sudan, Zimbabwe, and Myanmar are examples of fragile states. These countries often lack strong institutions, are prone to corruption and are generally avoided by international investors.

However fragile states can offer superior returns in a high risk environment. Fragile states often hold valuable mineral or metal sources, luxuries and fast growing albeit volatile economies.

Frontier Markets

Frontier markets are those countries which are enjoying economic growth and prospects but are also characterised by instability, reliance on a specific sector and with small undeveloped stock exchanges. Frontier markets are generally open to foreign investment. Frontier markets offer opportunities to investing firms but also present more risk than emerging markets.

Sri Lanka, Vietnam, Kuwait, Kazakhstan and Nigeria are all typical frontier markets. As these countries become more stable and their economies become more diverse they may become emerging markets.

Geoeconomics

Geoeconomics is when countries use trade and investment and commerce to further their strategic goals. This can be seen clearly in the Belt and Road Initiative where China is using Chinese firms to invest overseas which will help bind these target countries to China’s foreign policy objectives.

Chinese investment in Africa has meant many countries on the continent giving Beijing diplomatic support. Pakistan has become a major Chinese ally. In part thanks the China Pakistan Economic Corridor which has led to massive investment by Chinese firms in Pakistan. In return Pakistan is “an all weather ally” particularly in relation to India which China views as a threat.

The US has used trade sanctions on the likes of Iran and North Korea to push those countries into submission. Sanctions can suppress economies, but they also create resistance and pushback from those receiving them, so are less successful in removing governments.

Geopolitics

Geopolitics is the study of how geography effects politics. Geopolitics connects global power to geography. Natural resources, rivers, mountains, seas and lakes as well as climate and demographics can all contribute to, or take away from political power. Geopolitics is largely interchangeable with international relations and takes into account trade, economics as well the alliances and organisations such as the WTO and UN that bind the world’s nations.

Understanding geopolitics is critical to understanding global risk. So many global risks from climate change, pandemics to more obvious threats such as war and terrorism are shaped by geopolitical forces. Organisations and companies regularly lose money, reputation  and access to markets thanks to a poor understanding of geopolitical risk.

Many western companies were hit by the trade war which erupted between the US and China over the Trump administration but the growing tensions were apparent even before Trump was elected.

The last few years have seen many prominent leaders such as Bolsanaro and Trump rise to power with an anti-globalist, nationalist agenda. Many people feel that the benefits of globalization have not reached them and their fears have often been stoked by a wave of fake news made possible by social media platforms.

The next decade is likely to see a more multipolar world as China, India, the EU and other countries become more prominent. At the same time it is not clear whether the unfolding climate crisis could push countries to cooperate or drive them apart.

Global Governance

Global governance is the ability to manage cross border or international affairs, this can mean climate change, a pandemic, wars and terrorism. The world has become more interdependent and a host of organisations such as the International Monetary Fund, World Trade Organisation and United Nations has risen to help manage global affairs. Global agreements such as the Paris accord for limiting carbon emissions are example of co-operation to create a global public good – namely a low carbon low and reducing the damage from climate change.

Some argue that the current model of the nation state is unravelling because they are unable to control global market forces, nor deal effectively with global crisis like climate change. Instead they are reliant on multinational corporations to provide jobs while non state actors have become more powerful. Above all nation states are increasingly unable to provide economic security for their citizens.

Some states are looking to increase cooperation to overcome this, the EU is the perfect example of this. When 27 states band together, they can collectively bargain on trade and standards and maintain a powerful global force. Others like the UK which decided to leave the EU view the best option for the state is to reduce regulation and attract inward investment to ensure prosperity.

Gray Rhinos

Gray rhinos are highly probable, high impact event but neglected risk. Scientists have been warning about the risk of a major pandemic for many years. But because in particular western countries have not experienced anything like Coronavirus for over hundred years the risk was widely ignored.

As a result many countries were unprepared, this stands in sharp contrast to many East Asian countries like Vietnam and Taiwan who had experienced more recent outbreaks of SARs. As a result they were fare better prepared when Coronavirus arrived.

Human Rights Risk

Human rights are a contested field. Attempts to apply universal human rights have been resisted by authoritarian governments as well as those who believe them to be Eurocentric. Despite this resistance to human rights they remain a popular principle across the globe.

Many organisations that become involved in human rights abuse face a backlash from the public. Countries that routinely ignore human rights such as China, Saudi Arabia and Iran face a massive reputational problem. While they may try and overcome this through careful public relations campaigns the fact remains that these governments are not trusted.

Human rights risk has impacted companies such as Volkswagen, Disney and McKinsey. These have all faced negative publicity from the fact they that operate in Xinjiang region of China which is home to mass internment camps.  The local Uyghur population have separatist sympathies and are often forced into these centres for “re-education” which allegedly involves forced labour.

Horizon Scanning

Horizon scanning is an exercise at looking at up coming threats and opportunities. Trends, threats, changes and prospects which have appeared but are not yet impacting the organisation. Ideally the organisation will be prewarned and more prepared for the threats that do occur and more able to take advantages of new opportunities that arise. In many cases these threats or opportunities will not arise

For example the prospect of enhanced artificial intelligence has been in the news for the last few years. Horizon scanning would examine how the application of artificial intelligence could help or hinder the organisation, highlighting how the topic should be explored.

International Investment

International investment has soared over the last decades as firms grow and view overseas expansion as a means to grow further. Barriers to entry around foreign investment have also fallen around the world as countries compete to attract new firms bringing the prospect of jobs and prosperity. However there are sings that this tide is turning, with nationalism and protectionism on the rise, global investment could be much more challenging in the future.

China is the biggest market to open in the recent decades – welcoming foreign companies to a previously closed economy, other formerly Communist countries such as Vietnam, Kazakhstan and Laos have followed suit.

Chinese firms have also started investing in every corner of the globe. At first in raw materials but later diversifying into every imaginable sector, including infrastructure, media, manufacturing and agriculture.

Cross border investment is highly desirable, but also poses major risks to any firm. Expanding into another country leaves creates new political, legal, geopolitical and reputational risks. Any overseas expansion needs to be carefully considered and planned considering all the potential risks.

For example firms that have invested in Russia or China were hit hard by the geopolitical forces that lead to US and EU imposed sanctions and a US led trade war.

Migration

Migration is a global phenomenon. Millions of people every year move across borders. In 2019 there were an estimated 272 million migrants, or 3.4% of the world’s population. People move for many reasons, to escape their environment thanks to lack of economic opportunities, disasters or to avoid persecution. Recent large scale migration includes the exodus of Syrians to neighbouring countries to flee the civil war. The plight of Rohingya people leaving Myanmar for Bangladesh to avoid persecution as well as the steady movement of sub Saharan Africans towards Europe in search of better prospects.

Migration is often political unpopular, countries that host migrants often see the public and politicians blame them for crime and being a burden on the state. In fact migration can very often bring economic benefits to the host country such as a bigger work force and new entrepreneurial energy.

However large scale migration is a risk because of the dangers involved for many people, the huge costs incurred by host nations which are often not that wealthy (the biggest refugee host nations are Pakistan, Turkey and Lebanon) to attempt to house and feed so many people.

Multinational Alliances & Institutions

International Alliances, multilateral institutions and cross border associations are key to managing issues in the modern world. They have multiplied since the end of the second world war creating a complex web which defines the world’s diplomatic, financial and military architecture.

The European Union, United Nations, African Union, International Monetary Fund and the Asian Development Bank are just a few of these institutions. Many view these institutions as evidence of a cooperative world and of the strong growing bonds between countries. Others see them as a threat to sovereignty or useless talking shops that waste money and achieve little.

In recent years these criticisms have been encouraged by a rising tide of nationalism. Alliances such as the EU have suffered as a member (the UK) leaves, while others such as NATO have been criticised for lacking relevance in the modern world. Despite criticisms these alliances are here to stay and look set to be joined by new institutions such as the Chinese led Asian Infrastructure Investment Bank (AIIB) which symbolises China’s growing global role.

Natural Resources

Natures resources are unfairly distributed. Supplies of minerals, metals, food and fuel have no respect for national border. The demand for these resources can This distribution can encourage trade or conflict – decisions driven by political choices.

The battle for the world’s fish is another example EU states battle (peacefully) over fishing rights. North Korean boats intrude into Russian and South Korean waters in search of fish.

Rare earth metals are a group of 17 metals used in the manufacture of batteries, smart phones, jet engines and wind turbines. They are crucial to the modern defense industry and China controls as much as 90 percent of the world’s supply of these metals. If China decided to restrict the export of these hard to mine metals it would cause chaos in certain manufacturing sectors.

Political Risk

Geopolitical and political risk overlap – both mean the risk of negative outcomes as the result of political change or instability. Political risk has more of a focus on a particular country, so a change in government in Indonesia may result in a less favourable investment climate which turn will impact on an organisation’s decision to expand in that country.

Geopolitical risk has a more cross border, international element, considering scenarios such as weaker international alliances resulting in growing international instability. Monitoring and understanding how political risk can impact an organisation is critical to protecting it. Failure to understand changes in political risk can hit firms hard.

For decades Australian firms grew rich off ever growing demand from China. But the last few years have revealed growing political tensions between the two countries which exploded into a trade war. Ideally this would have been the time to try and diversify away from dependence on China.

In 2020 China hit Australia with a series of sanctions official and unofficial. Beijing hit Australian barley with 80 percent tariffs and ordered power plants to stop buying coal. Wine and many other goods are likely to see tariffs imposed in 2021 unless Australia changes policy to become more China friendly – allowing Huawei to invest in its telecoms infrastructure and loosening ties with the US.

Technological Competition

Tech companies have taken centre stage in the modern economy. Ventures such as Facebook, Baidu, Apple and Google dominate the corporate world. Countries see a thriving tech sector as highly desirable and hundreds of copycat Silicon Valleys have sprung up across the world. The race to develop new tech such as quantum computing, advanced AI as well as commercial application give countries a military and commercial advantage over rivals.

Tech firms derive a lot of their power from their ability to gather and hold huge amounts of useful data on the users of their products. This allows them to sell huge amounts of information to advertisers. It also gives them access to more sinister powers such as information on users more likely political leanings, which in turn can be used by operatives to push adverts and influence elections. Through monitoring of internet usage habits firms can gain an idea of people’s strongest desires, beliefs and habits.

Tech competition has spilled into the geopolitical sphere, China has longed banned US firms such as Facebook and Google from its domestic market. The US recently banned Chinese app TikTok over fears that it is connected to Chinese intelligence. Behind these bans is a desire to ensure that rivals do not end up harvesting the data of their population and that home grown ventures retain a competitive advantage.

Terrorism

Terrorism is the acts of violence to achieve a political aim. Terrorism has become much feared in the West, but countries in Asia and Africa are far more likely to be the victims of terrorism. Terrorists biggest weapon is the fear they instil in others. The presence of terrorism repels outside investors, brings governments to negotiate with terrorists or push  resources into fighting them – either strategy.

For organisations the threat of terrorism means additional risk to employees and other assets. Some organisations work in particularly risky parts of the world and are exposed to terrorism. Diplomats, oil and gas workers and NGOs are all examples of those in harms way. Organisations should invest in security training for individuals as well as a plan to protect staff through security staff and protocols.

Reputational Risk

Reputational risk is the potential damage inflicted when the public, investors, staff and other stakeholders lose trust in an organisation or institution. Reputation takes many years to build but can be easily and quickly lost through poor publicity thanks to political or personal scandals, the launch of a badly designed product or service.

Reputation is rarely lost in one single action, but can be eroded over time through a series of poor decisions and events which steadily undermine the standing of an organisation. Reputation is particularly important in an economy where many firms are valued on intangibles such as brand value and intellectual capital.

Despite the dangers of reputational risk, most firms do not have a plan to protect it relying on crisis management. Managing reputational risk means first assessing the organisation’s reputation to see whether it is strong, neutral or weak and whether this matches with reality.

