Political Analysis by Willis Towers Focuses on Risks Associated with Politics

Political Analysis by Willis Towers Focuses on Risks Associated with Politics

In the face of escalating political risks, global businesses have been forced to reassess and adapt their risk management strategies. According to the Willis Towers Watson (WTW) 2022 political risk survey, companies are enhancing their risk identification processes, elevating reputational risk and crisis preparedness to boardroom levels, and incorporating broader policy and environmental considerations into their corporate governance.

The survey highlights several key adaptations. One of the most significant is the increased focus on political polarisation as a material risk. Businesses recognise the rise in political polarisation globally, particularly in democracies such as the United States, Germany, and India, where societal divides create uncertainty affecting economic stability and corporate strategies. This has prompted firms to reassess risk models to account for socio-political instability.

Another key adaptation is the formalisation of processes for managing reputational and political risks. A significant majority of companies (92%) have established formal procedures for identifying and managing reputational risks, often linked to political dynamics. Crisis preparedness has also improved, with 93% maintaining formal crisis teams actively trained for reputational and related incidents, and linking these efforts increasingly to board-level Key Performance Indicators (KPIs).

There is also a shift from viewing reputational risk purely as a branding issue to involving risk and financial professionals in governance and oversight. This includes linking risk management activities to executive and board incentives, embedding risk awareness into core business metrics.

In addition, companies are integrating environmental, social, and governance (ESG) metrics into executive compensation and corporate strategies, which indirectly addresses evolving political and regulatory pressures on sustainability and social responsibility.

Firms and regulators alike are adopting advanced risk analytics and reinforcing strategic, proactive approaches to political and economic volatility, rather than reactive responses.

The report covers a wide range of political risks, including supply chain disruption, protests, materials shortages, and more. One of the most pressing concerns is the ongoing conflict in Ukraine, which has had a net negative financial impact on 86% of Western European companies. Panelists are worried about the escalation of the conflict, sanctions, inflation, and the potential for being arrested for facilitating avoidance of sanctions or being pressured to renegotiate energy contracts.

Many companies are becoming nervous about continuing business in China but are unsure about how to disconnect from such a major market. Forty-two percent say decoupling from China will "greatly strengthen". The risk to undersea infrastructure, shipping, and oil/gas rigs may increase due to the political situation in Ukraine and the Middle East.

The credit and political risk insurance market has access to more capacity than ever before, according to a report by Willis Towers Watson. The survey and interviews were conducted by Oxford Analytica in January and February 2023 and are based on responses from 50 companies around the world, of which 50% have revenues in excess of $1 billion.

In conclusion, global businesses have responded to heightened political risks by embedding political and reputational risk management into formal governance structures, raising crisis readiness, integrating these risks into financial and executive performance metrics, and leveraging improved data analytics to navigate complex geopolitical landscapes. This reflects a shift from traditional risk avoidance towards proactive, integrated risk governance aligned with broader societal and regulatory concerns.

1. In response to the escalating political risks, businesses are enhancing their risk identification processes, particularly focusing on political polarization as a material risk, especially in democracies like the United States, Germany, and India.
2. A significant majority of companies (92%) have established formal procedures for handling reputational and political risks, prioritizing crisis preparedness, and linking these efforts to board-level Key Performance Indicators (KPIs).
3. To address evolving political and regulatory pressures on sustainability and social responsibility, companies are integrating environmental, social, and governance (ESG) metrics into executive compensation and corporate strategies.
4. The credit and political risk insurance market has more capacity than ever before, as revealed in the Willis Towers Watson report, based on responses from 50 companies globally, with half having revenues over $1 billion.
5. Global businesses are adopting advanced risk analytics and proactive approaches to political and economic volatility, shifting from reactive responses to complex geopolitical landscapes, including events such as supply chain disruptions, protests, and conflicts like the ongoing conflict in Ukraine.

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