A Guide to Climate Tech: How Technology, Innovation and Entrepreneurs Can Build a Zero Carbon World

The Rise of Climate Tech industry and how it is tackling the biggest global risk.

Tiny brightly coloured microbes live in Yellowstone park’s volcanic springs which can thrive in incredibly hot temperatures up to 235 C. These so called extremophiles are bright yellow, orange, blue and survive and by turning light into energy. Scientists have long been fascinated by their unique habitat and properties.

The microbes caught the eye of Thomas Jonas the CEO of Nature Fynd. The company now takes these microbes and with the aid of water has created a process which can turn sugar into protein. This protein can then be used as the basic building block of an artificial meat product.

Nature Fynd was founded to tackle greenhouse gas emissions through food production. The company can produce “meat” with 99 percent less land and greenhouse gases than the livestock equivalent. Nature Fynd is part of new wave of companies focused on utilising new technologies to reduce carbon emissions.

Why Climate Tech is a Critical Sector

As the threat of global heating grows the need for solutions grows more urgent. Climate tech is an industry focused on solving humanities biggest problem. 2021 has seen record breaking temperature across the world along with more instances of extreme weather, floods, wildfires and hurricanes. From rocky beginnings as cleantech a decade ago which saw a lot of money pumped into firms but few success stories (Tesla a notable exception).

Now a new wave of exciting companies is emerging which are utilising technology to transition society to a zero carbon future.

Proterra is a leading provider of heavy electric vehicles, producing buses, trucks and shuttles all with zero carbon emissions. Founded in 2004 the company is taking advantage of the fact that more companies and governments are switching to electric vehicles for their fleet. As the number of charging points and policies favouring electric vehicles grows so will the market for these vehicles.

Each degree of warming will make climate tech a more attractive sector. As the problem of global heating grows, the solutions needed will become more urgent.

Pachama allows companies purchase carbon credits and restore nature through forest projects. They use artificial intelligence to monitor the forests and protecting older trees and growing new trees to restore habitats.

Aclima measures greenhouse gas emissions and pollutants at a local level which allows its customers to identify where and how they are contributing to greenhouse gas emissions, giving them the information they need to take remedial action.

Climate tech firms can be divided into seven broad areas:

  • Creating zero carbon transport (electric vehicles) or mass transport solutions.
  • Developing solutions around agriculture, farming and forestry which reduce emissions or even create negative emissions (this could mean a venture like Pachama or vertical farming solutions).
  • Decarbonising the built environment, firms that can decarbonise heating systems or make them more efficient. Or firms that can that make buildings with low carbon materials come under the climate tech umbrella.
  • Renewable energy companies, the most obvious solution for many observers, this can mean the production of solar panels and wind turbines or firms which can optimise energy efficiency, distribution and usage.
  • Companies which decarbonise industry through new techniques such as low or zero carbon cement.
  • Companies which utilise machine learning and artificial intelligence to make use of data sources such as satellite imagery, physical sensors and temperature readings which create a detailed information around the rise of climate change.
  • Carbon Capture and Storage is the most uncertain and unproven climate tech, but if deployed successfully could suck carbon out of the air and store it safely. Reducing the amount of carbon in the atmosphere could represent a silver bullet for climate change. But CCS has yet to be proven at scale.

The huge of scale of change required to get the world to net-zero is breath-taking. Estimates run into US$5-7 Trillion over the next couple of decades to hit current 2050 targets. The good news is that the sector is fast growing. In 2020 companies in Climate Tech raised capital three times faster than artificial intelligence. PWC put this figure at US$16 billion, a large amount but tiny compared to what it required.

How Disasters Could Drive the Climate Tech Sector

Perhaps ironically what will drive more investment and more demand for the products is each new piece of bad climate related news, every natural disaster will raise awareness about climate issues. The many pledges made at international conferences and by individual governments are also driving change.

For example, the EU recently published its sustainable finance taxonomy defining climate friendly activities. While many of the pledges are flawed and some may end up unfulfilled or ignored it does create a powerful sense of momentum.

Global giants Microsoft, Unilever and Amazon have all seen which way the corporate wind is blowing. These firms have all set up venture funds to back climate tech start-ups joining a stampede of new financial backers looking for the next growth story.

43 Unicorns and Counting

The business opportunities in this space are likely to rival previous tech booms and produce new Unicorns (tech firms worth a US$ 1 billion or more) and major new companies. Already there 43 Unicorns in the Climatetech sector, but many start-ups will get absorbed by rivals or simply not survive.