If reputation is strong, but reality is that it is not performing as well, then this gap needs to be closed. If reputation is poor in comparison to reality then a plan should be put in place to highlight strong performance with the media and key stakeholders. But it should avoid short term “spin” measures to artificially enhance reputation.

Supply Chain Risk

Supply chains are a key feature of the modern economy. Metals, components, agri-produce, electronic goods and millions of other goods are shipped, driven and flown across the world to satisfy industrial and consumer demand. Much modern trade is done on a just in time basis so goods do not sit in warehouses for long.

This makes supply chains prone to disruption– natural disasters, conflict, pandemic and industrial action such as strikes can quickly halt the movement of goods. Even short disruptions can cost millions, which is why understanding and mitigating supply chains is so important.

Supply chains can also mean reputational issues. Resources mined from illegal mines that drive conflict such as Myanmar or timber from unsustainable sources. Clothing from poorly run, dangerous factories which endanger or even kill workers means that multinational companies face anger from customers and shareholders and even their own staff.

Trade

International trade has exploded in the last decades. Large multinational trade agreements have become more common resulting in a complex web of agreements between states around the globe. These agreeements and modern logistics has made trade as simple and risk free as it has ever been in history.

However many risks around trade remain. Trade has always been used as a tool of politics and warfare. From Napoleon’s continental system to the tariff escalation or the present trade war between the US and China. Organisations that profited from growing trade between nations can see it grind to a halt as politics overrules commerce.

International trade agreements have been blamed for many problems deindustrialisation, loss of sovereignty and underdevelopment. The last few years have seen free trade have been put on the back foot. Despite set backs international trade is going a critical part of the global economy and understanding the risks it faces will be key.

Decline and Fall: The Geopolitics of Climate Breakdown

8000 years ago the Sahara region was far greener and wetter, supporting a sizeable population of hunter gatherers and large animals. Over time the region became more arid and prospects dimmed for the people that roamed an increasingly dry interior.

These nomads moved to the coast in search of more fertile land and in particular the mighty Nile river to the East. This migration eventually led to intensive population settlement around the Nile, which in turn led to the rise of the Egyptian civilisation.

Humans have always moved to adapt to climate change. However the speed of change in the Anthropocene and the huge scale and complexity of the civilisations humans have built. Adapting to this new reality over the next decade to this new world could be the biggest challenge humans have ever faced.

A Fast Warming World

As the world’s climate changes at an unprecedented rate the effects are becoming obvious at just 1 C warmer. At 1.5 C the impact will be far reaching and undeniable. Each increase in temperature will bring more disruption, conflict, and disorder. Change will not happen in linear motion. A 2 C increase is not twice as bad as 1 C increase, it is far, far worse. The world is destined to be hotter and more prone to disasters such as mass forest fires, floods, crop failures and deadly heatwaves.

These disasters will spur mass migration due to sinking cities and dying farmland. In turn this will stimulate anger among people affected by these disasters. One positive response will be a dash towards renewable energy and serious attempts to decarbonise the economy.

Climate resilience measures such as new heat resistant crops, sea defences and sustainable infrastructure will become essential. All of this implies huge and unpredictable change for humans.

Scenarios for Climate Geopolitics

Climate breakdown will also have a major impact on international politics as countries grapple with rapid change. Water shortages, heat waves, sea level rise and extreme weathers (and all the other negative impacts) will hit developing countries the hardest, but every part of the globe will be affected. No where is yet adequately prepared.

Climate change is the ultimate threat multiplier and as the risks unfold many will take on a geopolitical dynamic. Below I look at eight different geopolitical scenarios the world could face. These are not predictions but rather sketches of how the geopolitical landscape could play out over the next decades.

Climate Breakdown Magnifies Conflict

The long running war in Syria has been often linked to climate change. Drought linked to climate change in Syria caused thousands of farmers to flock to cities in search of a better life. Overcrowded cities and unhappy famers helped created the conditions for widespread protests which in turn sparked civil war.

Climate change has also been linked to the Darfur conflict. Pastoralists in the Darfur region were forced to move due to get access to fresh water but this brought them into conflict with local farmers. The clashes eventually led to a deadly war characterised by massacres and ethnic cleansing.  

Climate change does not cause war, nor does climate change create hurricanes. What it does do is magnify risk making disaster more likely. A hotter world this less fresh water, arable land, fewer resources and more angry people, all of which creates the ideal conditions for conflict.

Mass Migration

Mass crop failures, receding fresh water, cities slowly sinking into the sea will spark widespread migration. Many people will move to other parts of their own country. Others will look overseas and inevitably people will choose or be forced to flee across borders sparking political and social reactions. Climate migrants may find much sympathy across the globe and may be welcomed into their new homes.

However, all too often across the world migrants are demonised. The size and scale of climate migration could dwarf previous waves of migration. The Syrian war set off a wave of migrants into Turkey and Europe with major political consequences.

Many European politicians and voters were unhappy with the prospect of large scale migration and tried to stop or discourage Syrians from moving. The desertification of the Sahel region could see millions upon millions of desperate people unable to farm or find work and look north to Europe for salvation. There will be heavy political price seeing millions of migrants enter Europe or watching them face destitution and famine at home.

These scenes will be recreated across the globe as retreating glaciers and shrinking water will put huge pressure on agriculture across the world. As ice melts for good the mass failure of farms and crops will follow. The result will be rocketing food prices, mass migration and political chaos.

The Rich and the Poor

Countries will start blaming each other as the worst effects of climate change take hold across the world. Developing countries will condemn developed nations for over consumption and years of climate emissions. Developed nations will blame each other for not doing more to reduce emissions earlier.

Global crop failures will cause famine in developing countries and fast rising food prices in developed countries. A loss in living standards will mean political upheavals as people take out their anger against the government. Crop losses can be partly mitigated by using adapted crops and by changing crop type as well as perhaps technological fixes such as growing meat in labs.

Richer nations have more resources for adaptation and resilience measures. They will be able to build sea walls, resilient infrastructure and rebuild faster after disasters.

The developing world has been struggling to catch up with the living standards of the west for decades. But the capacity of many African and Asian countries is limited in terms of disaster recovery. They lack the resources and capability to rebuild as effectively as western nations.

Economic Collapse and Political Chaos

Economic growth is one of the central tenets of capitalism. An objective to be pursued at any cost. But the economic devastation caused by climate change will reverse many of these gains. Instead of economic growth countries will experience a collapse in usual economic activity as a hostile climate makes our current life unsustainable.

The Covid crisis is a chilling foreshadow of the future. Lack of economic growth will see faith in capitalism shaken and perhaps the emergence or re-emergence of new strains of political thought arise. Socialist, green, as well far right and fascist parties will see their popularity flourish as the disillusioned look for answers.

While northerly countries such as Canada and Russia enjoy enhanced agricultural benefits others will suffer immensely. The World Bank estimate for India sees its economy shrink by a quarter thanks to climate change. India’s recent burst of prosperity will be reversed as productivity collapses. As crops dry, rivers shrink, monsoons arrive will late and heat waves kill people by the thousands. The foundations of the current world economy will rot away.

Ultimately any economy is dependent on “natural capital” such as clean water and air, fertile soil and agricultural yields. The warmer the earth becomes the possibility of multi-breadbasket collapses increases.

A New Era of Isolationism

Recessions and economic collapse could usher a new period of isolationism as countries retreat inwards focusing on trying to feed and placate their own angry populace. Infrastructure designed for our current world will be unable to cope with new rapidly changing conditions.

When the monsoon arrived late in India in 2016, farmers overwhelmed the electrical grid to meet irrigation needs, shutting power down across much of country. The 2020 monsoon is expected to be the 3rd year in a row which is late.

Financial markets will react to climate risk too late. Bankers and insurers will realise that the much of the real estate that underpins the global economy will be worthless in a couple of decades. This could cause an unprecedented global financial market crash as assets are radically revalued downwards.

Disorderly Transition

As the reality of climate change hits home a transition to renewables and decarbonisation will accelerate. Countries that have tried to ignore the rush to decarbonise could be left behind or face an energy crisis as they attempt to lurch to renewables or are forced to through regulation. This shift will profoundly change the geopolitical map.

The transition to renewables will become unstoppable and the oil and gas giants will see their dominance collapse. Fossil states such as Saudi Arabia may panic in the face of falling solar and wind energy prices. Some may pivot to renewable energy. The Gulf economies are in a strong position to utilise solar power given their abundant sunlight and empty desert spaces.

New “electro” states may emerge to capitalise on their dominance in green technology. Using their advantages in clean energy to dominate battery, solar or wind technology or to sell renewable energy to others. Australia for example plans to export solar energy to Singapore.

China is the world’s worst carbon emitter but has become a leader in developing new technologies such as solar panels and electric batteries. However, there is far less geopolitical leverage in supplying solar energy compared to oil. It should be much easier for countries to become self-sufficient in energy which could reduce the geopolitical tensions that have characterised the oil age.

Petro States and Electro States

Fossil fuels have defined the modern economy, underpinning the massive economic expansion of the last two centuries. Before widespread coal and oil use humans had to largely rely on horse, water wheels, animal oils and their own hands to produce energy.

The current global energy mix remains focused on coal, oil and gas. The main oil producers are Russia, US and Saudi Arabia. Russia has shifted much of its focus to supplying China. The US has undergone a domestic oil boom which has allowed it to become self-sufficient in oil.

Saudi Arabia remains the key swing producer able to increase or decrease oil production in order to shift prices sharply. It is not surprise that these three states have been the most active in delaying greenhouse gas emissions treaties or in the case of the US pulling out of the landmark Paris Agreement.

The Middle East sits on top of much of the world’s easy to drill oil. This fact makes it much more tempting for outside powers to interfere and meddle. The prize is influence and control over the region which controls much of the world’s most important commodity as well as holding a key geopolitical position between Europe, Asia and Africa. Without oil the Middle East is unlikely to transform into a peaceful utopia. But if demand for oil fell rapidly it would release some of the geopolitical tension that envelopes the region.

As oil demand dwindles petrostates will be left fighting for market share. While investment in oil and gas may collapse as investors shun a declining industry. But as marginal producers and countries with high production costs like Venezuela move away from oil. In turn this may increase market share for Gulf States who can usually produce oil cheaply and who still have easy to recover reserves.

While some petrostates may pump oil for longer than expected, eventually their geopolitical influence will wane. A decarbonised world will hand power to those places best able to utilise renewable energy and take it from the old fossil powers.

The Age of Disaster

Disasters such as flooding, typhoons and storms will increase in number making previously inhabited areas barren and unlivable as the cost of insuring, rebuilding and recovering from disasters becomes too costly.

Increasing number of wildfires across the world will destroy forests and housing, heatwaves will become a major source of death and reduced productivity.

Despite freshwater sources drying up, flooding could increase in severity due to the increasing intensity of weather patterns. Rainfall is lower overall but falls in a short space of time, this combined with deforestation and increased use of floodplains for housing creates the receipe for more deadly floods.

The good news is that humans have become more adaptable to disasters. Early warning systems, well coordinated recovery efforts and infrastructure which is designed to withstand extreme conditions means that many lives and homes can be saved.

However increasing intensity of disasters will push this resilience to the limit in many parts of the world. If disaster only strikes once a decade that gives ample time to rebuild. If major typhoons, floods and wildfires become a yearly occurrence it becomes much more difficult and expensive to rebuild. People could be driven from their traditional homes resulting in widespread migration as well as anger which could morph into political change and economic chaos.

The Technology Race Heats Up

As the realities of climate change bite countries, companies and other organisations will accelerate and improve the solutions to climate breakdown. Many of these solutions exist, solar panels, wind turbines, curbing deforestation and planting more trees and energy efficiency measures.

