Businessman and woman walking in opposite directions
  • Gary Reader, Leadership |

It’s a predictable news clip: political leaders shaking hands, engaged in deep discussion, apparently seeing eye to eye. These are the moments where trust between two people sets the tone for relationships between nations and, ultimately, the prospects of business investment and trade.

With geopolitics and trust so strongly related, mistrust features as a major driver for many of the geopolitical flashpoints in Eurasia Group’s predicted Top Risks for 2021.1 And, since trust also forms part of the social contract held with the public, the rise of misinformation, and plummeting trust in government, is raising geopolitical risks to business.

But this is not all bad news. Eurasia Group also reported that business now holds the title of being most trusted by the public; and it is also (concerningly) the only institution seen as both competent and ethical.2 The lack of governance and trust among world leaders in this “G-Zero world”3 can also present many upsides for global businesses. With a greater strategic focus on geopolitical risk, business has the opportunity to re-establish trusted relationships with regulators, investors, consumers and the public.

Mistrust in multilateralism

Heightened mistrust in recent years has arguably eroded the power of global and supranational governance structures (like the WTO), or the public’s belief in them (such as Brexit). At the same time, as identified in KPMG’s Top Risks: Bottom Line for Business, strategic competition has intensified on the global stage – in technology, agriculture and healthcare, and potentially now the realms of data and cyber (#5 and #6 in Eurasia Group’s Top Risks). Such mistrust is resulting in policy-making that seeks to strengthen and protect domestic industries and diversify supply chains away from ‘adversary’ states.

The retreat from multilateral coordination towards nationalistic approaches may continue. Eurasia Group predicts that climate (Risk #3 in Eurasia Group’s Top Risks) will be the next area to watch. Nations committing to zero emissions targets as part of the Paris Agreement may seek to gain first mover advantage in areas such as resource access, protect their own carbon assets or cushion the costs of new regulation for domestic industries, potentially resulting in higher costs for foreign companies through mechanisms like carbon border adjustments.

A lack of multilateral cooperation in this space may lead to an uncoordinated and uncertain policy landscape that stifles innovation and creates uneven playing fields – not the most effective approach when it comes to solving a ‘global’ problem like climate change. 

Barriers in bilateral relations

Trust between state actors is also becoming less stable. These relationships are particularly at risk during significant domestic transitions, such as changing presidencies and COVID-19 recovery periods, since leaders are unsure how their counterparts may act.

At the same time, the shift to cyber information warfare has resulted in a lack of global norms around what are the acceptable rules of engagement against different actors and capabilities, with, for example, hospitals and healthcare companies becoming the targets of recent attacks.

This lack of trust between bilateral players can increase the likelihood of geopolitical flashpoints and their associated business risks - like disruptions to shipping lanes, spill-over from a state-sponsored cyber attack, or a shutdown of critical infrastructure.

The result is that we see a direct relationship between cross-border trust and confidence and continued, secure international trade and investment flows, or vice versa. It becomes more challenging for companies to invest in long-term bilateral relationships when the rules of the game are subject to change. And, as stock markets reflect this uncertainty, the valuations of publicly-traded businesses are affected, impacting their access to capital, and hitting at the core of business growth.

Scepticism in society

Of course, a perceived lack of coordination by government across a range of issues has the potential to inflame public sentiment. In the information age, these geopolitical movements quickly escalate across distant geographies.

Increasingly, companies are taking these matters on themselves in order to meet the rising expectations of their consumers and investors. For example:

  1. Sustainability: Greta Thunberg’s movement led to global demonstrations in September 2019.4 Now, over a quarter of all investment dollars under professional management is being held by ‘ESG-friendly’ investors.5
  2. Equality: A push for new reporting requirements around modern slavery in Australia led to comprehensive supply chain reviews by global apparel manufacturers, mining businesses and others.6
  3. Privacy: As discussed in KPMG’s Geopolitical Face-Offs (PDF 2.8 MB), governments are juggling consumer demand for privacy and control of the information used for business analytics. Businesses should take proactive steps beyond mere regulatory compliance to address consumer concerns around use of data. After all, 28 percent of countries do not have data and privacy legislation in place.7

In light of these considerations, the organizations that succeed in 2021 will likely be those that proactively manage these challenges, by making geopolitical risk and trust-building a central component of their strategy. Read KPMG’s Top Risks 2021: Bottom Line for Business report to find out more.

With thanks to Daniel Ginger, KPMG Australia, for supporting research.

Footnotes

1 Eurasia Group, Top Risks 2021, 2021
2 Ibid
3 Coined by Eurasia Group, this refers to a world with many leaders, but no global leadership.
4 BBC, Climate protests: Marches worldwide against global warming, 2019
5 Morgan Stanley, Sustainable Signals: Asset Owners Embrace Sustainability, 2018
6 Australian Department of Home Affairs, Modern Slavery, 2020
7 World Economic Forum, A roadmap for cross-border data flows, 2020