Climate tech differs from Cleantech (which experienced a boom/bust cycle a decade ago). Climate tech is focused on activities which reduce carbon emissions. Cleantech is broader and includes activities which help protect the environment such as water filtration or recycling, but not necessarily reducing carbon emissions.

Why Now? Climate Tech has hit a critical inflection point thanks to various factors:

Both demand from consumers and regulation from governments is driving the corporate sector to find new low carbon alternatives. The Paris Agreement, the EU Sustainable Taxonomy and the Task Force for Climate Related Climate Disclosures (TCFD) are all relatively new policy initiatives which

Energy is the most obvious sector for climate tech to disrupt. Solar and wind energy has already made a major impact on global energy production. Falling costs over the last decade (85 percent in the case of wind turbines) means that renewable energy is competitive with fossil fuels. But climate tech is wider than just energy production. For example, battery storage for cars or on an industrial level is increasingly a vital driver of decarbonization.

More efficient energy storage means that renewables become more effective as they can avoid the vagaries of the wind and sun. Grid management tools using machine learning and other techniques can also make for more efficient energy use. The market for electric vehicles pioneered by Tesla and the batteries which drive them is set to grow rapidly as car manufacturers shift production and governments look to ban their use.

Climate tech solutions can be divided into the vertical which deal with carbon emissions in one industry. For example, reducing the carbon loss from soil through precision agriculture or manufacturing process to make low or zero carbon concrete.

Alternatively horizontal solutions address carbon emissions across multiple sectors. Electric car batteries are a good example of this as they have allowed the car industry to shift to electric cars (EV), this encourages the use of solar and wind energy to produce the electricity to run the cars.  

Machine learning (ML) is another horizontal tool which can cut across boundaries and solve problems. ML uses algorithms which can perform a task normally done by humans, such as identifying pictures of friends on social media, act as a IT support chat bot to solve software issues or collect and identify patterns in satellite imagery.

The seven broad areas in Climate Tech are outlined below:

Transport

Moving people and goods by land, air and sea takes up a lot of energy. Most transport is run on oil products which of course leads to greenhouse gas emissions. It makes sense that many climate tech firms are looking to shift and upset this sector.

Electric vehicle production whether this be car, bus or truck is a highly visible sign of climate tech. Of course, the source of the electricity is key. If the electricity is supplied by fossil fuels, then electric cars are not climate friendly. Electric vehicles are only as green as the source powering them. The production of electric vehicles can also be problematic thanks to the need for rare earth metals in the battery which can be environmentally destructive.

NIO is a Chinese car maker which focuses on making Telsa like electric autonomous vehicles. NIO are luxurious vehicles with ultra modern autonomous driving features. With many countries promising to phase out petrol driven cars, manufacturers are shifting to electric models.

Food and Agriculture

Farms and agriculture are increasingly recognised as both major source of greenhouse gas emissions (around a quarter of all emissions) and a difficult problem to solve because of humans need for huge quantities of food and in particular methane producing livestock. Many policy initiatives are unlikely to impact on agriculture as it has been exempted from carbon pricing.

This challenge has resulted in many of the most climate friendly and innovative solutions. Meat production is a major and growing source of greenhouse gases (especially methane) and there many ethical concerns around livestock farming. The answer is a global shift to a plant based diet.

But of course this desire clashes with people’s love of meat. Food production companies such as Viva and Beyond Meat have used technology to create alternative proteins – which taste and appear like meat or fish but are plant based. These products typically represent 90 percent less carbon emissions than their meat equivalents.

The market for plant based products has grown rapidly. The number of vegans and people demanding more plant based foods has grown rapidly in many western countries. The Michelin Guide recently awarded 81 stars to vegan and vegetarian restaurants. A powerful symbol that the world is taking vegetarian food seriously.

The earth and soil and peat are also a major source of carbon storage and depleted soils and. Regenerative agriculture can mitigate climate change and involves activities which improve soil health and sequester carbon and enhance water retention.

Regenerative agriculture includes practices such as cover cropping and conservation tillage which farmers have been doing for many years but too much of modern farming has become destructive to the land and the result in billions of tonnes of carbon being released from the soil each year

Gingko Bioworks are encouraging sustainable agriculture through testing strains of microbes. These microbes can be used to fix nitrogen in the roots of plants. This  improves yields and reducing the need for nitrogen fertiliser (around 3 percent of global emissions).