Countries that were used to growing plentiful crops could be forced to import as domestic supplies wilt and die.  This will push up food prices, but also create innovative solutions such as widespread lab grown meat and intensive urban farming. Urban farming grows vegetables in a nutrient water often using unconventional buildings such as high rises.

China controls the lion’s share of the global solar panel industry and the supply of rare earth metals which provide the key ingredients of modern batteries. As the world moves to decarbonise, market share and expertise in these sectors will become increasingly significant.

Becoming a leader in an emerging green technology will become a major advantage as demand surges for these products and ideas. Other technologies around negative emission technologies are still being developed. Carbon capture promises to extract carbon from the atmosphere potentially solving the problem climate change.

But carbon capture has not yet been done at scale and so remains a speculative solution. Lab grown meat as a solution to carbon emitting meat sector also has promise. But again this has not been widely adopted. The next decade could see a battle emerge between corporations and countries to lead and dominate in these new technologies that promise to solve the climate emergency.

Climate Chaos

The scenarios are just that, not predictions, no one has a crystal ball. Climate risks will not appear neatly as planned and predicted. Many factors including the will of humans to mitigate and adapt to new circumstances and flight climate change will change the likelihood of these scenarios.

Similarly, government actions may shape new unexpected geopolitical maps. Climate breakdown may usher in a chaotic global order or a new era of international cooperation.

After the Storm: Long term risks in the aftermath of Covid-19

In July Intelligent Risk, a publication of the Professional Risk Managers’ International Association (PRMIA) published my article on long term risk to the world economy following Covid-19.

In March 2020, millions of office workers around the globe packed up their desks and almost overnight became remote workers. They left behind daily train journeys, coffees with colleagues and crowded meetings for a new world of virtual meetings, makeshift home offices, and juggled teaching with emails.

Now many firms are struggling to survive an unavoidable global recession. However, they also need to react now to the longer-term risks facing the economy.

  • Covid-19 will act like a fast-forward button, accelerating long terms trends such a shift to home working, rising economic nationalism and corporate sustainability.
  • Long-term structural shifts in the economy will permanently reduce demand for many sectors. New working and social patterns will threaten sectors such as airlines, entertainment, restaurants, and international tourism.
  • Shocks like Covid-19 create recession, mass unemployment and most likely major political aftershocks. However, shocks also trigger innovation, ingenuity, and new opportunities.

Globalization Under Fire

Globalization was already under threat from nationalism and trade wars like the US-China disputes. When Covid-19 first appeared in Wuhan at end of 2019, the main concern in the West was around disruption to supply chains that originated in China. Companies dependent on supplies from China faced and experienced shortages of pharmaceuticals, PPE, and many other goods.

These problems may ease soon. However, long-term firms may seek to make their supply chains more resilient. This could mean more “inshoring”, shortening and simplifying these often complex, opaque chains. Economic nationalism or economic independence may also see barriers raised to prevent shortages of critical medical supplies or the supply of goods deemed strategic or valuable such as rare minerals, oil, and food.

A new world means new opportunities and markets. Tech companies that provide work from home services like video chat should have a bright future, as should domestic tourism in a world scared to fly and online delivery services. Zoom a digital communications firm specialising in video meetings had 10 million daily meeting participants in December 2019. In April 2020, just four months later, Zoom counted more than 300 million daily meeting participants.

Less obvious niches like drive in cinemas could also enjoy a boom. The collapse and retreat of many firms due to Covid-19 will result in a wave of consolidation and restructuring. The successful firms of the future will be those that prove resilient now.

Covid-19 and Climate Change

The prospect of economies in ruins, unprecedented recession, and mass unemployment will prompt many to assume that action on climate change is no longer a priority. However, a Covid-19 recession is a stark reminder of how nature can deliver a deadly shock. Covid-19 is a dress rehearsal of how climate risks may soon affect society.

Disruption is a harbinger of change. Deep recession is the time and opportunity to remodel the economy on sustainable lines. This means building back better, sustainably. Kristalina Georgieva Managing Director of the IMF commented: “If this recovery is to be sustainable – if our world is to become more resilient – we must do everything in our power to promote a green recovery”.

Governments and Firms can build on policies already in place:

  • Invest in green resilient infrastructure that can cope with a changing planet. The world will experience more heat waves, sea level rise and extreme weather as climate change becomes more intense.
  • Mandate measures like the Task force for Climate Related Financial Disclosures (TCFD) reporting which identifies climate risks in Bank’s portfolios. Canada launched the Large Employer Emergency Financing Facility (LEEFF) designed to support employment during a Covid recession. Any firms receiving funding with have to publish climate related disclosures (TCFD).
  • Use renewable energy sources to help mitigate climate change.
  • Encourage green infrastructure: cycle paths, electric vehicle charge points, and a faster broadband to make it easier to work from home
  • New stimulus packages combined with a restructured economy could be the impetus for a more sustainable economy. The world will look closely for green credentials in China’s forthcoming economic recovery package. The EU is pushing ahead with its EU Green New Deal in conjunction with its Covid-19 emergency response package.

The Long-Term Risks for a “Brown” Recovery

A “brown” recovery is one based upon traditional energy sources such as oil and coal. These energy sources feed resource intensive sectors such as cement and heavy industry these activities magnify climate risks through greenhouse gas emissions. A world of more extreme weather events, deadly heatwaves and sea level rise will disrupt economies in way that dwarves the current crisis.

Companies that are not reducing emissions may be penalised by governments or consumers. France has made reduction in emissions and domestic flights a condition of its bailout of Air France. Consumers could increasingly shun firms that are not acting responsibly on reducing emissions or taking sustainability seriously.

How to Manage Geopolitical Risk

Introduction

In this guide I outline the major global and geopolitical risks faced by international organisations and how they can be successfully managed.

One of the world’s leading insurance firms Willis Tower Watson labelled geopolitical risk the number one risk corporate risk faced by multi-national companies. From war to climate change to failures of national governance, threats to organisations worldwide are diverse and always evolving.

After identifying the risks I provide ideas about how they can be managed and how to develop a resilient enterprise which can handle a rapidly changing world. Lastly I look at how best to spot geopolitical shifts and global trends and turn them to your advantage.

The Merchant of Prato

Francesco di Marco Datini was a fourteen century Italian Merchant who from humble beginnings created a wealthy pan European trading empire over the course of 50 years.

Datini dealt in anything that would make money, from armour and weapons, saffron and jewellery, money lending to art dealing. Key to his success was a network of informants and agents which allowed him to stay abreast of and take advantage of events across a tumultuous era in Europe. The fourteen century had more than its fair share of warfare, plague and religious schism.

Datini’s shrewd management, his access information and above all his ability to adapt to a changing world were key to his success. This is what we now call managing geopolitical risk.

War between France and England was an opportunity to sell weapons and armour. While peace and royal weddings were a chance to sell luxury goods like spices and fine cloth. Lending money to monarchs and the nobility were generally avoided thanks their unreliability in repaying loans.

Natural disasters like storms and made hazards like brigands were sometimes unavoidable, but careful diversification ensured they were not calamitous.

Datini understood managing geopolitical risk was key to his European trading empire. While times have changed since the fourteenth century, geopolitical risk remains a reality for organisations which can catch the unprepared unaware time and time again.

What is Geopolitical Risk?

Geopolitical Risk is messy, hard to define and even more difficult to predict. The Covid-19 pandemic is a great example. Narrowly defined the virus poses a healthcare risk. However, differing government responses and lack of international cooperation and the economic, social and political fallout seen across the world is a geopolitical risk.

Geopolitical risk is the probability of a political action negatively or positively affecting a company. Global Risks mostly overlap with geopolitical risks and include topics such the shadow economy, environmental risks and cyber risks.

Geopolitical risks can be identified but acting on them can be much harder. Even more difficult is proactively managing risks and turning them into opportunities.

Many companies view geopolitical risk as something that happens to them. Often it can feel that geopolitical risks are out of our hands, and we or the organisations we work for are a passive recipients of global events.

But companies can monitor, engage and even shape geopolitical risks and turn them to their advantage.  But to do this they need to prepare, monitor and understand risks, but above all be ready to act when they arrive.

Conflict

Interstate war or internal conflict

Since the dawn of civilisation, countries and empires have gone to war. It is no surprise to us that war and conflict cause misery, death and can make normal life very difficult. Serious widespread conflict or war may seem remote to most people in developed nations. But many parts of particularly the developing world continue to suffer from conflict.

An arc of conflict cuts through through Africa, the Middle East and Asia. Any company considering investing in emerging economies in these regions have to weigh up the likelihood of conflict in their target country.

Many wars rage on for years but are relatively underreported in the international press. For example, the Yemeni conflict which has drawn in Saudi Arabia the Gulf States as well as western states and Iran. Others like Syria remained more in the public eye, perhaps because of the migrant crisis that affected Europe.

Predicting War

While it is difficult to predict wars and conflicts. It is possible to carefully monitor a country’s political climate, relations with its neighbours and crucially its history of violence. This analysis can at least can give an indication of the likelihood of future war and conflict.

War can break out over resources, nationalist sentiment as well as perceived ethnic or ideological differences. Many modern wars are at first glance civil wars. Syria, Sudan and Somalia are all recent examples. But civil conflicts always end up dragging in neighbouring states. Syria has drawn in Turkey, the USA, Russia and France and others into the country. It is always worth taking a regional view of how a conflict can spread.  

When a war starts a firm’s assets come under threat. In some cases firms can easily pull out of a country. A consultancy for example. Others focused on natural resources or infrastructure cannot easily pull out their mines, roads, tunnels and physical infrastructure.

How staff threatened by war are cared for by the firm is also crucial. Very often staff can be moved out of the country fairly easily before the conflict spreads. However locally hired staff may not want to move from their home, nor is it always possible due to immigration rules.

Cyber Conflict

Conventional wars across land, sea and air are familiar sights across the globe. But the last decade has seen the new theatre of cyber conflict emerge. Cyber conflict has had a low profile but the world is slowly waking up to the reality of cyberwarfare.

The raging global debates over allowing Chinese firm Huawei to develop critical infrastructure in many western states has brought cyber concerns to the top of the security agenda.

The cost of conventional war is high in terms of human life, but also diplomatic and economic fallout.

Cyberwar as an Alternative

Cyberwar offers a powerful alternative. By infiltrating government agencies or critical infrastructure through phishing attacks, systems and networks can be compromised. This can demoralise the enemy and cripple critical infrastructure such as power or water supplies.

Cyber attacks can also be used to steal valuable information. The theft of the US Democratic party emails in 2016 helped changed the result of the US election.

Best of all cyber attacks can be carried out in secret or through proxies. This gives governments valuable cover and plausible deniability. Attacks over the internet are far less obvious than an old fashioned invasion or bombing raid.

Geopolitics and Cyberwar

For example a shadow cyber war between Iran and Israel has been ongoing involving disruption to water supplies and alleged attacks on nuclear facilities.

Companies are vulnerable to cyberattacks by criminals but also governments if they hold important strategic assets or information. Defence and military contractors, national infrastructure (powerlines, ports, systemic banks, rail & road), shipping and firms in the medical sectors are all potential targets.

Recently Australia has recently been the subject of a wide number of cyber attacks which were blamed on China. Australian government agencies were hacked in a major attack which prompted a rare public warning by the head of the Australian Intelligence agency.

The Attack on Maersk

The Danish Shipping firm Maersk was hit by a ransomware attack in 2017. Experts believe the attack originated from the North Korean government was in fact deployed by accident. The attack shut down all the Maersk IT systems. It took two week for IT systems to be restored and cost the company over 300 million Euros to fix and repair the damage.

This form of warfare is on the rise and companies as well as governments will be in the crosshairs. For some companies and organisations the threats will be obvious. Other companies should consider their vulnerability to cyber attacks with a geopolitical motive by thinking about:

  • Are they doing business in countries with a history of using cyber attacks to gain commercial & political advantage such as China
  • Do they partner with sensitive government agencies or ministries that might make them a proxy target or hold valuable information.
  • Are staff easily able to bypass company security and use personal accounts and devices to store information.

