Doing Business in an Era of Geopolitical Conflict

Transcription

David Stearns:
Welcome to BSR Insights, a series of conversations on emerging and cross-cutting business, economic, and social issues. Drawing on BSR's expertise for more than three decades of leadership in sustainable business, we'll help practitioners and decision-makers to navigate today's increasingly complex world. I'm your host, David Stearns. Thank you for joining us. In this episode, we'll be exploring how businesses are navigating an era of acute geopolitical tension and uncertainty. We'll examine the real world challenges companies face, and how sustainability strategies can help protect people, stabilize operations, and build resilience in a rapidly shifting global landscape. To help us unpack all of this, joining us today from San Francisco, we have Aron Cramer, BSR's President and CEO. Welcome, Aron.

Aron Cramer:
Thanks, David.

David Stearns:
And from Tokyo, Ogi Kanaya, BSR Associate Director, who provides strategic advice to companies in Japan on a wide range of sustainability topics. And welcome, Ogi.

Ogi Kanaya:
Thanks, David.

David Stearns:
It's great to be chatting with both of you today. So I'm going to dive right in. I guess the best place for us to start will be, and maybe we'll start with you, Aron, what are you hearing from companies? What specific sustainability-related issues that are spilling out from conflicts around the world are rising to the top of the corporate agenda today?

Aron Cramer:
Sure. Thanks, David. I think with respect to the conflict in Iran, there are some specific things, but I'll also answer from the perspective of what I think the way that we at BSR think about this, which is, this is obviously a very significant conflict with significant impacts, but we are in an era of lots of geopolitical conflict. So there may well be, and I would say probably will be, some additional things that happen. But with respect to what's going on right now, first of all, I think companies are a little bit frozen by the conflict and in damage control mode. And everyone is trying to predict how long the conflict will go on and how long the second and third order effects of it will be with respect to energy and fertilizer, and other critical materials that need to go through the global economy.

I think though, that this is just yet another example of why companies should be, and I think many are, but probably not all, and not all to the degree maybe they should, anticipate and prepare for such shocks, because we've seen lots of these through the 2020s already. But with respect to the present day, obviously energy supply is crucial, and for advocates of clean energy, the notion that this proves its importance, I think is present. Companies are worried about their supply chains, and this is just yet another shock to global supply chains. We're also hearing from companies that bandwidth is an issue. They are just scrambling and doing some firefighting, and that means that there is probably less time available to look at longer term considerations.

So these are some of the things that we're hearing from companies. It is both already a significant thing that's happened, and it's also just over a month. So I think companies are still figuring it out, and ideally thinking not only about today, but what the medium and long-term impacts are going to be.

David Stearns:
Thanks for that, Aron. Turning to you now, Ogi, sitting there in Tokyo, companies may be exposed to slightly different or more acute risks than their counterparts in the United States or Europe. Can you tell us a little bit about what specific sustainability-adjacent issues you're hearing are most relevant for companies doing business in Japan at the moment?

Ogi Kanaya:
I hear two things from members, which are not specifically only related to the Japanese context, but let me start with what I'm hearing from members now. The first one is directly related to conflicts. Companies are thinking about raising the bar for risk management to avoid contributing to conflicts. Today, there are many different types of businesses related to defense and securities. In addition to traditional defense, companies which are highly regulated and face significant barriers to market entry, there are also companies that work in communication systems, software-based solutions, and AI. This dynamic has become further complicated by expanding to dual use technologies, with both civilian and military applications. So companies are checking to see if their clients or transactions are legitimate and not causing or contributing to conflicts. However, it is hard to spot or detect these problems in the real world. So the customer due diligence has become a big challenge amid rising conflict risk, which I think is not limited to the Asian context.

The other issue is much more general. It is about what will happen as the consequence of the conflict or the end of the rule-based international order, as Mark Carney has framed in Davos this year. So if the rule of law which has served as a foundation for sustainable business loses trust, then what should be used for promoting sustainability? Should companies keep trying to meet the international goal of climate change? The companies posing these questions actually do not intend to cease their activities right away, of course, but there are concerns that sustainability standards, which have become a key component of competition, may be compromised. These are the issues that I hear from members so far. I do have some specific point of view from the Tokyo or the Asian perspective as well.

David Stearns:
I want to come back to something you mentioned at the beginning of your comment there, Ogi, where you were talking about some of the elevation of risk management in a number of different sectors and product types. As you were speaking, it occurred to me that these aren't the types of things that I typically associate as being in the domain of the sustainability team. And I'm wondering to the extent that, how are sustainability approaches so well suited to helping companies to navigate the type of risk mitigation that you were referring to earlier? What is the role of the sustainability team in that context?