Heavy Industry

Heavy industry is the fastest growing source of carbon emissions. The world’s demand for goods and products is seemingly never ending. Metals, concrete, fertilisers, plastics, and fertilisers all produce large amounts of greenhouse gases during their creation. Companies that can reduce emissions, reduce the amount of raw materials or used or make production processes more efficient can be classed as climate tech.

For example, 3D printing companies such as EOS and GE Additive can reduce transportation costs by allowing companies to print components reducing emissions. Hybrit is a Swedish firm which is trying to develop zero carbon iron and steel production from energy source to manufacturing process. Hybrit are experimenting with using hydrogen instead of carbon or coke to aid the reduction process. The reduction removes the oxygen from the iron which is a key part of making steel. Traditionally it is done in a blast furnace and relies heavily on coke (a major carbon source).

The Built Environment

Buildings emit large amounts of carbon thanks to heating and cooling systems emitting heat. But the materials that are used to build houses, factories, road, bridges and all our other infrastructure needs also involve large amounts of energy. Just cement production alone amounts to around 8 percent of all carbon emissions globally.

Efforts are underway to try and reduce this amount by trying to capture the carbon emissions during the manufacturing process. Ideas include switching to different more climate friendly fuel sources and by substituting materials such as using coal ash and blast furnance slag instead of clinker.

Through energy efficiency measures such as modern heating systems, improved insulation, plus smart heat management (often using machine learning) emissions can be reduced. These measures can be introduced into existing homes, but of course it is easier to be put into new builds. Green construction methods cut up front carbon costs through green materials.

Airex is a UK company which uses sensors and smart ventilation to help reduce heat demand in buildings. By cutting energy use Airex can cut fuel bills and using sensors can identify poorly ventilated areas and improve air quality.

Renewable Energy and Storage

Wind turbines and solar panels are the most obvious symbols of climate tech. Across the world renewable energy options are becoming more widespread and cheaper. Widespread industrial battery storage now promises to store energy and overcome the problem of when the sun is not shining or wind not blowing.

Hydrogen promises to be an exciting new carbon free energy source. Hydrogen burns like natural gas but without the carbon emissions. Excess renewable energy created in times of low demand can create hydrogen. This hydrogen can be then stored, transported and used as a zero carbon power source. However, this technology is still in its infancy

Climate Capture and Storage

The most uncertain, controversial, and risky climate tech area is carbon capture and storage (CCS). This is seen by some as the holy grail of decarbonisation but by environmentalists as a distraction from carbon reduction efforts.

Extracting carbon from the air and storing in the ground on a massive scale could theoretically solve global heating. Environmentalists view CCS as a risky distraction from decarbonisation which offers false hope. It is perhaps no surprise that funding has been patchy in this sector. The uncertainty and long-time horizons around CCS make it unsuitable for venture capitalists which prefer faster returns and more established technologies.

However, one source namely oil companies have been the biggest backers of CCS – although results have been poor so far. Expect these experiments to continue as if successful it would potentially allow oil companies to capture the carbon they are responsible for releasing into the atmosphere. Some have speculated that the technology for injecting carbon into the ground after capture uses similar techniques to the deep underground drilling that oil companies have such strong expertise in .

Climate Data and Analysis

The launch of many nano satellites has led to an explosion in the amount and quality of earth data captured. This has led to many new companies emerge to provide data on climate risks and forecasting. Companies like Jupiter Intelligence and Sust Global provide detailed information on physical climate risks for organisations. Understanding how the climate may create risks on a granular level allows clients to how extreme weather, drought, sea level rise and many other factors impact their assets.

Firms in this space use machine learning to process and sift through the huge amounts of data and turn them into actionable insights or financial signals. As well as climate risks this information can be used to monitor crop production, deforestation or reforestation rates (which can feed into sustainability ratings) and tracking natural disasters in real time to aid recovery efforts.

What’s Next?

For the success of Climate tech to continue there are several hurdles which need to be overcome. Firstly, financing needs to continue at an even faster rate, which in turn is dependent on the success of the companies involved in the sector.

Secondly the regulatory environment needs to shift further towards climate tech. This means actions like the phasing out of fossil fuel subsidies which prop up the oil and gas sector. It also means more initiatives like the EU sustainable Taxonomy which determines climate friendly activities. However, the problem is that if the legislation or regulation is too complex there is a risk that it will prove difficult for start-ups to navigate. This gives an advantage to larger firms with existing resources and could stifle competition.