Terrorism

Militant groups continue to plot and carry out violent acts across the world impacting both security forces and civilians. Terrorism is widely feared in Western countries for good reason. But in fact it is developing countries such as Iraq and Afghanistan that suffer the most at the hands of such groups.

Widespread terrorism drives instability in countries, terrifying the people and driving away business. Business people are unwilling to travel to danger zones and require additional protection to operate where terrorism is a risk.

Terror groups are closely linked to poor governance as they undermine legitimate governments through violence and in some cases morph in states of their own. The most notable example of this was the Islamic State in Iraq. Terror groups are also linked to crime as very often they engage in drug smuggling, money laundering or wildlife poaching as way to fund their activities.

The Shadow Economy

Financial crime, drug smuggling, people trafficking, and many other activities earn criminals billions a year globally. One estimate puts the shadow economy at US$870 billion in revenues. But these costs companies, governments and society untold damage. Many of these activities cross borders and can be considered global risks.

Networks like Mexican drug cartels can undermine legitimate governments and provoke something close to a state of civil war in that country. In 2018, 33,341 murders were recorded in Mexico. Other networks make alliances with political networks which results in corruption, the undermining of institutions and markets. In some countries such as Afghanistan the distinction between government and criminal enterprise is almost non-existent. 

Criminals can infiltrate supply chains through illegally produced timber, illicitly mined minerals such as blood diamonds, even using slave labour to produce goods. This type of activity feeds corruption and crime but when otherwise legitimate companies are involved it can damage hard won credibility.

Supply chains can be long and opaque with many companies unaware or turning a blind eye to potential criminality. Poor publicity around supply chains can lead to long lasting reputational damage to those involved.

Money laundering is perhaps the biggest element of the shadow economy. In order to legitimatise illicit earnings, criminals need to clean their money. They do this by laundering their gains through legitimate businesses and banks. Some estimates put place illegal earning at 5 percent of the world economy.

New Political Actors

Individuals, NGOs, activist groups thanks to social media and modern campaign techniques can make major political waves. Groups such as Black Lives Matter or Extinction Rebellion have made headlines throughout the globe. These groups have been spurred on by widespread racism and the threat of climate change and their protests have inspired local copycat groups across the world.

The Blackfish documentary exposed cruelty to Orcas at Seaworld Florida. The documentary caught the attention of the public and activists, quickly becoming a viral hit. Eventually it resulted in a major downturn in visitors at the iconic US park. The film cost just US$ 76,000 to make, but made a major dent in Seaworld’s profits with its stock price falling 60% the year it was released.

A small group or individual with the right cause and a savvy media presence can change perceptions and ruin the reputation of a company or institution (like US police forces) and inspire change in companies (witness the promotion of Black Life Matters messages across corporate social media in June 2020).

Environmental Risks

Climate Risk the impact of Climate change

Human activity has raised the concentration of carbon dioxide to over 400 parts per million. It is no coincidence that nine of the ten hottest years on record have occurred since 2005. The world is heating fast and this brings extreme risk.

Given the rate that Co2 levels are continuing to rise the world is on track to experience a 2 C rise in the next few decades. The world faces drought, extreme weather, water shortages and sea level rise on scale never experienced before. The pace of change will leave traditional infrastructure unable to cope with rising seas and higher temperatures.

Crop yields will decline and vast areas of farmland will dry out and become unusable. Extreme weather events will multiply in number causing businesses billions in damages and ever-increasing insurance costs. At the same time rising sea levels will push seaside dwellers inland putting many of the world’s major cities such as New York and Shanghai at risk.

Climate change is a threat multiplier. Existing risks such as extreme weather, drought and heatwaves will increase in frequency and severity. In the long term and given its global nature climate change represents the biggest threat to humankind.

Climate change will create unprecedented disruption to life in the next decades ahead which can only be partly offset by adaptation measures. All organisations should be considering the risks that climate change present.

Environmental Risks

Agriculture and ultimately all human activity is dependent on a functioning natural world, insects to pollinate crops, clean water to drink, fertile soil to grow crops as well as countless other natural commodities.

Deforestation, conflict over resources and water and the degradation of the world’s oceans and rivers all pose a threat to our way of life. The world’s oceans are being plundered by fishing legal and illegal, threatened by pollution and acidification and oxygen depletion.

Huge islands of rubbish have formed in the Pacific Ocean. The world’s forests, jungles and wilderness are also under assault by loggers and developers as humans expand farms and settlements. Deforestation threatens a key carbon sink and habitat to much of the world’s animal and plant life.

Environmentalists have been warning the world about these risks for many years and now the threats are materialising.

The Blue Economy

The “blue economy” (economic value of seas and oceans) has been valued at US$ 24 trillion but in reality is incalculable. Protecting oceans just like climate change depends on collective action among nations.

The open nature of the world’s oceans has meant they have been an easy target for exploitation by fishing fleets

Companies that are that damage the environment will see their reputation under threat from activists and eventually the public who increasingly shun goods they believe unethical.  

Biodiversity Loss

Biodiversity loss is of increasing concern and not just among environmentalists. The 6th mass extinction is accelerating and threats to wipe out not just large charismatic animals like tigers and whales but also insects, plant life and birds.

Climate change, habitat loss, use of pesticides, hunting and poaching have led to spectacular declines in wildlife. Mass die outs of animals can set off catastrophic cascades where entire ecosystems are destroyed. This loss also threatens humans as many indigenous people rely on natural habitats as homes. But those living in the rest of the world will eventually pay for destroying nature.

Farming and is ultimately dependent on healthy ecosystems, clean water and pollinating insects. Depleting farm yields, loss of pollinating insects and loss of natural carbon sinks like forests along with climate change will accelerate a food crisis where previously strong agricultural yields disappear.

A world of declining food yields will create political and economic crisis as more people are pushed into food insecurity and famine. China for example has destroyed much fertile land thanks to pollution and using it for housing and industry. But thanks to its relative wealth is able to import more food to make up the shortfall.

However in the future countries may find it harder to spend their way of food shortages if there are widespread global crop failures and rapidly increasing prices.

Many will wonder if biodiversity loss will really impact on businesses or whether they will care. But there are moves underway to create a global framework for protecting biodiversity in the same way there has been for global emissions and climate risk.

Resource Conflict

Wars may be driven by water conflicts such as the Ethiopia – Egypt dispute. The Grand Renaissance Dam in Ethiopia threatens to cut the water flow of the river Nile which would devastate Egyptian agriculture, industry and society.

No country is more dependent on a river than the Egypt is on the Nile. Hopefully the dispute can be settled peacefully, but given what is at stake war could become a reality.

Egypt is the Nile, and the Nile is Egypt

Herodotus

Oil and gas deposits, diamond and other minerals can also attract war and violence. Conflicts driven by resources include:

  • Conflict in the Democratic Republic of Congo driven by coltan and other minerals.
  • The Gulf Wars in Iraq were driven in part by the desire to control or stabilize a region valued for its oil deposits and strategic significance.
  • Rakine Province in Myanmar: armed militias, warlords and individuals battle for control of the jade rich, but lawless province of the South East Asian country.
  • Baloch Separatists in Pakistan who claim the central government and now China are benefiting from the region’s resources rather than the locals.
  • The Libyan civil war which pits various factions (backed by outside powers such as Turkey and Egypt) the prize being an oil rich country bordering Europe.

Governance Risks

In 1914, little over 100 years ago the world was dominated by multi-ethnic European centred empires. The United Kingdom, France, Germany, Austria-Hungary and Russia ruled massive regional and global empires. The decades before 1914 had seen many colonial wars but overall relative geopolitical stability.

This was all punctured by the calamitous events of August of 1914 where events in Europe spun out of control into a global war. Although the causes of the war have been explained in retrospect by historians, at the time it was a major shock.

Now after many years of US dominance there is a feeling the world is moving into a new unpredictable phase – what author Ian Bremmer called G-Zero. A geopolitical landscape where every country are working towards their own interests rather than trying to work together. As a result global public goods (such as security, global warming mitigation & knowledge production) become harder to provide.

A number of trends are pushing global trade wars and economic dislocation:

  • Surging global migration
  • Fraying international alliances
  • Growing competition between state
  • The rise of nationalism and populist governments

Trends such as the decline of fossil fuels and the rise of renewable technology could shape geopolitics in new unexpected ways. Could states like Saudi Arabia decline along with oil. But new resource powers based on lithium (a key ingredient in electric car batteries) such as Bolivia rise?

Failure of National Governance

Government regulation, interference, and expropriation pose a major threat to companies, usually in developing countries. While many governments taking a long term view and are keen to provide a stable investment framework.

Others seek to extract value from unwary investors. This can come in the form of nationalisation or favourable treatment to local or well-connected firms. Some governments prefer to heavily tax firms which can make their operations unviable.

Uncertainty in legislation or tax regimes leads to friction between companies and governments. The rise of global nationalism and trade barriers threaten to make governments even more hostile to foreign companies. Outsiders, particularly those involved in the extraction of natural resources are often considered an easy target.

For investors understanding the target country and its government and political reality is key. Without this overseas expansions easily fall apart. Western tech giants Google, Facebook and Twitter have all been blocked in China because their business model clashes with the Chinese government’s plans to develop its own tech champions. Tech companies have a great deal of influence over the flow of information, something the Chinese government is keen to control for itself.

Global Migration

The movement of people is often linked to economic dislocation, climate and environmental issues. Mass migration of people within or across borders can lead to geopolitical risks as governments squabble over the impacts of migration. Global migration is predicted to rise as the impact of climate change increases.

Migration from Syria to Europe was triggered by the long lasting conflict afflicting the country. The prospect of further conflict in Africa and the Middle East, along with widespread youth unemployment and climate change raise the prospect that millions of potential migrants will try and enter Europe.

The political response in Europe to Syrian refugees was largely negative with many European leaders making political capital out of demonising migration. In other words gaining popularity by promising to keep out immigrants.

Religious and Ethnic Persecution

Other migrants like the Royingha people of Myanmar many of which have been forced out of their homes into Bangladesh are subject to ethnic and/or religious persecution.

Global migration may be slow thanks to the Covid-19 pandemic, countries closing borders and implementing stricter immigration regimes. In the longer term this will not deter migrants trying to move nor the anti-immigration sentiment pushing governments to reduce immigration.

Migration is primarily an opportunity for companies. They can pick staff from different countries, widening their talent pool. Migrants often fill jobs which locals cannot or will not do. This can be highly skilled tech work or more routine agricultural work.

The risk around migration is that is sometimes leads to a political backlash which nationalist politicians can take advantage of to take or keep power. In turn extremist politicians create their own uncertainty which can be damaging for the business sector.

Technological Competition

The world’s powers and corporations are in a technological arms race to develop the most advanced artificial intelligence, big data applications, the internet of things and cyber capabilities. The advantages in terms of commerce, espionage and military applications are huge.

Countries have always used new technology to gain advantages over their competitors, from using gunpowder weapons in medieval battles, to the 20th Century space race. Now the technologies are different but the competition between states just as real. These areas in tech are the battlegrounds of the present and future.

Weaponization of social media, states use social media to promote propaganda, spread misinformation with the aim of shifting opinion or even winning elections.

Cyber attacks can be used to harvest data (such as the Marriott Hotel data breach) such as the movements of diplomats, military and politicians. Nation states that retain the best techniques for cyber warfare gain a major advantage over rivals.

Artificial Intelligence has become a hot topic, although its yet to realise its potential, becoming a leader in this area will create new opportunities in military and commercial applications. Vladimir Putin said in 2017 the nation that leads in AI ‘will be the ruler of the world”

First mover advantage in technology gives country’s a competitive advantage. The race to build Silicon Valleys full of tech firms has increased as the new products and services created are seen as vital to a modern economy.

