KPMG Australia says businesses need to better prepare for geopolitical risks

The consulting firm has warned businesses no longer have the luxury of hiding from a more complex geopolitical environment and need to take action.

Australian businesses are navigating a more complex geopolitical environment than at any time in living memory, with a complex range of interconnected challenges and opportunities, says major consulting firm KPMG.

The warning comes ahead of the US election next month and growing tensions in the Middle East and the Russia-Ukraine war.

KPMG Australia geopolitics partner Merriden Varrall told The Australian the nation could not avoid the fallout from geopolitical events and businesses needed to take a holistic approach to ensure they were prepared.

“Australia has been very fortunate over the past few decades, but that ability for us to be a little bit distant is no longer the case,” she said.

“We don’t want companies and businesses in Australia to just say this is too much. We’re paralysed. We want to try and help businesses to think of really practical ways that they can navigate and negotiate risk.”

Until recently, many executives thought geopolitics was not relevant to them. The events of the past few years are now shaking this sense of comfort after about 93 per cent of international firms suffered losses linked to political instability in 2023, compared to just 35 per cent in 2020, according to KPMG.

Ms Varrall said business leaders now understood geopolitics did matter and needed to be tackled, and that when there was change there is also opportunity.

“We’re seeing leaders start to embrace the geopolitical-centric risk framework and opportunity framework. They’re doing internal audits to understand and communicate the risks to the right people,” she said. Businesses were encouraged to undertake scenario modelling to understand the risks and what actions needed to be completed to mitigate any exposure, she said.

“If the South China Sea is key then a business should have a data point so if there’s an incident then you know about it in real time. While we can’t predict what will happen, taking steps to understand the risks and what the impact could be will leave businesses better off,” she said.

Analysis by KPMG shows consumers and retailers, already suffering from reduced consumer spending, are the most vulnerable to geopolitical challenges. KPMG says the sector was already dealing with climate change effects on the supply chain, faces risks from a lack of trust which could lead to reputational damage.

KPMG says there has been a sharp increase in the number of businesses that have lost money from geopolitical events since 2020. Picture: Sean Gallup

As Australia and other countries focus on national security and reducing dependence on other countries, Ms Varrall said schemes such as the Future Made in Australia fund could lead to trade wars.

“Retailers are exposed to these international, geopolitical, supply chain and other disruptions.

‘’When you look at potential scenarios that could occur, many are more likely to impact consumer and retail than other sectors,” she said.

“These companies are not likely to think as far ahead as defence or energy. While a two to three year time frame was fine in the past, businesses need to look ever further ahead.”

The proliferation of misinformation and disinformation on social media, driven by sophisticated algorithms, was fostering social and political division and eroding trust in essential institutions, posing significant challenges to businesses, she said.

Ms Varrall said the risk to business was that customers would not know what to trust anymore and whether to believe what a company was saying.

“With social media and AI, the danger without regulation is that information can be spat out with a different meaning which also creates an atmosphere of broader mistrust and relates to the idea of the risk of plummeting trust in public institutions,” she said.

Originally published as KPMG Australia says businesses need to better prepare for geopolitical risks