KPMG: An overview of geopolitical risk forecasts in 2023 – conclusions for business

Yearly, Eurasia Group and KPMG prepare a forecast of geopolitical risks that could affect various business sectors. In January 2023, the latest annual report, Top Risks 2023, once again confirmed businesses worldwide to be highly vulnerable to a crisis.

The results of the annual KPMG 2022 CEO Outlook report show that geopolitical uncertainty is likely to continue to affect business strategies, with 81% of CEOs planning to adjust their risk management processes. This year, Eurasia Group also warns that "we remain in the depths of a geopolitical recession, with the risks this year the most dangerous we've encountered in the last 25 years."

The geopolitical changes in the world are causing additional uncertainty among business leaders, which in turn can lead to unproductive and wrong decisions. We have prepared a brief overview of the Eurasia Group and KPMG forecasts, with key conclusions that businesses should consider in the current circumstances.

Risk 1. Globalisation is not only about free trade, but also about greater vulnerability

Solution: National security changes a sustainable approach to globalisation

Globalisation has evolved into a fragmented world, where economic cooperation has weakened and competition has intensified. Interconnected and developed supply chains, once considered a sign of free trade and economic efficiency, can now be perceived as a vulnerability that needs to be reformed in the face of increased geopolitical competition. To ensure their viability, countries are trying to establish national industrial policies that give preference to domestic suppliers in procurement in critical industries, including semiconductors, energy, pharmaceuticals, defence and other sectors, as well as in non-EU neighbouring countries. All of this is exacerbating the inflationary pressures that countries are experiencing today, which are likely to continue through 2023.

The new paradigm for the global economy is defined by:

• high levels of interdependence between societies and markets achieved through 30 years of economic integration, causing both enormous economic growth and vulnerabilities;
• heightened geopolitical competition and polarisation amongst countries, driving a G-Zero world (an order in which no country or group of countries has/have the political and economic leverage to influence the international agenda or provide global public goods – Mind), characterised by a vacuum in global governance;
• the primary area where geopolitical competition resides is in the economic sphere, centred on the race for technological supremacy;
• companies are important players in this geopolitical arena.

The contradictory trends of the last 10 years have challenged the established principles of globalisation, and the COVID-19 pandemic and the full-scale war in Ukraine have only exacerbated them, with new supply chains being created and existing ones being reoriented.

To effectively manage their companies in this new environment, executives must rethink outdated business models. Many of the challenges faced by international businesses, including trade barriers, fragmented regulatory regimes, access to key technologies, and supply chain disruptions, are driven by this new model of globalisation. Understanding how national security is shaping the new model and assessing the impact of politics on business objectives is now necessary to help seize opportunities and avoid risks.

Risk 2. High inflation and reversal of years of global progress

Solution: Productivity, efficiency, and ESG: A strategy for troubled economic times

The current "polycrisis" – a term that refers to the intersection and interdependence of various risks – and the subsequent geopolitical recession are leading to a deterioration in economic conditions, mainly due to record-high inflation and the unravelling years of global progress. The IMF highlights that the rising cost of living, deteriorating financial conditions in most regions, russia's full-scale invasion of Ukraine, and the ongoing COVID-19 pandemic are all weighing heavily on the global economic outlook. Global growth is projected to fall from an expected 3.4% in 2022 to 2.9% in 2023, and then rise to 3.1% in 2024.

However, despite the challenging times ahead, according to the KPMG 2022 CEO Outlook, 71% of global CEOs are confident about the global economy over the next three years. In order to capitalise on this optimism, four interlinked issues need to come to the forefront of boardroom discussions: stagflation, the energy and food crises, cost of living crisis and inequality, and the future of ESG.

Energy and food crisis

Energyand food remain the main drivers of inflation

Countries seeking energy stability are likely to temporarily delay their decarbonisation goals, demonstrating the important role fossil fuels still play in the global economy. Against this background, the world may face a much steeper decarbonisation curve in the medium to long term to attain net-zero by 2050. In the absence of technological breakthroughs, demand reductions, energy efficiency programmes or a radical change in the growth-based economic model, significant shocks could result.