The success of major tech firms and their control over the flow of information has gained them enemies. Tech firms monopoly power, dubious data practices and willingness to overlook widespread misinformation on their sites could lead to many protracted legal and political battles.

Global Diplomatic Architecture

The alliances, institutions and governance that have dominated the world in the last 80 years are now under strain. NATO, WHO, IMF have all been heavily criticised by members and outsiders alike in recent years. The roles and usefulness of these institutions have been questioned.

Many have questioned NATO’s role given it was an alliance designed to counter the threat of Communism in Eastern Europe. A threat which is long gone. Meanwhile the rise of China and its financial firepower means it can form its own financial architecture.

New Chinese influenced, some say dominated institutions like the Asian Infrastructure Investment Bank (AIIB) have been set up to emulate or rival traditional relations. At the same time poor relations between the US and European countries have undermined NATO.

Multipolarity – the growing divisions between the world’s powers and the growing strength of rising powers is a major risk. Foremost of these rising powers is China and its flagship foreign policy project the Belt and Road Initiative. The Belt and Road initiative is a label given to China’s outbound investment and trade. It has become a highly visible form of commercial diplomacy with countries queuing up to be a Belt and Road partner.

These shifts in alliance and power projection create uncertainty and change which create risks – such as a trade war between China and the US. It can also be an opportunity – for example Pakistan has seen an influx of Chinese money which has helped boost its economy. Although some say that has come at the price of increased dependence on China.

Nationalism, Populism and Social Cohesion

Fraying social Cohesion driven by narrow political groups, unpopularity with political elites, hate and misinformation spread by social and traditional media along with inequality, unemployment and generational divides has all made the world a more angry, dangerous and harder to govern.

Nationalism and populism are on the rise across the world. The US, India, Hungary, Brazil and the Philippines have all seen the nationalistic leaders rise to power. Populist leaders have tapped into the unpopularity of perceived elites and fear of unemployment, economic uncertainity and migration.

This trend has made it easier for authoritarian states like Russia and China to operate feeling less need to pay lip service to liberal values. The spectre of another recession may make accelerate this trend.

Nationalist leaders also have a tendency towards corruption, nepotism and incompetency – which eventually catches up with them. Nationalist states are also more prone to conflict with its own citizens and other countries. All this helps add to the current feeling of uncertainty, change and pessimism in global politics.

Trade Wars and Economic Nationalism

Many observers see globalisation going in reverse which will disrupt supply chains, create currency disputes and made foreign investment more difficult. The so called weaponization of finance has seen embargos, sanctions and tariffs used in place of warfare.

The most significant examples have been the sanctions on Iran imposed by the USA and others which have put severe pressure on the Iranian economy and made it hard for banks to do business with Iran or face fines enforced by US authorities.

Russia faced similar sanctions following its annexation of Crimea. These sanctions driven by the EU did not have the same impact. Russian gas and oil remain indispensable to Europe. Russia’s economy managed to escape the worst predictions of doom, but undoubtedly suffered. Sanctions are likely to remain a policy of choice for mainly western countries who can punish countries they deemed to have.

Russia and others have criticised sanctions viewing them as hypocritical – pointing out the the US and UK faced none for their invasion of Iraq.

However for a company facing sanctions it is a serious matter, major fines, loss of revenue and markets are a reality for the likes of Societe Generale. The French Bank were hit by US imposed fines (worth US$1.3 billion for dealing with Iranian and Cuban companies.

Supply Chain Risk

Supply chain risk has rapidly increased in recent years. A world economy reliant on international trade routes is one vulnerable to disruption by trade disputes, natural disasters, or reputational issues around the source of manufactured goods or minerals.

Covid-19 has compounded these fears. Many companies are reconsidering supply chains fearful of being left short by factories in China closing or at the mercy of US-China trade wars. Some firms are looking to countries like Vietnam to provide goods, while others may decide to bring manufacturing closer to home

Covid-19 and the Great Reset

Covid-19 is a global health crisis, but the economic and social changes that are still emerging and could create long term risks. While much good can come of a reset, the risks are also apparent.

Economic dislocation and depression, unemployment, rising government debt and in some parts of the world widespread disaffection and anger towards government. To add to that overstrained healthcare systems, disrupted supply chains, corporate and government debt levels and there is a great cause for concern.

For multinationals the geopolitical risks can be clear, but even SMEs and small firms the second order effects can be devastating. For examples see the Covid pandemic or the effect of US-China trade wars on the economies of agricultural states in the US.

How Can My Firm Manage Geopolitical Risk?

Consider the big picture – Scan, Focus and the Act

The first step is understanding the geopolitical risk landscape, and how it applies to your firm.

  • Scanning the environment to monitor, identify and assess geopolitical risk.
  • What appetite does for Geopolitical Risk does my firm have, are we willing to take big risks if there is an upside.
  • What are the firm’s most valuable assets and which are exposed to risk
  • Some firms may prefer to use a outside expertise, but using existing internal knowledge is also invaluable.
  • Remove institutional blindspots – this is where outside expertise can help.
  • Next is to map the company’s profile to the geopolitical risks. This allows focus – which risks are likely to be most important.
  • Does the firm have the capability to manage geopolitical risk.
  • How can it become proactive – managing political stakeholders for example?
  • Does the firm have the right skills/staff to deal with the risk. Can staff be trained or is it preferable to hire outside expertise.

Once Geopolitical Risks have been framed what specific actions can a firm take to develop resilience:

Political Analysis of your firm’s footprint

By analysing and monitoring the countries and regions your firm operate in. Emerging economies which are characterised by unstable politics and seesaw like economic conditions. Analysing, monitoring the country is an obvious action. But more difficult is linking change too how it might affect your firm. If your firm is in a sensitive industry it will be more exposed to political interference.

For example if a new government hostile to foreign companies comes into power in a country you are doing business this should be considered when making investments. Analysis can be done from afar, remotely, but the best information often comes from the ground. Staff and contacts in the country can often give you the best intelligence. This local knowledge combined with a macro view should provide a comprehensive analysis of the target country.

Creating a Resilient Firm

Central to developing a resilient firm is identifying critical functions and activities and how they could be recovered or protected during a crisis. Engaging a business continuity or resilience expert is usually a must, especially for a larger firm. Creating and exercising (see below) crisis plans through simulations or exercises will test their effectiveness. Exercises also help ensure effective communication channels between employees.

Many firms have seen their resilience tested by recent events such as the Covid pandemic. Many companies will not recover from the crisis, most will survive if weakened, a minority will come out stronger. Partly due to luck or government bailouts.

A select few will come back strong thanks to their resilience ability to adapt to new circumstances. Unsurprisingly tech firms have profited from the crisis as people have flocked to social media and ordered more online goods from the likes of Amazon.

Disaster Recovery

Accept that you cannot foresee every risk, but a resilient firm should be able to recover from a major traumatic incidents be it a fire, flood or IT failure. Some of these risks are purely operational in nature (faulty wires leading to a fire). Others disaster such as bombs, wars and some cyber-attacks have a geopolitical element.

Developing a comprehensive disaster recovery plan that will allow for the firm to continue following a disaster is critical. The major features of a disaster recovery plan would be:

  1. Establishing an IT plan disaster recovery plan (such as data centre separate from the firm’s HQ or main centre).
  2. Creating disaster recovery plans the entire organisation detailing actions and procedures following an incident. Crucially these plans need to be tested using an exercise (see below).
  3. Developing an alternative communication system if there is a widespread IT failure and normal communication routes are not available.
  4. Developing a business impact analysis (BIA). A business impact analysis is a major piece of work which identified each critical activity an organisation undertakes and how important it is following a major incident. A well executed BIA can help an organisation effectively recover from a disaster.

For example a shoe manufacturer may plan that following a major incident shutting down part of its manufacturing that continuing to make its biggest selling shoes is critical. But niche shoes and those lines which are soon to be discontinued could be delayed until fully capacity can be restored.

Red teaming – Table Top Exercises – War Gaming – Simulations

There are many different variants, but a simulation or exercise should confront participants in a realistic scenario. These exercises should usually be based on the disaster recovery plans created. Although exercises can be based on any scenario, not just disasters.

The exercise will also bring together teams, cutting across silos in the organisation. Scenarios can be remote, desktop or a live action. They can be run in real time or can look at events occurring over days, weeks or event years. Acting out a scenario will help uncover your strengths and more importantly your weaknesses.

Only direct confrontation with a political, security situation or  and putting executives on the spot will any real knowledge be made. Exercises should generally be run by an outsider to the firm, who will be best placed to challenge the Executives and avoid group think

A crisis response team should be populated by executives. Other staff will provide specific expertise it is unrealistic that the C-Suite would not take charge in a major crisis. However, the CEO of the organisation should not be directly involved in crisis management. As a prolonged crisis will divert their attention from running the business.

A variant on the above is scenario planning which can be done via tabletop. But scenarios can be expanded and transformed into more detailed work which focuses on the response to a realistic scenario. So a firms operating in a conflict zone would develop and workshop plans covering response to attacks on assets, kidnappings, shifts in governments and thousands of other possibilities.  

The result of these exercises should be to develop a crisis response team or teams that are well prepared, have strong communication lines, understand their roles clearly and are prepared to act decisively in a crisis.

Horizon Scanning

Horizon scanning is looking at longer term threats to an organisation. Scanning does not attempt to predict the future. Instead horizon scanning considers potential threats and risks and attempts to develop risk scenarios of events that might affect the firm. The power of horizon scanning is making people aware of future possibilities, challenge assumptions and change mind-sets.

There is no set rules or framework for horizon scanning. The key is to focus on the issues that will affect your firm. Market dynamics in your sector, government action or regulation. Information gathering can be done on desktop, but talking to relevant contacts and monitoring social media is also useful.

The idea is to identify trends and issues which may present challenges or opportunities to the organisation. Not everything identified in horizon scanning will be relevant but an organisation can spot trends early and adapt accordingly.

Adopting Climate Risk Analysis

Climate Risk is a new addition to geopolitical risk. This new field looks to analyse the physical risks faced by companies and countries posed by climate risks such as sea level rise, extreme weather and heat waves. Climate risks also include what is called transition risk.

Transition risk is the changes in government policy faced by firms as a result of climate change. This could include governments closing down coal plants to reduce greenhouse gas emissions.  

Companies across the world are rushing to adopt the Task Force for Climate Related Financial Disclosures (TCFD) which will identify which projects face the highest climate risks.

Opportunities from Geopolitical Flux

Acting on Geopolitical Risks and turning them into opportunities

While predictions about Geopolitics are a dangerous proposition, the world appears to be heading towards a more unstable chaotic period thanks to divisions between the main powers and the growing effects of Climate change.

Geopolitical Risk is not all bad news. Shrewd observers can take advantage of geopolitical trends by investing in industries and countries that stand to benefit.

Geopolitical analyst Milena Rodban coined the term Geopolitical Flux which to me is more apt description. Another way to benefit from geopolitical change is antifragility: Nassim Nicholas Taleb developed this concept in the book Antifragile.

The thrust of the book is that a truly resilient organisation benefits from change, chaos and flux, even thriving from disorder. An antifragile company can thrive in difficult times while competitors fall away, unable to cope with a new world.

Post Conflict Zones

Post conflict countries or fragile states represent an opportunity. As a war ends and peace returns, a country or region can present new opportunities. Many companies will be fearful, but very often assets are relatively cheap and there is little or no competition. The catch of course is that many conflict die down only to be rekindled a few years later.

The end of the Iraq war attracted many western firms particularly in the oil sector. But the resurgence of violence and the rise of the Islamic state soon made the country a war zone again.

However, Angola ended its long running civil war in the 1990s but the country maintained a no go zone for many companies. Chinese oil firms took a chance and built relations with the political and business elite of the country and Angola soon became a major oil exporter to China.