Ogi Kanaya:
Actually, the companies that are posing these concerns have the collaboration between sustainability teams and risk management teams. So they are tying together and teaming up together to raise these concerns and trying to solve these problems.

David Stearns:
So in this way, it's looking for ways that the sustainability approach can serve the enterprise strategy more broadly. Aron, any thoughts on this question?

Aron Cramer:
Yeah, I mean, it's a very good question. The role of the chief sustainability officer and the sustainability team has already been changing a lot over the last couple of years. And we've put out some interesting reports, including surveys of about three dozen leading CSOs to try to elaborate on that. The goals underlying sustainable business have not changed—climate change, human rights, biodiversity, regulation, governance, all of that. The context, however, in which it's playing out has changed, and I would say radically. And Ogi-san made a good point about the decline, I hope not the death, but the decline of the rules-based international order. This means a more fragmented, a more fraught, and a more contested environment. So sustainability teams really need to be fluent in geopolitics and not simply leave it to government affairs, because there's a clear intersection between a lot of what sustainability teams are aiming to do, and are there to do, and some of the questions that are being raised.

The good news here is that a lot of the tools that sustainability teams have used for a long time, are being proven more relevant than ever in this environment. One is scenario planning. A lot of companies have done climate scenarios, and clearly, a disrupted energy system—it's been disrupted twice in four years by significant conflict—has to be taken into account. Similarly, climate transition plans have to assume unexpected events and so on. And third, I would say that the risk dimension, which Ogi-san spoke to, is also really, really important because supply disruption and price volatility, when it comes to all sorts of natural resources and also energy, are deeply affected. The last thing I'll say is that sustainability, as practiced, has integrated global cooperation into how we think about things, and we are in an era where global cooperation is also fraying. Again, I don't think it's unalterably broken, but it's not in good shape. And I think the current environment shows, that's not just something that's a nice thing to do because we're nice people and we believe in cooperation. It actually provides the very foundation on which business can operate successfully and sustainability goals can be advanced.

David Stearns:
Thanks for that. Ogi, I'm wondering if you have any additional thoughts. We kind of took a deeper dive into the different ways that sustainability teams can equip themselves to navigate some of this, and Aron referred to a number of items, scenario planning, etc. Any other advice you've been offering to companies along these lines in terms of how they can equip themselves to navigate this turbulent era?

Ogi Kanaya:
The tool that sustainability teams can really leverage would be future scenario analysis, which Aron has already mentioned. So the point is that the sustainability team needs to possess the ability to understand both short-term shifts in the situation and the long-term social challenges, and to consider what solutions can be provided through its own business. If they can show that they possess this ability, then they can demonstrate their significant value in the companies. That's what I believe.

David Stearns:
Do either of you have the sense that leadership within companies, like the CEO or the heads of government affairs groups, that they are actually reaching out to sustainability teams at this moment to seek their guidance or counsel? I mean, you've both cited some pretty compelling reasons for why the sustainability team has a significant role to play here. I'm just wondering to what extent companies are actually recognizing and embracing this.

Aron Cramer:
David, if I can take a run at it, I think it depends a little bit on where the chief sustainability officer is situated inside a company and to whom he or she reports. What is his or her portfolio proximity to this CEO? So I think that's an important question. Based on what I know, and this is based on anecdote not study, it's highly inconsistent. I think in some cases, yes, but in many cases, companies are just trying to keep the economics going. If you're exposed, the first question you have is: are my people exposed? The second question I have is: can I get access to the natural resources I need? The third question I'm asking is: what are the prices of key inputs doing and what do I think they're going to do? And then I want to know how my customers are going to be affected by this, whether consumers or B2B.

So I think those are probably the questions that are first and foremost on the minds of CEOs, C-suites, and boards. I think the sustainability teams have a lot to offer. It will vary inside a company, depending on a whole range of factors, how directly they're going to be able to offer insight, and so on, that is needed today. But I think we need to separate what's needed today, when companies are in firefighting mode, from what's needed to think about where we go next.

David Stearns:
So you've teed me up perfectly for my next question, Aron. In this moment of uncertainty, where there are active conflicts around the world, companies are surely and understandably very focused on risk mitigation along all of the different elements that you and Ogi cited previously. Completely understandable, but I think maintaining a duck and cover approach for too long is also probably ill-advised. I’m wondering if you could both give me your thoughts on how the sustainable business agenda can adapt in this era in a way that companies don't lose their ambition—so that they can maintain some level of ambition in spite of not only the headwinds that were facing sustainability before moments of conflict, but now even more in an exacerbated, more risky situation, considering the conflict that we're experiencing?

