Report recommends ways to boost political risk management

There is much room for companies to improve the way they detect and manage rising political risk within their enterprise risk management frameworks, says RiskBusiness in a timely report published following Russia’s invasion of Ukraine.

International governance, risk, audit and compliance solution provider RiskBusiness says in its new Political risk – An overlooked risk category now coming of age? report that political risk has risen during the last decade as a result of wide range of different events.

It notes that the conflict in the Ukraine and the Covid-19 pandemic are two extreme political risk scenarios that have forced companies to focus on risk management. However, it adds that local or national political risks may be less vast but can still have significant impacts.

And RiskBusiness’s report notes that there are several areas where companies can improve their political risk management, laying out a number of areas for organisations and their risk managers to focus on to boost protection.

Firstly, it says companies must ensure that political risk information is more widely available to individuals managing the threat. It says good sources of information are vital if senior management and the board want these risks to be adequately managed by their teams.

The report flags the Economist Intelligence Unit and Transparency International as good sources of information and suggests companies monitor social media in some markets.

The firm also advises companies to regularly discuss political risk at board and senior management level.

“Political risk is a critical [threat] and should be a regular part of strategic discussions about risk appetite, risk mitigation strategy and other elements of the risk framework. This should then roll down across the enterprise risk management programme throughout the organisation. Also, having the board and senior management openly talking about managing political risk sets the tone at the top regarding the importance of political risk within the overall enterprise risk management programme,” states the report.

“If the board and senior management aren’t focusing on political risk issues, the teams across their organisation won’t either,” it adds.

RiskBusiness goes on to urge companies to include political risk questions in their risk and control self-assessments.

“For areas of the organisation that have historically been impacted by political risk, or which are operating in a politically sensitive environment, be sure to regularly and proactively monitor the state of play for these risks. An open-ended question about political risk could be useful as well, as it may help call out emerging political risks,” it says in the report.

The company also says many organisations have been caught out by political risk-related loss events that have impacted outsourcing and supplier relationships. Therefore, it encourages companies to properly assess third and fourth parties for political risk.

It recommends that more organisations conduct political risk scenario analysis. “Companies should consider undertaking this kind of scenario analysis from both a risk and a resilience perspective. For some organisations, it may be helpful to bring external experts in to work with the organisation to develop realistic scenarios of more ‘everyday’ political risks, as well as extreme but plausible scenarios,” it says.

“Companies should also look for potential scenarios in the experiences of other organisations during the Covid-19 pandemic and the invasion of the Ukraine to create scenarios, as these are more extreme events. Lastly, scenario analysis may also be a good way to potentially tease out emerging political risks,” it adds.

RiskBusiness stresses the importance of risk managers understanding how political risk loss events could impact operational resilience, and looking at the impact of political risk across the entire enterprise risk spectrum for knock-on impacts.

Finally, it encourages firms to develop internal and external communications strategies to help deal with political risk loss events and/or operational resilience issues.