Boat Spotting: Watching out for new emerging opportunities and risks

The most agile companies can turn geopolitical risk or flux into an advantage. By spotting trends as they take off – such as climate risk reporting and adopting it gaining knowledge and a competitive advantage.

Trade and economic disruption causes pain and those with lengthy supply chains suffer. But those who are more flexible or can see the rise of tariffs and protectionism can act. The onset of a trade war between China and the US has seen many firms move operations or source commodities from different places to avoid the worst effects.

The warning signs of trade war between China and the US were visible early on in Trump’s administration. A geopolitically aware firm that operates between the two countries would be sensibly assessing the situation and identifying how any risks could be mitigated. This could include moving some supply chains to Vietnam or other countries.

Conclusion

At time of writing Disney was struggling with a torrent of bad publicity due to its new live action Mulan movie. Part of the film had been shot in Xinjiang province and Disney thanked the region’s publicity department in the credits.

The region has been troubled by multiple reports of internment or re-education camps. Up to a million ethnic Uyghur citizens are said to be in these camps. Disney were condemned by many commentators for working with officials from the region.

The film failed to make an impression on the Chinese public and the bad publicity has not helped Disney make friends in Beijing. Having strong political capital with the Chinese government is key to gaining further market share in the country.

Its not clear whether Disney failed to spot the dangers of working in Xinjiang. Or if they did spot the dangers they did not act on them or anticipate them. Either way those responsible for their geopolitical risk management failed to protect the firm.

The ethical choices behind wanting to film in Xinjiang were also questionable, but Disney and others would argue that plenty of other firms operate in the region and in China without criticism. But perception is important – Disney has a high profile and a family brand. By appearing to align with a regional government associated with internment camps was a step too far.

Above I have tried to outline the main geopolitical risks facing companies across the world. Of course geopolitical risks are international in nature but they vary in their impact depending which country you are in. The corporate sector is also extremely diverse, so different global risks matter to different firms. For example climate risk is a bigger deal for the infrastructure sector than the media industry.

Once risks are identified the next step for a company is preparing and mitigating these risks. Although some risks cannot be identified in advance (Black Swans). Others can be tackled in advance. Some risks are relatively slow moving and there will be time to prepare and adapt. Others will need a crisis team to respond when time is of the essence.

Geopolitical risk is real, ever changing and often unpredictable. Firms that fail to prepare will face serious consequences in terms of financial, operational and reputational damage.

The Fight for Blue Gold: Water and Geopolitical Risk

In June 2020 the Egyptian Minister of Foreign Affairs Sameh Shoukry warned the UN that Egypt faced an existential threat. That threat and regional geopolitical risk is the Ethiopian Renaissance Dam. The construction of the dam threatens to dramatically cut the flow of the Nile to Egypt.

Less water reaching Egypt will could ruin the livelihoods of its farmers and people. Cairo claims that the dam will inflict permanent damage to Egyptian society, but for Ethiopia it promises power to provide light and power for one of Africa’s most populous countries.

Egypt urged the UN Security Council to adopt a resolution that would give international backing to reach a compromise agreement. Ethiopia has rejected the resolution and announced the filling of the dam would begin in the next two weeks.

Egypt has hinted that a military solution could be used if an agreement is not reached. The gravity of the situation has been recognised by the USA, which is attempting to broker a deal between the two countries.

Resource Conflict and Geopolitical Risk

The dispute highlights how conflicts over resources can morph into geopolitical risks. Water wars have long been predicted by analysts. Conflict over water and other resources is as old as civilisation itself. Now the world’s freshwater supplies are under huge strain as rising populations and economic growth drink up ever more water.

Climate change will compound this problem. Rising temperatures will melt glaciers reducing the flow of water from many mountains, drying lakes and allowing sea water to salinate rivers. Control over water by itself may not cause conflict but may act as a catalyst. India and Pakistan are already have a frosty relationship. Disputes over water could put relations between the two into a deep freeze.

Melting Glaciers

Disappearing glaciers in the Himalayas will soon reduce the flow of mighty rivers like the Indus, Ganges and Brahmaputra making the Indian sub-continent one of the most exposed to drought.

Control over the remaining water in the Indus will make the battle around Kashmir where the river emerges more acute. Pakistan and India have been gone to war over the divided province three times and tensions remain high between the two nations.

Pakistan is highly dependent on the flow of the Indus for its agriculture and freshwater supplies. Any attempt by India to exert control over the water will face major resistance from its nuclear armed neighbour.

India recently completed the Kishanganga dam. This has led to an on-going dispute with Pakistan around the Indus River Treaty which has been handed to the World Bank to settle.

The Cradle of Civilisation

The Tigris-Euphrates river is called the cradle of civilisation as it is where the Sumerians and Akkians built some of the earliest recorded cities. Since then the river has been the lifeblood of many countries, cities and empires.

In more recent years the Turkish have built dams which control the flow of water to Iraq and Syria. If Turkey continues to take more water or drought reduces the river’s flow it could cut water flow to Iraqi and Syrian farmers and cities. If crops start failing and cities experience water shortages, Turkey could be the scapegoat.

Somalia and Syria

Internal conflict is another source for potential water wars. As the climate changes and regions used to plentiful rainfall find themselves dry and arid. Farmers and pastoralists are forced off the land it can lead to famine and social breakdown.

People forced to move into new areas often sparks new conflicts. Climate change is at least partly behind conflict in Syria. A long lasting drought in the country forced thousands into cities and new regions. This new poverty stricken population helped to spark protests against the government, which in turn transformed (combined with other factors) into a devastating civil war.

In Somalia a long lasting drought in many regions has hampered the recovery the country and pushed many into food insecurity. Economic uncertainty is a fertile breeding ground for the terrorists, pirates and militants that have plagued the country.

Even developed regions will not be immune to water conflict. Last year Cape Town came close to running out of water after years of low rainfall and rising demand for water for agriculture and domestic use.

Where are the Solutions?

As fresh water faces multiple threats, pollution, climate change and overuse, are there any solutions to a growing crisis? Firstly: humans can be pushed to use less water through efficiency measures and improved infrastructure such as fixing leaky pipes.

Secondly: desalination is currently an expensive option for the energy rich. But there is hope that new techniques can make it a viable and economical option in the future.

Thirdly: its hoped that scarcity will force humans to be more careful with water and treat as a valuable commodity. However, billions of people already experience water scarcity in the present day.

So in the future it is likely that the middle classes will continue to ensure good access to water. While those on the margins will continue to suffer from climate change driven water shortages.

Monitoring Risk from Space: An introduction to Spatial Finance

The global municipal bond market is a worth an amazing US$ 3.8 trillion a year. As one might imagine the owners of these bonds are highly motivated in wanting to protecting their investments.

Growing awareness of climate and geopolitical risks in the form of rising sea levels, floods and wildfires and their impact on the value of bonds is driving new ways to assess these new risks.

Using the information provided by satellites above the earth allows companies to assess risk in real time and react accordingly. The merging of satellite data and finance led to the emergence of a new term – spatial finance.

Constant surveillance by hundreds of satellites and drones allows every part of the globe to be constantly analysed in minute detail for change. This wealth of data combined with powerful computing techniques promises a real time picture of how the world’s environment is changing.

The Rise of Spatial Finance

To help promote this new idea the Spatial Finance Initiative was launched by number of prestigious organisations, namely the Alan Turing Institute, the Green Finance Initiative and the Satellite Applications Catapult.

Its mission is to:

“Mainstream geospatial capabilities enabled by space technology and data science into financial decision-making globally”

Spatial Finance Initiative

The emergence of spatial finance has come at a critical time where the assessment of climate risk has become increasingly important to banks, insurers and major corporations.

The launching of the Task Force on Climate related Financial Disclosures (TCFD) recommendations has meant companies need to understand how their assets will be affected by climate risk. Spatial finance has the potential to pinpoint shifts in the environment and map those a firm’s assets.

Spatial Finance in Action

For instance an agribusiness with farms in across a different regions and countries will be able to see how drought, sea level rise and rainfall has changed over time. Of course, satellites cannot predict the future. But by identifying current patterns of change they can give a glimpse into the future.

Capturing information on the environment is the spatial section. The financial part comes by understanding how the world’s environment is changing in microscopic detail. Putting the two together will allow financial decisions to be made more accurately.

Realising ESG Goals

Farms and agribusinesses can be monitored for their adherence to Environmental Social and Governance (ESG) goals. For example farmers in the Cerrado region of Brazil signed up to a zero deforestation pledge in order to protect forests.

Deforestation has also been linked to lower rainfall in the region which in turn reduces hydropower production capacity. The deforestation pledge is monitored by satellites which can assess whether farmers are encroaching on forests.

Sovereign Debt

Geospatial data techniques are being considered in linking sovereign debt risk with environmental risks. This way both governments and investors can see changes in environmental risk and which can drive sovereign debt risks.

If a country fails to care for its environment it may be considered more likely to default. Early signs of drought in an agriculturally dependent region could be an early warning of poor harvests and financial problems. At the same time crops can be tracked daily to estimate yields and future revenues.

Implementing the TCFD

Implementing the Task Force on Climate Related Financial Disclosures (TCFD) recommendations for example will drive predictions of climate change on physical assets. Measuring the impact of a sea level rise, drought, flood and a variety of other climate related risks can destroy the long term viability of a project.

Geospatial data can be used to track other environmental issues such as illegal fishing. Satellites spotting boats in marine reserves can provide the information required to fight the illegal fishing. Political will and resources are still required to actually stop and catch the perpetrators of environmental crimes.

Tracking Biodiversity

Nature related financial disclosures are the menu for the landmark biodiversity conference in Kumming in China. Companies could be encouraged to disclose their impacts on biodiversity in a similar way many are disclosing their emissions or exposure to climate risk.  

Satellites can track a changing environment in real time and identify where and how companies are making an impact on the environment. 

Satellites and Finance

Hedge funds have been using satellites to get an inside track on changes in demand or the movement of key individuals.

When an Occidental owned private jet was spotted at Omaha airport (home of Warren Buffett). It was a sign that the company were seeking the investor to help on their purchase of Anadarko.

Ten days later Buffett announced he was investing in Occidental. Alternative data companies routinely track private jets as prior knowledge of deals is a powerful source of information.

Monitoring Disasters

The danger to human life from flooding following the catastrophic events of Hurricane Harvey in 2017 was tracked using geospatial satellite imagery. The same data was used to speed up insurance payments requested after the hurricane damage.

The power of satellite imagery and ever larger data sets will increase the ability to spot relationships between geography and financial indicators. Spatial Finance will be an ever more powerful tool for identifying geopolitical risks and improving financial performance.

The Geopolitics of Renewable Energy

The freezing tundra and glaciers of Greenland have become host to a new geopolitical struggle. China has stepped up its interest in the island through Chinese firm Shenghe Resources share in the Kvanefjed mining project in the south of the country.

President Trump reportedly took an interest in buying the island from Denmark (which controls Greenland’s foreign relations) last year but was firmly rebuffed. However the US has made it clear to Denmark that China should be kept out of Greenland.

In 2018 China wanted to invest in an abandoned US naval base called Grønnedal in Greenland. Copenhagen was quickly warned off any such deal by Washington. Now the US is stepping up investment in Greenland in an attempt to build more influence in the region.

Rare Earth Metals

Greenland and the Kvanefjed mine is home to rare earth metals which are used to build mobile phones, tech and batteries. Access to these metals is a key part of modern manufacturing. As a result China has tried to corner the market in rare earth metals to gain leverage over its rivals. This market is what led China to Greenland and the Kvanefjed mine.

For its part US is trying to prevent this by prioritising the supply of rare earth metals through a strategic stockpile. This battle may become more common place as renewables and the batteries that store their energy overnight become more commonplace.