Another limiting factor is lack of talented people in the industry. Climate tech is a young industry and its use of cutting-edge concepts like artificial intelligence means that there is a limited pool of workers to drawn upon. However, as the sector grows and the demand for such skills grow, so will the number of people attracted to it and they will develop the appropriate skills.

The rise of social media industry shows us how quickly a new sector can arise and dominate. The combination of new technology, the growing urgency of the climate crisis and the shift in the regulatory environment means that Climate Tech has a bright future.

When Technology and Politics Collide: How to Manage Geotechnology Risk

Geotechnology issues are a growing global risk for multinationals. I examine what does geotechnology risk entail and how can it be managed effectively.

In 2020 the UK ordered the removal of all Huawei infrastructure across the country by 2027 . Initially the UK had welcomed Huawei’s investment, but warnings from parliament, the intelligence services and from the US steered the government in a new direction. The Huawei ban effectively brought to an end to the “golden era” of relations between the two nations.

Huawei’s global power has grown steadily across the last decade as it leads the way in providing cutting edge 5G infrastructure. The company with origins in the Chinese People’s Liberation Army has been pivotal in developing new technologies such as 5G which allows unprecedented connectivity. Allowing people to watch videos and use the internet on the go. 5G is also crucial to developing the Internet of Things (IoT).

5G and the IoT allows millions of physical devices to be connected to the internet opening up new possibilities such as driverless cars and smart jackets. The IoT also enables so called smart cities with thousands of sensors providing up to date information on everything from traffic, to air quality to security. Connectivity allows constant feedback loops that allow officials to monitor and improve on key performance indicators. Critics would argue they also allow officials to snoop and spy on citizens.  

Technology has been pivotal in geopolitical battles through history. Now new technologies are driving new political divisions which create global risks for organisations.

Tech Rules the World

Technology companies now make up roughly a quarter of the world’s stock markets. While European firms do have strengths in areas like the development of 5G (Eriksson) and Software (SAP). It is increasingly China and the US that dominate the global tech scene. Large domestic markets, access to finance and entrepreneurial culture have all helped the US and China cultivate strong technology sectors. Now firms are looking to dominate new areas such as fintech, climatetech and the internet of things to build and dominate new markets.

This rivalry has been demonstrated by the global political row over Huawei. Building 5G infrastructure appeared to be dull behind the scenes job. But in fact, building 5G allows Huawei enormous power over the development of this critical technology and standards that regulate it. Huawei is a private company. However, like all Chinese firms – the Beijing government can exercise a great deal of control over their actions and would expect full cooperation if required.

Tech is a Political Choice

China and the US are both competing to set global technology standards. When countries choose Huawei over a western firm for 5G or vice versa they risk angering the other side.

The Australian government moved to ban Huawei from its 5G networks along with the US and other countries. This rejection of Chinese technology along with other factors caused a major diplomatic rift with China. China banned Australia imports of wine and beef, while Chinese investment in Australia has fallen 61 percent in 2020.

China is Australia’s biggest economic partner so declining trade and investment relations is a major blow to the nation’s economy. However, Australia has effectively followed the lead of the US its major diplomatic, military and intelligence partner in rejecting Huawei on national security grounds.

Choose Wisely

Companies or countries that select Huawei even for part of a 5G network will faces political pressure and exclusion from the US networks. Interoperability between different networks can also be a potential issue, while different 5G providers can work together it is more efficient to use one carrier which in turn makes choosing a single vendor more likely in the longer term.

Battles over infrastructure have a long history. Britain pressured Egypt and France into taking control over the newly built Suez Canal in the nineteenth century and fought unsuccessfully to retain that control in the 1950s. Today China often receives a political dividend from its sprawling Belt and Road infrastructure investments in every corner of the globe.

Competing Network Initiatives

The US has actively promoted their Clean Network Initiative an attempt exclude China from global telecommunication networks. China has responded with their own Global Data Security Initiative described as the Chinese attempt to write rules on data governance. Dominance in this sphere gives the winner a major advantage in terms of intelligence gathering, commercial edge and political firepower.

China’s Digital Allies

In contrast Saudi Arabia and other Gulf States have embraced Huawei which is rapidly rolling out 5G across the region. China views this rollout as part of the Digital Silk Road itself a strand of the Chinese Belt and Road Initiative, the cornerstone of China’s foreign policy.