Aron Cramer:
Well, I can start. I would say let's learn some lessons. It's not clear to me whether business leaders or government officials, or frankly, the public—all of us—learned the lessons we should’ve learned from COVID; that we have learned all the lessons we should have learned from the supply disruption that we saw over the war in Ukraine; that we've learned the lessons that we should have learned, frankly, from 50 years of disruptions to the energy system, and all the second and third order effects that go along with it. So my starting point would be to say, let's not keep making the same mistakes. Let's assume that volatility is there. Let's assume that we need to focus more on local energy, which again, is more often than not cleaner energy than we get through the Strait of Hormuz. As I like to say, sunlight doesn't have to go through the Strait of Hormuz to heat my home or my office building

So let's just recognize that these kinds of shocks to the system should be expected, that we are in an era, as someone said to me in Davos in January, of structural volatility—and build more resilience in. Resilience, I think is proving that it's actually an essential tool, not just a buzzword that sounds good at sustainability events. So let's not keep making the same mistakes, because as I look around, we seem to be taken by surprise over and over again by events that may not be predictable in terms of time, place, and manner, but are fairly predictable in terms of how we can expect the world to evolve.

David Stearns:
How about you, Ogi? Any thoughts?

Ogi Kanaya:
I fully agree with Aron's point—learning from the lessons of history. In regard to the energy transition, it is not the first instance that we are experiencing energy shortages. Japan, for example, experienced a similar situation just 15 years ago after the nuclear accident. And I believe this was an important opportunity for a shift in the energy industry. However, the reliance on coal-fired power plants has risen sharply as the short-term solution. Companies with a long-term perspective have recognized the importance of long-term energy resilience, and have invested in renewable energy as an independent and diversified energy source. So I believe they are enjoying the benefit of it right now. But also, it is true that people often assume that once a crisis passes, the problem won't come up again. This makes them reluctant to think about long-term investment for resilience.

David Stearns:
Ogi, we've been reading in the headlines recently, in the business sections, that there are critical shortages of energy supplies affecting not just Japan, but other countries in Asia, which has cascading effects throughout supply chains—not just on energy, but on other crucial materials. Can you talk a little bit about what some of those challenges have been and how companies are navigating this situation?

Ogi Kanaya:
The situation has worsened beyond just energy price increases, to the point of fuel and raw material shortages, as you mentioned. So there is a concern about a shortage of naphtha in Japan. Naphtha is a material used to manufacture a variety of products, including critical items such as medical equipment like injectors or IV bags. The government will start identifying the critical applications that should be prioritized in supplying fuel and raw materials. If this happens, it has the potential to result in energy and resource conservation in less critical applications. It could also lead to a reevaluation of lifestyles that rely on disposable or one-way use products. This could prompt businesses to reevaluate their products and packaging designs.

David Stearns:
Thanks for those really valuable insights, Ogi. Aron, any additional comments or observations to add to Ogi’s?

Aron Cramer:
First of all, I think they're very well-placed comments, and while not positive, very useful for us to hear. So thank you for that. I would just add that we are already seeing a time where people are more focused on sovereignty and security. We see this in a variety of environments, and national leaders are saying, "Hold on, we need to make sure that we can deliver within the boundaries of our country." And in fact, Larry Fink of BlackRock, in his most recent letter, made that very loud and clear in the context of the United States. And I think the current conflict is only going to reinforce that.

In addition, if we see shortages along the lines of what Ogi-san mentioned and what we may see elsewhere, there are already suggestions that energy may be in short supply in the winter to come at the end of this year in some parts of the world. That is going to change consumer sentiment and citizen sentiment, very substantially. So the long tail of effects here will be substantial, and I think they will continue to reframe how we think about sustainable business.

David Stearns:
Thank you, Ogi and Aron, for these really helpful insights. I think you've given us a lot to think about. And we encourage any of our listeners, if there's something you've heard today that resonates with you, to please share it with someone who also needs to hear it. We also encourage folks to visit BSR's website, bsr.org, where you can find additional tools and insights which will help you and your company to navigate this time of rapid global realignment.

In our next episode, we're going to do a deeper dive on how business can manage human rights risks and other human rights-related considerations during times of geopolitical conflict. We hope you'll join us for the BSR Insights Podcast. I'm David Stearns, and we'll see you next time.

Thanks for listening. For more in-depth insights and guidance from BSR, please check out our website at bsr.org and be sure to follow us on LinkedIn.