Much of the globe is still addicted to oil but renewable technology has cut into the energy market. Renewables offer the promise of clean energy and a chance to avoid the messy geopolitical risks of the Middle East.

A Changing World

Right now the world stands on the edge of great change. A dramatic fall in cost of renewable energy has made them truly competitive with fossil fuels. This change has been driven by ever more efficient solar and wind technologies, as well as government policies to encourage their use.

At the same time industrial scale electric batteries are becoming a reality. Successful large scale battery use solves the issue of energy storage which is a major constraint on renewables. Despite these advances fossil fuels have retained their grip on world energy output until now.

“Coal consumption will be crushed in 2020”

Benjamin Nelson – Moodys

The Covid crisis crushed demand for energy, pushing down the price of oil and coal as a result.

Covid-19 has sparked many geopolitical risks, but threatening the future of coal was perhaps a surprise. Moody’s predict that coal demand in the US is set to fall 50% in 2020 devastating the industry.

Already under pressure from renewable energy and policy initiatives like the Paris Agreement and the Task Force on Climate Related Financial Disclosures TCFD. These changes have been encouraged by many businesses. The Coal industry will struggle to recover from these double blows. The oil industry could be next.

The Dawn of the Renewable Age?

The rise of renewable technology will also have a major impact on world politics. The oil and geopolitical risk has been a constant theme of the 20th century. Oil drove European Powers to dominate the Middle East and other parts of the world.

Many oil rich states have experienced years of war and conflict thanks to the wealth and influence that oil represents.

The Curse of Oil

Oil wealth has often primarily enriched elites, particularly in poorly governed countries such as Nigeria and Equatorial Guinea. These same nations have often become dependent on oil, unable or unwilling to diversify.

This dependency has stifled their economies and created conflict within and between countries as factions vie for control of a valuable resource.

If you take oil out of the equation then these nations will be forced to adopt new economic models. This could be painful for the elites but may result in more balanced, less corrupt governments.

The Renewable Political Revolution?

But what happens when you take oil out of the equation. The world will look very different as the advent of renewable energy transforms the geopolitical landscape in new and unpredictable ways.

Of course renewable technology does require some resources. Lithium and other rare metals are key components in electric car batteries. If these continue to replace combustion engines as then the supply of these metals will become an important political and economic consideration the same way the supply and production of oil is today.

Metal Super-powers?

While China is currently the world’s biggest producer of lithium and the largest electric vehicle battery maker. Countries like Bolivia and Chile are also major producers of the metal. Could this make Bolivia the future Saudi Arabia’s of electric batteries, the world dependent on their supplies of the metal?

Maybe, but it is also likely that as demand for lithium and other metals rise so will the search for, discovery and mining of these resources. Eventually diversifying the global supply of the metal.

The other wild card is an environmentally friendly one, the potential for recycling these metals is yet largely untapped. Apple has committed to using only recycled lithium in the future.

This trend could continue as demand rises and concerns about the effect of lithium mining and the damage caused by discarded batteries increases. All this could yet ruin Bolivia’s dream of becoming a lithium powerhouse.

The Fall of the Fossil fuel producers

As reality bites the producers of oil, coal and even gas could suffer new crises. Already prone to political instability the authority of the House of Saud, the Gulf monarchies and many African dictators could crumble. If they see their main source of revenue dry up and with it their ability to support key institutions like the military, as well continue the patronage of the political elites that support them.

This time may come sooner than people realise. Even if fossil fuels remain dominant for a long time but renewables look more favourable in the longer term. Companies will realise that the oil and coal reserves have a fast declining long term value and could soon become stranded assets.

Producers may also rationally try to cut production and increase prices to order to gain higher revenues in the short term. However, this would of course make renewables look more attractive. These oil dependent nations benefit from a shift to solar and wind energy.

Many Gulf countries can become solar power giants in their own right. The move away from resource dependency will create more diverse economies and perhaps even transform their political climates for the better.

Technology Rules

Renewables are fundamentally different from fossil fuels in that first and foremost they are technology based. While renewables may depend on the wind and sunlight they do not require the movement of enormous tankers of gas and coal from a mine, or oil from a well.

Instead what matters is which country can manufacture the most efficient and cost effective solar modules and wind turbines. This means that the quality of intellectual property, patents and production centres will determine the winners of the renewable age.

Right now European countries arguably have an edge on solar and turbine technology and the race to build batteries for cars, homes and the grid continues.

Of course that is not the only part of the story, countries can easily buy renewable energy components and set up a network based on overseas technology. But many like Turkey and Brazil feel that this would place them at a long term disadvantage.

Renewable Protectionism

To help overcome this technology gap certain countries have enacted laws which determine that a certain percentage of renewable energy installations have to be built with domestic panels or turbines. The idea being that this will help create local production centres, even if it means increasing the construction costs of renewable installations in the short run.

This has already led to conflicts as countries like the USA seek to restrict cheap Chinese solar module imports to in order to protect its own manufacturers. However, for producers and users of energy, cheap Chinese imports are preferable as they keep capital costs lower.

The Looming Threat of Climate Change

Perhaps the most important geopolitical impact of renewables is if and how quickly they replace fossil fuels. The sooner this happens the more likely catastrophic climate change will be prevented.

Climate change is the most dangerous long term geopolitical risk facing the world. Widely predicted is mass crop failure, water shortages, uninhabitable cities and extreme weather. This new world will certaintly lead to mass migration and widespread conflict and will throw the geo-political framework we know and understand now into chaos.

The Keys to the World: Geopolitical Risk and Maritime Chokepoints

Across the globe there are maritime chokepoints which hold valuable strategic value but also significant geopolitical risk. Below I look at both the history and geopolitics of the Suez Canal, Panama Canal, the Straits of Malacca and Hormuz and the Bosphorus Straits. Historically these places have been important thanks the huge amount of shipping that passes through them, as well as their military and naval value.

The Suez Canal

The Ancient Egyptians were the first to dig a canal from the Red Sea to the Mediterranean. Several different versions of the waterway were dug throughout antiquity but they eventually silted up and were forgotten.

When the modern version first opened in the 1860s the Suez Canal revolutionised international trade. By cutting the travelling distance from India and the Far East to Europe at a stroke. The new route also altered the world’s geopolitical landscape. Suddenly gifting Egypt a new military, geopolitical and economic significance. This was to prove both a blessing and a curse.

“A Key to World”

The Canal was originally conceived and financed by the French. However he British government soon realised its significance and took advantage of the Egyptian government’s weak financial position to buy a stake from them in the 1870s.

Over time shares in the company controlling the canal evolved into direct control over Egypt. The Canal soon became an essential part of British imperial thinking. At once a powerful “key” to control the world’s oceans and trade, but also a weak spot, vulnerable to enemy attack and something to be carefully guarded.

The Canal’s importance was cemented in the early part of the twentieth century as the region’s oil flowed through the narrow channel. Oil supplies became crucial for both industry and eventually the Royal Navy. The Navy switched from coal power to oil in the first decade of the 1900s.

Egypt Takes Control

Now the Canal lies firmly in the hands of the Egyptians thanks to President Nasser’s nationalisation in 1956. A bold move which resulted in a military intervention by the British and French who were set to lose their prize Middle Eastern asset.

“We shall defend [the Suez Canal] with our blood and strength, and we shall meet aggression with aggression and evil with evil”

Gamal Nasser 1956

But in turn these fading imperial powers were ruthlessly undermined by a lack of US support (who threatened to pull the plug on British debt). At once ending British illusions about its superpower status and pushing the French into a long term rapprochement with Germany.

 For the Egyptians it was a moment of national triumph. But a short-lived one, for the disastrous 1967 Arab-Israeli war saw the country defeated and Egypt closed the canal for 10 years.

Enter the USA

The Canal was eventually reopened and today ownership over the canal provides a good income from shipping fees and a useful diplomatic tool for Egypt. Cairo can opt to close the canal to traffic to countries (like Israel) it takes issue with. The Canal also helps bolster Egypt’s reputation as the geopolitical lynchpin of the Middle East. This despite a patchy record of political and economic management.

Egypt’s stewardship of the Suez Canal means strong US support in the form of military and diplomatic aid. Despite the uncertainty of recent years, Egypt is considered “to big to fail”. The geopolitical risk of an unstable Egypt is well recognised by the Washington establishment. It will come as no surprise that Egypt is the second largest recipient of US military aid.

China on the Horizon

The Egyptians also maintains strong links with China. Bilateral trade has blossomed between the two countries in recent years, as has Chinese direct investment in the country. Beijing’s increasing economic presence across the Middle East means it will get further drawn into the regions’ messy geopolitics.

While China presently has good relations with all the major economies of the region. It could one day be forced to choose allies and enemies. If that point arrives you can be sure Beijing will take into account the massive volume of Chinese goods passing through Suez to Europe before endangering relations with Cairo.

The Straits of Malacca

This narrow gap separating Indonesia and the tip of the Malay Peninsula was long recognised by the British as the fulcrum of trade and military power in East Asia and one of the “keys” along with Gibraltar and the Suez Canal that “locked up” the world through naval power.

Singapore lies to the north of the Strait and was the centre of Britain’s Far Eastern military command. The City’s position ensured the construction of huge sea facing fortifications (which in the event proved useless when the Japanese managed to attack by land in World War Two), to protect it and its loss was arguably Britain’s worst military defeat of the twentieth century.

Geography rules

Singapore’s strategic position and good governance has made it one of the world’s great hubs for shipping and commerce. It is by some measures the globe’s busiest port (vying with Shanghai for this particular honour). As well as watching over the immense flow of electronic and consumer goods leaving the factories of Asia to the shopping centres and malls of Europe and the Middle East.

In the other direction the Strait sees a hefty proportion of the world’s oil supplies en-route from the Gulf to China and the US. Overall a quarter of the globe’s merchandise pass through the Straits. This represents a huge geopolitical risk.

 Hostile Powers

Therefore the idea that the Strait could be closed or shipping stopped by a hostile power has long occupied the minds and plans of politicians and military chiefs among the world’s great trading powers. While the US does not have a permanent Naval presence in Singapore, it has a number of aircraft carriers in the region and retains strong relations with Singapore as well as its neighbours.

Beijing also retains good relations with the city-state which has a majority ethnically Chinese population. This undoubtedly helps cement business and social ties between the two nations. 

China is currently developing its naval capacity but remains a long way behind the US. Beijing views protecting its overseas trade as a major priority and lack of control over the Malacca Straits is of huge concern.

A String of Pearls starting at the Isthmus of Kra ?

The next decade will see Beijing become more assertive in its “backyard”. This will be particularly felt on issues such as control over islands in the South China Sea and Taiwan.

There has been speculation that this will manifest itself in a “string of pearls” – a series of naval bases in Asia and the Indian Ocean to buttress Chinese power, but so far there is no sign of this materialising.

In the longer term China will want the US to accept it as more of an equal, something Washington may find very hard to accept, how this particular dynamic unfolds over the coming years is crucial for peace in the region.

Interestingly there were once rumours the Thai government would cut a canal through the Isthmus of Kra, (the narrow central section of Thailand) financed by the Chinese, reducing shipping times and the strategic importance of the Straits of Malacca at a stroke. This kind of bold move could strengthen China’s hand, but at the risk of angering the Americans than their allies.

The Panama Canal

In 2016 Panama Canal saw the conclusion of a huge expansion programme costing US$5.2 billion. This work allowed much larger vessels through the canal. This ushered in a new wave of Panamax class supertankers, which in turn will bring about even greater economies of scale in the shipping industry.

Geopolitical Risk

The troubled and lengthy construction of the Panama Canal helped to forge a new Central American nation. The Canal was also crucial in the USA’s journey to becoming a global power. The opening of the Canal helped reduce shipping times dramatically. With the Canal open ships could avoid the long and arduous Cape Horn route at the foot of South America.

