The board response at times of geopolitical crisis

The ongoing situation in the Middle East is buffeting the world economy, generating significant uncertainty while driving up energy costs, disrupting supply chains and demanding attention at a time of competing priorities. It demands a considered and informed response from boardrooms across sectors. 

The role of fossil fuels in the crisis is significant, this is the second oil and gas price shock in four years, and there is no clear off ramp in sight. It brings the risk of continued reliance on volatile energy sources into stark relief. This presents an opportunity for boards to reconsider the risk reward calculation when making decisions about climate risk resilience. 

Geopolitical risk is now firmly on the agenda for everyone. All companies will face higher insurance costs and delays in supply chains, and while these short-term operational costs will be an immediate cause for concern, it is also crucial to maintain a long-term view of impact and put in place systems that mitigate this in future scenarios.  

Times of crisis test the skills of the most effective boards, highlighting the importance of a robust Nomination Committee that elevates non-executive directors with crisis-ready backgrounds, something we discussed with members at our McKinsey event a year ago. The businesses that are most equipped to deal with disruption to energy supplies and wider economic shocks will feature a diverse range of voices with deep experience of geopolitical risk and expertise in renewable technologies, energy networks or on-site generation.  

Boards, and in particular the Audit and Risk Committee, must also consider the UK’s position on energy security as part of its risk profile. Directors are personally accountable for the disclosure of energy-related financial risks and supply chain vulnerabilities. In a globalised energy market, the UK cannot realistically achieve complete energy sovereignty; and understanding this risk and pricing the cost of energy into financial planning is fundamental to addressing risk.  

Reputation, brand and investor confidence also come into the equation. The board has a key role in ensuring the effective stewardship of all stakeholders, championing a fair strategy to support workers directly impacted in the region, those hit by energy price volatility, and taking steps to bolster investor confidence through resilience.  

Chapter Zero has explored this with members, and four key immediate questions are emerging for boards:  

1. Stress testing & scenario analysis: Are geopolitical risks and the resulting financial impacts of fossil fuel price shocks sufficiently stress-tested in your organisation?

1. The strengthened economic resilience case for net zero: Does this crisis shift the cost-benefit analysis of delivering decarbonisation? Does the cost and uncertainty inflicted by fossil fuel volatility mean that the business case for delivering resilience through increased capital investment in renewable energy is strengthened?   

1. Transition plan credibility: Is your transition plan kept under review, given these developments? Has the investment case for climate action been strengthened, and is slower action increasing your risk exposure?   

4. Supply chain oversight: Considering the knock-on impacts of this crisis throughout regions such as Asia, and the disruption to supplies of critical raw materials, is the board sufficiently equipped for and focused on potential global supply chain disruptions, including product input availability and costs, rising maritime insurance premiums and freight rerouting costs?