Pim Poppe: Geopolitical risks and corporate resilience

January 21, 2025

_{This column was originally written in Dutch. This is an English translation.}

By Pim Poppe, Managing Partner, Probability & Partners

Welcome to 2025, the year of geopolitical risks. There is no doubt that geopolitical risks are on the rise. The newspapers are full of them. But what exactly do we mean by geopolitical risks?

Depending on who uses the word, the emphasis is slightly different. Clingendael, DNB, TNO, and CBS each interpret the term in their own way, but all in all it is about international power relations, economic vulnerabilities, tariff wars, strategic dependencies, and supply (in)securities.

In recent weeks, Trump's statements about buying up Greenland, annexing Canada and taking back the Panama Canal have set things on edge. The big question, of course, is wether this is grandstanding, a negotiating tactic or a serious policy intention. That matters quite a bit. What is certain is that geopolitics are the issue and that turmoil and uncertainty are heightened by these statements. What we also know is that Trump is not a mitigator of geopolitical turmoil, but a catalyst. As of yesterday, he is again president of the United States. So it is time to take a longer look at geopolitical risks.

Geopolitical risks can be grouped in several ways. The list should not be too short, but also not too long. Above all, it should be relevant to the country, sector or company in question. The list below is arbitrary, but as far as I am concerned a good place to start.

Geopolitical risks

1. Fight for economic hegemony
2. War & threat of war
3. Climate change
4. Cyber risk
5. Supranational disorder
6. Pandemic

These risks need no explanation; they speak for themselves, especially the first four. What worries me personally is that supranational structures (such as the EU, NATO, UN, OECD, WHO, et cetera) will be increasingly unable to resolve global risks or conflicts. This leads to supranational disorder, which is problematic because most risks can no longer be managed nationally. This disorder leads to uncertainty, postponement of investment decisions, higher risk premiums and falling stock prices.

In my opinion, a pandemic is also a geopolitical risk. We now know that a pandemic can become a source of conflict between countries competing for scarce resources. Moreover, different national approaches and ignoring the WHO can lead to ineffective control, with consequential damage. In addition, countries or regions can emerge from a pandemic very differently, gaining lasting economic and military power.

Risks influence each other. For example, cyber risk will increase with a growing threat of war or a struggle for economic hegemony. Cross connections abound.

What should companies do? At least not bury their heads in the sand. They should assess the conceivable scenarios for these six geopolitical risks, consider the vulnerabilities of their operation and business model in those scenarios, and report on the risks. They need to take mitigating measures. What happens if the Rhine is no longer navigable because of a lock hack or too low a water level due to climate change? Will we then transport by road? What if the house bank can't provide payment services for a week? What happens if one of the strategic international shipping routes is no longer navigable due to a regional conflict? What is plan B in these scenarios? How far do you work out plan B? What does the crisis organization look like? Should we practice making decisions under time pressure with limited information in crisis?

In any case, also estimate what your customers will do in the different scenarios. Estimate how vulnerable your suppliers are. Also estimate vulnerabilities along the axis of infrastructure that matters to your business. What could happen in different scenarios to the availability and cost of this infrastructure?

Infrastructure and geopolitical risks

Transportation infrastructure

• Roads
• Railroads
• Waterways
• Ports

Energy infrastructure

• Power grids
• Oil and gas pipelines
• Renewable energy sources
• International shipping and transport routes

Communication infrastructure

• Telecommunications networks
• Supporting cloud services

Financial infrastructure

• Payments
• Clearing and settlement

What should pension funds, insurers and other asset owners do in different scenarios? They need to ask themselves what scenarios they might find themselves in and how to adjust their portfolios accordingly. What if the multipolar economic world evolves? Do we then pull all the assets out of China? When do we do this? How do we weigh financial and ESG considerations if the situation worsens? How soon should we decide and how will we do it? The choice to do nothing is also defensible, but this decision must also be well thought out in advance. In addition, asset owners can learn about the vulnerabilities of the companies, sectors and regions they invest in in the event of geopolitical scenarios. If you do that in advance, you can make faster decisions if necessary.

Do regulations help? Yes and no.

Yes. There are now regulations and reporting requirements that help us make sensible risk assessments. For example, DORA and NIS2 help improve the digital resilience of financial institutions and other critical industries. The legal framework and scope differ, but the goal is the same: to strengthen digital resilience. This is good and important.

No. CSRD helps companies think about the ESG risks facing them, define scenarios and mitigating actions, and report on them. My concern is that if companies are fully compliant with CSRD, DORA or NIS2, there will still be gaps in the risk picture. Precisely because of the enormous attention that CSRD and DORA/NIS2 require, other risks are forgotten. The funnel of risks you want and can see must remain wide.

In short, geopolitical risks are material and topical. They are also elusive and have many faces. They deserve attention.

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