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Growing Polarization, Heightened Risk: Navigating the 2024 Business Landscape

BUSINESSGrowing Polarization, Heightened Risk: Navigating the 2024 Business Landscape

The growing polarization on the global political stage increases the risk of doing business in 2024. Key for entrepreneurs will be to minimize potential dangers, including increasing the resilience of supply chains, an appropriate access to resources policy, and addressing ESG issues, according to the EY-Parthenon 2024 Geostrategic Outlook report.

The Ukraine war, rising tensions between the USA and China, the escalation of conflict in the Middle East are just some events illustrating the increase in international tension. The number of mentions of geopolitics and political risk in public company documents increased by 600% in the second quarter of 2022 compared to previous years’ results, and remained at an elevated level in 2023. This shows that the executive staff is now paying more attention to the international situation than in the past. Since 2017, the global average political risk weighted by GDP has also been steadily increasing, reaching its highest level in 2023. Uncertainty is growing this year due to the election year – in 2024, elections will take place in countries inhabited by 54% of the world’s population and representing 60% of global GDP.

The pandemic and the war in Ukraine have highlighted the dangers associated with tightening relations between countries and as a result, both companies and governments are increasingly supporting the development of domestic production. In 2024, we will see more connections between economic and foreign policy, so entrepreneurs should focus even more on reducing risk in supply chains. Key for a growing number of companies will be a policy of obtaining critical resources. Sustainable development will increasingly permeate various aspects of doing business, also increasingly covering aspects of investing in a given country – says Arkadiusz Gęsicki, Partner EY-Parthenon in Poland and the Baltic countries from the Strategy and Transactions team at EY Poland.

Investment Opportunities in New Markets

This year is a good time to rethink supply chain strategies in terms of their impact on a country’s economic security, their diversification to increase resilience to disruptions, and identifying the most risky aspects of supply chains to minimize their implementation.

2024 will also be demanding in the field of M&A. Government policy, political decisions, or informal restrictions against certain firms can directly impact the profitability of cross-border transactions. For effective mergers and acquisitions, a solid understanding of geopolitical factors and a detailed risk analysis in investments concerning national security issues will be key. This will allow entrepreneurs to anticipate potential regulatory delays or transaction rejections.

On the horizon, there are new opportunities for foreign expansion in emerging markets. Many governments will be implementing policies aimed at stimulating local R&D activities and increasing production in strategic sectors. New investors will be able to take advantage of government tax incentives, grants, or subsidies. However, the prospect of lower operating costs should not overshadow the need for a thorough analysis of current regulations, regional geopolitical dynamics, and local alliances. This will accurately assess the profitability of expansion in individual markets – says Paweł Bukowiński, Managing Partner in the Strategy and Transactions Department at EY Poland, Leader of Divestment Advisory in the CESA region.

Race for Key Resources and Raw Materials

Economic growth would not be possible without access to raw materials, and this year will be a period of intensified competition for increasingly limited supplies of key resources: rare minerals, water, and food. The US Geological Survey estimates that the production of rare elements (used, among others, in batteries for electric cars or electronic devices) increased by 131% in 2017-2022. According to the World Resources Institute, the number of countries suffering from extreme water shortages increased from 17 in 2019 to 25 four years later. Data from the Food and Agriculture Organization indicate that since 2021, the global food price index has remained at its highest level since the 1970s.

That’s why it’s worth analyzing investment opportunities related to the extraction, processing, and recycling of rare metals. Tensions in the area of food production may be a stimulus to diversify supplies and increase government support in this area. Increasing water shortages are expanding opportunities for innovation in efficient water sourcing.

Sustainable Development in Focus

The years 2014-2022 were the warmest in history, and the World Meteorological Organization predicts that the coming years will be even hotter. Therefore, governments and regulators will not only support emission reduction, but actively address the consequences of advancing global warming. In addition to increased risk for citizens of individual countries, climate change also affects GDP – from 2012 to 2021, storms, forest fires, and floods caused losses of 0.3% of GDP annually on a global scale, according to Swiss Re data.

However, implementing sustainable development policy is becoming an increasingly multi-layered and complicated puzzle. Economic slowdown and inflation have led some countries to move away from previous ambitious climate goals, while government support for transformation towards a low-emission economy is growing. The climate policies of countries in 2024 will be driven by issues of economic growth and energy security, emphasizing the paradoxes faced in implementing ESG. Sustainable development issues are also a source of tensions at the geopolitical level. Some trading partners will oppose green regulations, which they see as protectionist or discriminatory. The EU’s border price adjustment mechanism, taking into account the level of CO2 emissions (CBAM), will remain a source of global trade tensions and may result in the imposition of retaliatory tariffs. Many large emerging markets will also introduce or expand price policies based on carbon emissions to finance their green transformation and ensure export competitiveness in Western markets.

Efforts to mitigate the effects of climate change will be accompanied by increased public and private funding for research and development of innovative solutions – estimates point to a market reaching $2 trillion annually within a decade.

For many companies, accelerating sustainable development-related investments will be possible through cooperation with government bodies. Those of them that already allocate significant resources to research and development may gain access to more public funds to implement green technologies. Adherence to ESG requirements will help entrepreneurs raise capital at lower costs for sustainable projects, as for many investors the long-term risk associated with such assets is small – says Enio Chłapowski-Myjak, Manager, EY-Parthenon.

About the Report

The annual Geostrategic Outlook carried out by EY-Parthenon presents an analysis conducted by the EY Geostrategic Business Group (GBG) concerning global political risk in the coming year. The report points out political decisions, events, or conditions at the global, national, regulatory, or social level that could influence the results of companies, markets, or economies.

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