Renewable energy sources, especially solar, are likely to drive demand growth in 2023. Demand for hydropower and nuclear power will also grow, although water scarcity will prevent these energy sources from reaching their full potential. France is ready to launch new next-generation nuclear power plants, China plans to launch an experimental fast-reactor, and South Korea and Germany are likely to drop plans to close existing plants. Hydrogen continues to attract attention, even if it is still a few years away from being used on a commercial scale.

The energy shift will be complicated by geopolitical factors. Delivering the clean energy revolution in an era of strategic competition between countries will mean dealing with more complex and critical supply chains. Countries may be competing for vast reserves of rare earths, copper, cobalt, chromium, lithium, nickel, graphite, silicon, zinc and other minerals.

The future of ESG

Global instability is likely to lead to further crises, requiring companies to respond in a sophisticated and thoughtful manner. A coherent and comprehensive ESG strategy will be key, even if future ESG standards and accountability are affected by the globalisation agenda. Changes in the global agenda following the war in Ukraine could lead to an even more destabilised world with an even greater divide between major economies.

There will be fundamental differences between global companies with more public ESG commitments and national companies with lower ESG expectations. Even today, the pressures placed on highly responsible multinationals are not felt equally by smaller companies, especially those operating in markets with low levels of ESG accountability. At the same time, the perception, and requirements for ESG also vary across regions. Encouraging multinationals to accept this differentiated responsibility will be a key determinant for the future of ESG.

In addition, there may be uncomfortable discussions about regional and cultural expectations for each ESG category, as well around the improvement of ESG standards – particularly the "S".

Risk 3. Possible threats of a technological breakthrough

Solution: The benefits of technology and its responsible implementation are the key to effective business protection

Throughout history, technological breakthroughs have been the main driver of continuous growth in labour productivity. Today, we are on the verge of a revolution in robotics and artificial intelligence that could provide a much-needed boost to the global economy and usher in the Fourth Industrial Revolution. In an ideal world, these disruptive technologies could be a panacea for creating a cleaner, safer and more inclusive world. Today, however, countries and territories are locked in a geopolitical competition where actors who once promoted globalisation are now hindering it and focusing on national security objectives. This competition is particularly acute in the field of advanced technology.

Introduction

With capital costs increasing and the emerging market outlook remaining uncertain, businesses are being even more cautious about investment. Investing in cutting-edge technologies is becoming increasingly difficult due to costs, time and resource constraints, and complex ROI calculations. However, this cautious approach runs the risk of missing out on a once-in-a-generation opportunity to be among the early adopters and leverage major technological advances to significantly improve the productivity of their organisations. Technology has already proven to be a game-changer in many sectors, such as healthcare, industrial manufacturing, and sustainability.

Protecting

On the flip side, the use of new technologies means that organisations need to protect themselves from the potentially negative impact of technology on their business. Cybersecurity threats are dynamic, and the consequences are constantly growing. The accelerating development of artificial intelligence and digital strategies, the number of hacker attacks and ransomware, and the lack of clear lines of responsibility between users, companies, suppliers and government agencies have all contributed to the high profile of cybersecurity on the agenda of decision-makers.

The sophistication of cyberattacks and the complexity of cyber risk management indicate that many challenges lie ahead. More responsible data governance and a review of the cyber risk management framework are important steps that CEOs must take to ensure resilience to cyber threats.

Bridging the gap between how a company can use customer data in a legally permissible manner and customer expectations of how their data will be used will also be key, as there are many reputational and trust risks in this area. Failure to maintain digital trust can have devastating financial, reputational, legal and other consequences.

Thorough modelling and quantitative risk assessment can help organisational leaders understand the true level of cyber defence. It can help them understand which cybersecurity controls contribute most to reducing risk, and therefore help ensure that they focus their resources on the areas that deliver the most value.

About KPMG's alliance with Eurasia Group:

KPMG International has entered into an alliance with Eurasia Group, one of the world's leading political risk research and advisory firms. The alliance aims to develop solutions to help businesses cope with geopolitical challenges. Through the alliance, KPMG professionals can tap into the expertise of Eurasia Group analysts in more than 100 countries and jurisdictions, along with KPMG network firms, to understand the levers that affect business – from macroeconomic indicators to detailed risk analysis.