Saudi Arabia’s decision use Huawei is likely to see it align itself more closely with China on tech policy. The countries are perhaps natural partners in this sphere as they both share a top-down approach to governance and rejection of western human rights norms. This approach could eventually lead to rifts with the US, Saudi Arabia’s traditional security partner. 

While some US allies have effectively banned Chinese firms from 5G infrastructure taking the side of the US. Others such as Turkey have used both Chinese and western firms for 5G infrastructure in an attempt to placate both sides.

However, trying to remain independent will become more difficult to maintain over time as 5G becomes more widespread and both the US and China may push countries to take digital sides.

Hard Data Choices

Tiktok was the first global social media brand born in China. Designed for creating short form videos the App spread rapidly becoming the most downloaded App in the world in 2020. Tiktok and its parent Bytedance were gathering data from their user base across the world (of course no different from other firms).

Concerns were raised when it was clear that large amounts of data could be indirectly accessed by the Chinese government (although a CIA report concluded that they had not done so). This coincided with growing digital nationalism particularly between the US and China.

The Trump Administration soon moved to ban TikTok or force its sale to a US company. Trump’s Executive Order was blocked by the US courts but eventually a deal was hammered out to ensure US consumer’s data was not held in Chinese jurisdiction.

There was speculation that US also feared TikTok because it was dominating a newly important industry, namely Social Media. This is an industry the US had a stranglehold over since its birth, Facebook, Twitter and Instagram were all started in the US . Many saw Chinese firm arriving to disrupt the sector which collects huge amounts of data and now has incredible political power. This pushed the US to act and try to stop TikTok’s runaway growth.

Growing Digital Nationalism

TikTok is not the only case. India has banned 177 Chinese Apps on the grounds they present a “threat to the sovereignty and integrity of India”. India and many others do not want to see a rival like China to gain dominance in key platforms such as social media.

Data localisation laws are also likely to become more popular. Governments and citizens concerned about data leakage and sovereignty will demand that data collected within the country should remain there.

Making decisions around buying technology hardware or software might at first seem like a choice between brands, price and which has the most advanced or appropriate technology. In fact, it is clear that technology choices are increasingly having a geopolitical impact. Organisations need to actively manage this risk.

How Can Organisations Manage this Risk?

Geotechnology risk is technology driven geopolitical or global risks or change which impact the operations of an organisation.

Consider your geopolitical choices when backing a Chinese or European company for any kind of technology service, infrastructure or hardware. It might seem like a technical choice but in fact it is a political one with long term implications.

Digital Nationalism is here to stay so preparation is essential. Organisations need to thoroughly understand geotechnology threats. Understanding who in your organisation is responsible for overall political risk is crucial. They need to be supported with information to make effective decisions.

Multinationals should be aware of data onshoring governments like the US. IF they view their citizen’s data as being exposed or misused or their essential interests under threat by others will move to protect them. This could include sanctions or taking legal action against foreign companies.

These are the questions Executives need to be asking themselves

Can we work with stakeholders, business partners, regulators suppliers, governments national and local to manage Geotech risk in a similar way to managing geopolitical risk. All these stakeholders could have a different reaction to this risk. But there could be severe commercial and reputational consequences if firm is partnered with another from China, the US or other country which is then suddenly barred from working with national governments.

Firms should question whether they have the ability in house or hired in to understand and track Geotech risk. Understanding an often fast changing landscape is difficult as many understand the tech or the geopolitics, but rarely the interplay of the two.

What can be done to effectively manage Geotechnology risk? Companies should be proactively managing these risks. Can they influence stakeholders to prevent or smooth over politically charged issues. Speaking with government or regulators to see and influence events before they become a risk will help organisations navigate political risks.

Deciding on technology partners should be considered with a political lens as well technical and pricing considerations. How will that firm’s national origins be viewed now or if there is political friction in their countries of operation. The national origins of any technology partner should be considered whether it is Chinese, Japanese, German or Vietnamese. Firms from all countries carry a potential risk.

Be prepared for complexity. Governments may require tech firms to be divided or set up separate arms. This could mean one arm serving Chinese markets and another Western markets with clear national divisions in data hosting and usage. This could also mean companies working more through alliances rather than formal mergers to avoid regulations.

Horizon Scanning

Scanning for future technology based risks is an important activity for any prudent firm. The emergence of driverless cars, ever more advanced artificial intelligence and renewable energy are all future flashpoints of competition and disruption. Both the US, China, Russia and many others will view critical technologies as worth shielding and protecting from foreign competition and interference if the political climate becomes worse.

