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Physical risks linked to a changing climate in global supply chains

In this study, we show how exposed Swedish industries are to physical risks linked to a changing climate. This exposure is due to their production is dependent on global supply chains and facilities in places with significant risks.

The trend towards increasingly global value chains, characterized by production outside the OECD, just-in-time deliveries and low inventory levels, has been going on for several decades.

Swedish industries have to a considerable extent positioned themselves to perform advanced services, while the production that can be carried out by less qualified workers has been moved abroad. An estimated one million Swedish workers today work in international supply chains and the chains have become a key component of the country's competitiveness.

At the same time, global supply chains expose businesses to major sustainability-related risks in production, including the physical climate-related risks we focus on. One example is the floods in Thailand 2011, which knocked out a large part of the world's microchip production. Many companies in Sweden, who hardly knew that their products contained components from the factories concerned, saw their production stop.

Companies have the opportunity and tools to manage many of these risks if they know about them. However, international studies suggest that only a small proportion of larger companies have access to the risks of their suppliers, and almost exclusively the first level of suppliers. Smaller companies are very rarely aware of their risks in the supply chain.

The purpose of this study is to provide an overview of the Swedish industry's exposure to physical climate-related risks. The risks covered by the study are water stress, flooding, extreme temperatures, tropical storms and wildfire. We first estimate the exposure using data on where companies have their own facilities and income streams. We then estimate the exposure of the industries by analyzing which countries and industries they depend on via their imports, that is, their supply chains.

This overview can be used to raise the awareness of the Swedish business community. It can also provide a basis for analyzing the need for public intervention. The aim of the study is to answer the question; How large is the private sector’s exposure to climate-related physical risks in the supply chain and how is it distributed among Sweden's industries? The question is one of the main issues in the framework project Sustainable global supply chains and the competitiveness of business - what is the role of the state?

Swedish industries are mainly exposed far upstream in the supply chain

With a few exceptions, we can say that the facilities that Swedish companies own on average are mildly exposed to all types of risk in our study. This is not mainly due to facilities being located in places without risk, but rather because of putting the right type of facility in the right place. For example, water-intensive production is not located in areas under water stress. The exceptions are some service sectors that place facilities in places where the staff are relatively often affected by heat waves and cold waves, as well as the energy and real estate industries whose facilities are exposed to flooding.

If we look at where in the world Swedish companies have their income, then cold waves are the type of risk that Swedish industries are most exposed to. Swedish large companies appear in our calculations as slightly more exposed to climate-related risks than large companies in our European neighboring countries, especially when it comes to water stressand heat waves. This result is driven by the fact that the Swedish large companies have higher incomes from more and more exposed countries than their European counterparts.

The total amount of risk exposure in Swedish industries' supply chains is to a large extent explained by the size of the industries' imports. A majority of the risk exposure is at the far end of the supply chains, not the first stage. This also applies to the industries whose imports account for a relatively small proportion of their inputs. This is partly due to the higher risk levels in the developing countries that are further away in the chains.

Our study demonstrates wide variation within industries in terms of risk exposure. A partial explanation is that the industry codes in the used databases are coarse, which means that categories can contain several different types of companies. Another part of the explanation, however, is that companies have made different choices regarding their establishments and supply chains. In other words, individual companies may be significantly more exposed to climate-related risks than the averages we present suggest.

Conclusions

Swedish industries’ exposure to climate-related physical risks in the supply chain is relatively significant. The basic assumption behind the motive for public interventions for increased risk awareness and improved risk management, e.g. that such risks exist, can be regarded as confirmed.

For the company that wants to deal with the physical climate risks to which it is exposed it is not enough, according to our analysis, to keep track of its nearest suppliers. The same goes for public actors when procuring goods and services.

Our results show that developing countries account for a disproportionately large proportion of Swedish industry's exposure to climate-related physical risks. Since these economies often constitute the simplest and lowest priced parts of the supply chains, their importance for the supply chains can be underestimated. However, a chain is only as strong as its weakest link. National, European and UN-initiated efforts aimed at strengthening the crisis preparedness and climate adaptation of developing countries are therefore of economic value also for the Swedish business community.

Physical risks linked to a changing climate in global supply chains

Serial number: PM 2020:10

Reference number: 2020/71

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