It was the French under Ferdinand Lesseps, the same man who had successfully built the Suez Canal that pioneered the construction of a link between the Atlantic and Pacific. At the outset Lesseps was supremely confident thanks to his experience in Egypt. However, he severely underestimated the difficulties of the terrain. Mountains proved difficult to dig around and the tropical climate had thousands dying of disease.

Enter the USA

Eyeing the failing French effort the increasingly confident and out-going US government authorised the purchase of the project. However when negotiations with Colombia the host country at that point failed, it started a chain of events which led to the US supporting Panama’s independence.

Panamanian rebels were assisted by a US naval blockade and overt political support. All of which allowed the new territory to split away from Colombia and then sign over the rights of the canal to Washington in the Hay-Bunau-Varilla Treaty, part in gratitude for helping them win independence, part in ignorance of the treaty’s consequences. 

Complete Control

Once the Canal was finally complete in 1914 it gave the US control over the most important trade route in the Americas, but also helped to confirm Latin American suspicion over Washington’s motives in the region and it is often cited as a classic case of gun boat diplomacy.

The Canal rapidly became an increasingly significant international waterway, now seeing around 16% of US trade pass through it every year and one the country was willing to defend with arms. The US deposed the increasingly anti-American Panamanian President Noriega in 1989 with a swiftly executed military invasion.

While the US finally relinquished control of the Canal in 1999 – on the condition it became a demilitarised zone. As the preeminent military power in the region it is unthinkable that Washington would allow a potentially hostile power to take any kind of control over the route.

The Prospect of a Rival Canal

China is now the major trade partner with much of Latin America and sees a significant chunk of its imports and exports pass through the canal. From Brazilian iron ore destined for the factories and workshops of the world’s foremost manufacturing nation. In the opposite direction tools, toys and all manner of consumer goods bound for North American shops and malls.

Fear of this vital route being compromised or cut off to Chinese shipping has led to outlandish schemes springing up. These include a Chinese backed alternative waterway through Nicaragua. Another idea is a “land” canal – a new rail line for heavy cargo cutting across Colombia to connect Pacific and Atlantic ports.

China’s Plan?

So far these ideas have made no real progress and remain unlikely to be carried out.  But the confidence and ambition of China has been underestimated before, so nothing should be ruled it out.

In this scenario it would be interesting to observe the US reaction. The idea of a major foreign power de facto controlling a trade route which comparable to the Panama Canal in Central America would not be popular in Washington. The US has already seen China take the economic initiative in its backyard. A Chinese controlled canal would I suspect be a step too far.

At its narrowest point it is only 700 meters wide. But the Strait represents a border between Asia and Europe as well as access to global trade for the Black Sea States. The Straits represent a strategic chokepoint and represents a huge geopolitical risk.

The Geopolitics of The Bosphorus

Istanbul was once called Constantinople. Named after its founder the Roman Emperor Constantine it soon became the most powerful and wealthy city in Europe and the pinnacle of the Byzantine Empire. A position it claimed for nearly 1000 years until its decline along with the Byzantines.

The rise of the Ottoman Empire and its invasion of the Byzantine Empire, culminating in the siege and capture of Constantinople in 1453 marked the eclipse of that great power. For many scholars the event signaled end of the medieval era in Europe. The conquest also represented the rise of a new power that would dominate the Middle East and much of Eastern Europe for centuries.

The Rise and Fall of the Ottoman Empire

In particular control of the Bosporus gave the Ottomans control of the key trading routes in the region. It also cemented their ability to control the Silk Road trading routes to the Far East.

Militarily it gave the Ottoman’s leverage over their northern neighbours, bottling up Russian naval ambitions to the Black Sea. However control over the Silk Road gave others the impetus to find new routes East.

Over time the opening up of oceanic sea routes by the Spanish, Portuguese, Dutch and English diminished its importance as Western Europe states could ignore the Silk Road to trade with China and India. Instead they could look across the Atlantic and Pacific for trade.

All this time other powers eyed the straits jealously. In particular the rise of the Russian Empire to the north and its desire for free access to the Mediterranean and beyond was a major contributor to the numerous wars between the two great Empires. The Ottomans and Russians went to war

The Great War

On land the capture of the city gave the Ottomans the impetus to move West and seize much of Eastern Europe only being halted at the gates of Vienna. That was probably the high point, over time slow decline took hold of the empire. Its last stand was the First World War where despite its technological disadvantage it successfully threw back the British assault on the Bosporus focused on Gallipoli.

Churchill’s doomed plan was to seize the Ottoman capital and knock a major German ally out of the war, while at the same time provide a supply route to their Russian allies and further encircle the remaining Central Powers.

The Turks bravely repulsed the British Empire forces, famously many of them from Australia and New Zealand and attention in the war shifted elsewhere.

The Ottomans won the battle, but the result of the war eventually dissolved the Ottoman Empire and led to the birth of the new Turkish Republic. The new republic brought a desire to move away from what was seen as a capital soaked in the old fashioned corrupt ways of the Sultans and their court and instead make a fresh start in a new capital in centrally located Ankara.

Istanbul and Reinvention

For other cities this might have might have resulted in decline and obscurity. Istanbul’s geography ensured its continuing relevance and since losing its capital status it has grown into a powerhouse. The most populous city in Europe, the commercial hub of Turkey and indeed the Eastern Mediterranean.

The Geopolitics of the Straits

Now with many predicting a global shift of world trade and investment away from the Atlantic and towards Eurasia and one dominated by China rather than Western powers. Istanbul looks set to profit. The Bosphorus holds a pivotal position on the Eurasian landmass. 2.9 million barrels of oil pass through Istanbul every day.

A huge volume of trade also pass through Istanbul, grain and the rich agricultural produce of Ukraine. While in the other direction goods from the rest of world flow to the Black Sea states such as Romania, Bulgaria, Ukraine and Russia. All of this can be cut off in a stroke by the Turkish Government.

The option to block the Strait on one level provides Turkey a great deal of leverage over its northern neighbours. But cutting off access to the Bosphorus would provoke a massive international reaction and represent a huge geopolitical risk. Even the threat of military intervention. But the fact that Ankara is able to take this measure ensures that any move against them will have be weighed up against this possibility.

Russia’s Watchful Eye

The Russian invasion of Crimea gave it a new platform to project power in the Black Sea. This along side military engagement in Syria and the growth of Tartus naval facility in the country enhanced its role in the Middle East.

It has also made Russia naval traffic through the Bosporus route ever more important. But any expansion of Russian naval power is ultimately frustrated by the narrow strait, as its fleet and exports and imports can be bottled up.

Beyond the Bosphorus Turkey is a significant regional power player. Its long standing President Erdogan is keen to extend its influence further into Africa, the Balkans and Middle East. This “neo-Ottomanism” is perhaps the inevitable result of Turkey’s power and economic success. Others see a power with Imperial designs which needs to be checked. Whatever its current stance, the Bosphorus gives Turkey a permanent geopolitical trump card.

The Straits of Hormuz

The narrow Straits of Hormuz connects the Persian Gulf and Indian Ocean. To the North lies Iran, while to the South the United Arab Emirates and Oman. A quarter of the world’s oil and a third of all gas supplies pass through the narrow waterway. Cutting off the Strait or interfering with tankers can send oil prices through the roof in an instant.

The Strait has been the scene of frequent stand offs between US and Iranian Naval vessels. Iran has threaten to cut off the Strait in the past. This power gives it a certain amount of leverage. But actually cutting off the route would incur a US military response as well as heavy criticism from many other states.

A world faced by oil and gas supplies disruptions would not look kindly on Iran. So far Iran has not carried out any of its threats. If however conflict arose between Iran and its neighbour Saudi Arabia or the US, closing off the Strait could be an unconventional and vital tool.

Melting Ice, Freezing Politics: Arctic Geopolitics

Icelandic President Ólafur Ragnar Grímsson made it clear: “The security of Shanghai in the future will be determined in the Arctic.” Shanghai is the world’s major city most vulnerable to flooding in a warmer planet. As more Arctic ice melts sea levels will rise, which in turn will sink China’s financial capital.

Melting Ice, Freezing Politics

China accepts the dangers of climate change and is a leader in environmental technologies that mitigate greenhouse gas emissions. But at the same time it appears more than willing to lend billions to projects like Yamal in the Russian Arctic. Yamal will provide 5 percent of the world’s natural gas supply and raising greenhouse gas emissions. But projects like this also place environmental pressures on the pristine Arctic environment.

Drill, Baby Drill

In contrast the US in the form of State Secretary Pompeo refuses to acknowledge climate change. Instead of seeing climate change as a geopolitical risk. He sees the disappearing ice as an opportunity for US firms to benefit from new mining and drilling opportunities.

The unpredecented melting of Arctic ice is a powerful reminder that reality of climate change has arrived. The rapid rise in average temperatures in recent years has shocked even seasoned climate scientists. Climate change is considered by many the biggest global risk.

The melting ice has allowed ships to traverse through Arctic Russia and even Canada’s Northwest passage. Vessels taking these routes will save time and fuel by avoiding traditional routes.

Russia’s Geopolitical Advantage

The opening up of this sea route transforms Russia’s geopolitical dynamic. As an ice free Arctic gives Russia influence over a new northern trade route. The lack of ice also opens up the possibility of more mining and drilling in the region. A prospect the US and Russians have openly welcomed.

Others like the Norwegians see the damage this would cause to a fragile region relatively untouched by humans until the recent ice melt. The Oslo government have ruled out oil drilling in the region and appear prepared to defend the Arctic’s environment.

Ownership of the region is also disputed. Russia put in a claim to the UN to extend its exclusive economic zone across the region. If applied this would extend the other Arctic state’s zones. The success of this claim would open up similar ones for the US, Denmark (via Greenland), Norway and Canada.

But this extension of territory could also stoke geopolitical conflict between the states, particularly if new mineral or hydrocarbon deposits are uncovered.

Other countries have also taken a keen interest in Arctic affairs through close proximity, Finland and Iceland are fairly obvious members. Others like the self styled “near-Arctic state” China demonstrate its new global role. China is a global power on the lookout for new markets, sea routes and avenues of power to explore.

Polar Silk Road

China has called for a Polar or Ice Silk Road and has sent an exploratory ice breaker Xue Long (Snow Dragon) to the region. China has also been investing in the Arctic such as the Yamal project and the hunt for rare earth minerals in Greenland.  

Every move by China will be carefully monitored by its neighbour Russia who remains friendly with China. Russia has watched painfully as China supplants it economically and diplomatically across much of the world. Russia will not be happy to see this happen in a region it views as its backyard.

Economic Potential

The Arctic region is reckoned to contain massive oil and gas reserves. It is reckoned that there are 44 billion barrels of natural gas and 90 billion barrels of oil. The Arctic is home to many different metal deposits and around 10% of global fish stocks, all of this makes it a hugely tempting target for a resource hungry world.

But the harsh conditions even with global warming make exploiting any of it rather expensive. Some analysts put estimate that the price of a barrel of oil would have to hit over US$ 100 to make it worthwhile drilling in the Arctic.

Currently oil prices are far from supporting that kind of investment. The geopolitical risks involved are significant and the reputational and operational risks are high. An oil spill or mining accident spoiling white ice bergs, killing seals and whales would be an environmental disaster but also a public relations one. The cost, difficulties and risk of operating in a polar region is also high. Most people do enjoy working and living in the freezing cold.

Arctic Risk and Global Risk

The irony is clear, the more climate change melts Arctic ice, the easier it is to exploit the Arctic through mining and drilling, which in turn will accelerate climate breakdown stoking massive geopolitical risk. So while China may well make significant short term investments and geopolitical point scoring. Ultimately it will also be contributing to the long term demise of its populous coastal cities such as Shanghai.

Instead China and the Arctic Council should focus on developing a more resilient region, better able to withstand the coming ravages of climate breakdown.