Protectionism

For example the US is trying to protect its solar panel industry from Chinese dominance. China successfully subsidised its renewable technology sector for years to achieve higher market share. But other nations do not necessarily want to be dependent on Chinese imports for solar and wind tech.

Understanding how competitors have dealt with geotechnology risk is crucial. Learning from the mistakes and lessons of others will allow organisations to hone their own strategy.

Politically motivated cyber attacks are another threat. Governments or their proxies may be driven to attack organisations because of links or even perceived links to governments. Large companies or organisations like banks or infrastructure companies like the US’s Colonial Pipeline or the UK’s National Health Service could be targets because of their strategic importance.

Turning Geotechnological Risks to your Advantage

Understanding and monitoring technology based risks and how it can combine with geopolitical risk effectively. By effectively identifying rising digital nationalism and how some companies or sectors will be impacted by this change. Once identified these sectors/companies can be avoided if possible. A well informed company may identify growing digital nationalism in advance and plan accordingly. This might mean ensuring they have geographically flexible data storage options.

Geopolitical Arbitrage

Far sighted organisations may identify opportunities in the growing digital divide and turn them to their advantage. This could mean carefully surveying the political pressures that push out other firms from working in a country. After all any organisation or company excluded because of political pressures leaves a gap in the market. This is arguably a very cynical play, but a well prepared firm can potentially take advantage of another’s misfortune.

Rebuilding the Living World: How to Act on Nature Related Risk

The widespread destruction and despoliation of nature is increasingly recognised as a global risk. Humans are reliant on clean water, air and the natural world to support our way of life. Arable land, oceans teeming with fish and forests full of life are just some of the things we take for granted but are under threat through massive overuse.

Since the industrial revolution in the nineteenth century economic development has accelerated across the globe. The global human population has risen at a stunning rate from just under 2 billion a hundred years ago to close to 8 billion people today.

Each new town, farm and factory built to accommodate these people and the increasingly intensive economic activities that support them has taken a devastating toll on the natural world.  Now this assault on the natural world is coming back to haunt us.

Over the last century a stunning 83 percent of mammal life and half of all plants have been driven to extinction and two thirds of all marine environments have been severely altered. The destruction of the natural world is clear, but now it has now gone so far it poses a major threat to humans.

Former Governor of the Bank of England Mark Carney said: “we have been trading off the planet against profit for far too long, living for today and leaving it to others to pay tomorrow. This has depleted our natural capital, had a devastating effect on the planet’s biodiversity and is causing unprecedented changes to our climate.”

Repairing Nature

This has prompted many business and political leaders to consider how the damage to the natural world can be measured and reversed. The time has passed for just charities and civil society groups lead on biodiversity. In the age where Environmental, Social and Governance (ESG) indicators are the norm we increasingly expect private companies to take the lead on these issues.

The World Economic Forum 2020 report placed biodiversity loss as one of the top five risks of the next decade. The World Economic Forum also estimated that nature positive transitions, in other words restoring and protection the natural world could create US$10 trillion in business value and 390 million jobs worldwide. Some would argue that you cannot put a price on nature and that this rationalises the destruction of nature – if the price is right.

Nature’s contribution to business is at once strikingly obvious yet usually completely ignored or taken for granted. Clean air, potable water and farm land are just some of the necessities that the private sector gains from natural capital. If these are damaged or disappear then companies are put at risk as they cannot produce goods and services that rely on nature.

Taskforce on Nature Related Financial Disclosures

While the risks may appear obvious, there is the problem of measuring them. Currently organisations lack data on how their activities depend upon nature and therefore find it difficult to measure the nature related risks they face. The Task force for Climate Related Financial Disclosures (TCFD) created a framework for Banks and others to identify how they are exposed to climate risk.

The TCFD which is still being implemented has given rise to the  Task Force on Nature Related Financial Disclosures (TNFD). Since 2020 an informal working group drawn from civil society, government and private business has been working with a technical expert group and a partner group with the objective of delivering a framework by 2023. The TNFD will complement the TCFD so organisations have a full picture of their environmental risks.

These risks are often difficult to measure, many companies rely on complex supply chains which provide much of the raw materials, minerals, commodities, metals, oil and agri-produce which both rely on the natural world and whose extraction can so often devastate it.

These risks can them impact on companies disrupting supply chains, change the price of raw materials, destroying capital. This in turn creates the financial risk for banks and insurance firms which until now has not been recognised.

