With the world in flux now is a good time to put geopolitics at the centre of your business strategy
On 1 June, the Australian Securities and Investments Commission (ASIC) released its areas of focus for 30 June 2022 reporting. This year, ASIC called out geopolitical risks as a key area of uncertainty that directors and management should assess in the future performance of a company, the value of assets and provisions, and in business strategies. They are absolutely right to do so – we are in a time of great geopolitical volatility which is not just going to settle back down into a status quo ante. For businesses to survive and thrive, just as ASIC notes, geopolitics needs to be central in strategic planning and operational design.
In the ASIC report, ASIC Commissioner Sean Hughes noted that “many companies are facing changing market conditions and uncertainties”. Mr Hughes’ observation is a great example of the great Aussie understatement, like saying, ‘yep, it’s a bit warm’ when it’s 45 degrees in the shade. But it can be hard to cut through the noise to know what those market uncertainties are, and where they might be heading.
The critical takeaway message for business is that the challenges we’re all feeling at the moment aren’t a temporary glitch which will settle down some time sooner or later. The global trade and investment environment is fundamentally changing, and ‘business-as-usual’ is becoming a thing of the past. KPMG’s Australia Geopolitics Hub identifies four main geopolitical drivers of change in our global business operating environment: structural shifts in the international system; rising mistrust; Industrial Revolution 4.0; and the climate crisis. What this adds up to is a world where keeping geopolitics at top of mind is becoming increasingly important.
The first geopolitical megatrend KPMG’s Geopolitics Hub identifies is the structural shifts occurring in the international system. The rising economic power of actors who were not part of the formation of the post-Second World War international system is shifting the locus of power away from the North Atlantic, where it has been based for the past seven decades. The desire of these emerging powers for more voice and agency is driving growing mistrust and strategic competition, and in some cases, posing challenges to the existing norms and structures. It is not yet clear how the system will be shaped in the future. How status quo powers respond to this shift also affects what happens next.
At the same time, around the world, mistrust is growing. This year’s Edelman Trust Barometer finds “society locked in a vicious cycle of distrust”, with trust in government at a worrying low. More and more people feel that the globalisation project has not worked for them, and/or what benefits there are from globalisation are being soaked up by a layer of elites who prevent the increased wealth from reaching the everyday people.The result is a strong sense of anger and mistrust towards the establishment status quo. The rapid decline in trust has many corollaries, including social and political unrest. Rising mistrust and citizen anger foments social polarisation and instability in the form of demonstrations, protests and riots. Another consequence of rising mistrust is a turn away from the political centre towards populist leaders. Mistrust and anger with establishment political actors and processes can lead to citizens disengaging, becoming polarised, and turning to options at the outer edges. Populist leaders often pose a real threat to domestic democratic institutions designed to check their power, and they tend to be very sceptical of global trade and economic institutions, instinctively preferring nationalism and protectionism.
Describing the third megatrend of what is happening in the realm of tech, digital and cyber as ‘Industrial Revolution 4.0’ is not over-dramatic. We are currently seeing the convergence of rapid technological developments in the fields of big data, the internet of things, robotics, blockchain technology, sensors, artificial intelligence and augmented reality. The depth and breadth of change in tech, cyber, digital and data will fundamentally change every aspect of the average Australian’s life in ways that we can’t even imagine – and indeed, already is. This tech disruption is highly geopolitical – both driven by, and in turn driving, global politics. In the highly competitive international environment, the command of technology is central to the pursuit and protection of national interests and state security. The geopolitics of technology is at the heart of supply chain security, and our ability to capture the markets of the future.
The fourth geopolitical megatrend driving the profound changes to the international business context is the climate crisis. As Paul Dillinger, head of Global Product Innovation at Levi Strauss & Co put it, “anyone with a supply chain is going to be affected by climate change… It’s as much an issue for us as for the Pentagon”. Direct environmental impacts – extreme weather events such as an increased incidence and severity of storms, floods, cyclones, bushfires, and droughts – create physical disruptions to the delivery of products and services in key markets. The climate crisis also has many flow-on effects that are already reshaping societies and economies, like communities who can no longer access the resources they need to live being displaced, both within and across borders, with worrying implications for political instability, rising tension and conflict. Pandemics like COVID-19 will become far more common as permafrost melts and releases long-buried disease-causing bacteria and viruses. Melting ice in the Arctic is intensifying geostrategic competition for control of sea lanes and underwater resources. Right now, commitments to mitigating climate change are not nearly enough to prevent these events occurring.
The world is in a state of flux. We don’t know when things will settle, or what they will look like when they do. We do know that nationalism and protectionism are on the rise, the line between the online world and the physical world is blurring, cybersecurity is lagging, the planet is in crisis, and COVID-19 is exacerbating inequality and social polarisation. We do know that uncertainty and volatility are here to stay. There is no coherent global approach on political models, trade standards, and international architecture.
As ASIC’s guidance shows, now is a very good time for directors and management to ensure they are putting geopolitics at the centre of their business strategies, and assessing the potential geopolitical risks when evaluating company performance and value.