Sustainability Leadership

While the TNFD is working hard to develop a new framework much as been done already. The University of Cambridge Institute for Sustainability Leadership (CISL) published a handbook which aims to identify and understand nature related risks. The handbook also wants to connect the natural and financial world in terms of risk and plot financial risk exposures.

Nature related risks can be divided into the physical such as climate change, pollution, land use change and invasive species. These can manifest through loss of air quality, water scarcity and food production. The other type of risk is transition risk which can manifest through new legislation, regulation or consumer sentiment around the protection of nature which forces change upon companies.

The TNFD is still in its infancy but the scale of the problem suggests that companies will have to incorporate it into their corporate risk framework and start measuring and reporting on how exposed they are to nature related risks.

Opportunities for Firms to Reverse the Decline

There are also opportunities for companies to positively contribute to nature. A World Economic Forum Report identifies 15 areas of transition where firms can contribute to so called nature positive activities. For example scaling circular and resource efficient models of production will reduce the amount of new resources needed to be extracted. Ecosystem restoration and regenerative agriculture will allow the natural world to flourish, increase biodiversity while still producing food. Sustainable management of forests would allow these spaces to flourish while still extracting timber.

Measuring Impact

How have we got to this point? For years companies have promised to clear up their supply chains such as deforestation causing beef, palm oil and soy production. But in reality most have failed to clean up their acts.

One problem lies in the profit motive – companies might want to stop deforestation but their first instinct is make money. Improving regulation and pushing companies to take social responsibilities more seriously may push them into change. Secondly there is a lack of transparency and data, it is difficult for firms to understand their own supply chains which are often are opaque and complex.

But now tools are emerging using new technologies which help firms track and map deforestation and other nature based risks. Mapping supply chains and measuring nature related risks is becoming easier thanks to advances in satellite technology and artificial intelligence.

Encore maps how businesses might be exposed to natural related risks depending on the industry and activity type. Firms from various different sectors can map their geographical footprint to potential risks. Trace Finance tracks commodity traders and financial institutions most exposed to deforestation risk. These new tools will hopefully create a leap in understanding around nature related risks.

The Dasgupta Review

Another landmark for biodiversity was The Dasgupta Review which was commissioned by the UK Government. The report calls on society to “change how we think, act and measure success” to “protect and restore natural capital and use that capital sustainably”. It recognises that we have collectively failed to engage with nature sustainably. The result is extinction rates 1000 times the normal rate as well as degrading pretty much every ecosystem on the planet. It also makes the point that our economies are ultimately dependent on nature not detached from it.

The report also recognises that much of the responsibility to act falls on the global financial system. Dasgupta recommends among other measures removing the numerous subsidies that governments provide that harm nature. For example his might mean ending subsidises for pesticide reliant agriculture which does so much to destroy insect life.

The report goes on to recommend that restoration and preservation of nature or increasingly the “supply” of nature in the dry economic language of the report. This means restoring degraded parts of the environment and better protecting remaining natural areas.

Climate Change

Biodiversity loss is intrinsically linked to climate change and the two issues need to be dealt with together. Accelerating climate change is devastating for biodiversity as species struggle to cope with a fast warming planet. Protecting biodiversity and natural areas acts as a brake on climate change. Deforestation is one of the biggest emitters of carbon, stopping that and planting more forests helps both biodiversity and climate change.

The challenge of stopping biodiversity loss is not to be underestimated. Changing the habits and assumptions of hundreds of years on a global scale is no easy task. Much of the world is so used to taking nature and the natural world for granted for so long, its no surprise that it has been trashed so comprehensively.

Changing these attitudes and getting firms to understand the risks around biodiversity and natural capital loss is akin to turning a supertanker around. However, the risks at stake concerning natural capital are so fundamental that failure should not be an option.

Corporate Resilience and the Pandemic

My latest article published in PRMIA Intelligent Risk – April, 2021 ‘COVID’s impact on cyber and operational risks looks at how corporate resilience has evolved in the face of a major global pandemic. Covid represented an unprecedented global risk factor and a major test of corporate resilience.

The Dragonslayer App matches your personality to different travel experiences around the world to help select an ideal holiday. The App launched three months before Covid hit the USA, so its business model was quickly dead in the water. Rather than packing up, the founder refocused and relaunched the venture in September 2020 as a subscription-based service that gives travellers up-to-date information about COVID restrictions across the globe. The company had taken a radical approach and adapted swiftly to the new environment, demonstrating its resilience in the face of crisis.

The global pandemic was the crisis that no one could avoid. Corporate resilience was tested as businesses were squeezed in many directions: loss of demand, supply issues, and workforces facing sudden mass remote working.

But how has corporate resilience evolved over the course of the pandemic to deal with a business landscape which has moved a decade in a single year?

McKinsey survey

A McKinsey Survey of 300 executives found that half of the respondents reported that COVID exposed weaknesses in their companies’ strategic resilience and that business model innovation was the most effective response. Over 60 percent of the respondents felt that these innovations would last beyond the crisis. Interestingly, 42 percent felt it had weakened their position, while only 28 were in a stronger position.

Companies that were in the right sectors such as online retailers, software firms and pharmaceuticals enjoyed a boom, whereas companies in the vulnerable sectors such as energy, retail and transportation were hardest hit.

Two stories from the retail sector demonstrate how agility and adaptation can be the difference between success and failure.

Traditional retail was one of the hardest hit sectors in the pandemic; busy high streets were left desolate, and shops shuttered.

Traditional retail

Retailers without a significant online presence faced ruin. In the UK, household name, Debenhams, dependent on physical shops and so unable to reach its customers filed for bankruptcy. In contrast, another traditional retailer Mars Petcare innovated quickly during the pandemic by moving beyond traditional lines of dog food and pet products to providing animal telemedicine.

Telemedicine is a field that has shot to prominence in the last year. Mars Petcare demonstrated it is not just for humans, as it helped many veterinarians shift online to treat patients.

Hybrid working

As the world looks gingerly towards a post-COVID world, hybrid working has appeared as a term, which promises to make organizations more resilient. In theory, a more dispersed organization (with staff split between office and home) will reduce dependence on physical buildings, and more flexibility could result in a more contented workforce.

However, hybrid working at this new vast scale is untested. Many workers have to adapt to new technology and another change in working practices. In addition, there is a potential conflict between those who favour working face-to-face and those who prefer technological solutions.

The pandemic has provided a number of lessons for organizations striving for resilience. The companies that are adaptable, agile and understand risks will thrive in the future.

As Microsoft CEO Satya Nadella commented in 2020; “We’ve seen two years’ worth of digital transformation in two months. The quarter is the new year, and the fastest will win”.

The lessons of the pandemic

Adaptability: Organizations can change processes, structures, and business models, or design them with maximum flexibility in order to adapt to new circumstances. For this to work, the organization needs to have a willingness and desire to learn from mistakes and evolve through trial and error. In a similar vein, volatility and exposure to stress, rather than seen as a negative should be viewed positively.

The experience of this (unless taken to an extreme) will help the organization face the future. Adaptability can come at the price of stability. Agility is usually easier for a startup like DragonSlayer but much more difficult for a vast lumbering multinational.

Understanding Risks: Many firms in the software, online delivery, and pharmaceutical sectors did well during the pandemic, but that does not mean they will thrive in another crisis. In fact, their success may blind them to risk in the future. Identifying and prioritizing risks as they appear is critical for a resilient organization. Organizations should be asking what risks will appear in the future, how they will play out over time, and are we equipped to respond effectively to these threats as they appear.

Businesses should employ horizon scanning and identify key emerging risks that will affect them in the future.

Adopting the precautionary principle: Murphy’s Law states, “If anything bad can happen it probably will.” This pessimistic view was borne out by the evidence; most people have a bias towards optimism and a tendency to ignore even obvious risks. For example, the World Economic Forum Global Risk report has been warning of a global pandemic for many years. Inadequate planning in many western countries has created an opportunity for this threat.

Businesses can adopt this principle through contingency planning across business units and stress testing of their activities for weaknesses. Business units should draw up contingency plans and test these in live scenario exercises. Of course, these measures are often time consuming and disruptive, but increasingly organizations will have to adopt them if global crisis and widespread systemic change continues to be the norm.

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

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 to information and above all his ability to adapt to a changing world were key to his success. This what we now might call successfully managing 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 Pan-European trading empire. While times have changed since the fourteenth century, geopolitical risk remains a harsh reality for organisations and one which can catch the unprepared unaware time and time again.

Introduction

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

Willis Tower Watson a leading global insurance firm labelled geopolitics 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.

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 such as consultancy firm they can easily pull out of a country. 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

A shadow cyber war between Iran and Israel has been ongoing for many years 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.