In this study, we explore the knowledge about physical risks emanating from climate change in Swedish companies of different sizes, ownership and from different industrial sectors as well as what proactive measures they implement to reduce vulnerability to this form of risk.

Companies have limited knowledge of physical climate-related risks

Through a questionnaire, we have analyzed what general knowledge companies have about physical climate-related risks in their supply chains and what knowledge they have about specific risks. From the analysis, we can conclude that most companies that respond to the questionnaire (over 300) have limited knowledge of this type of risk. They have more knowledge about other types of sustainability risks in their supply chains. However, the low response rate to the questionnaire does not make it possible to generalize the results. Nevertheless, there are several reasons to believe that the knowledge about physical climate-risks in the supply chains is lower in companies that did not respond to the questionnaire as well as in companies that belong to sectors that were not included in this study.

In a previous analysis (Tillväxtanalys PM 2020:10), we concluded that the Swedish business community is exposed to physical climate-related risks. A majority of this risk exposure is upstream the supply chain, especially in factories and transports from developing countries. In this study, we have chosen to focus on the Swedish sectors who appeared to be the most exposed to this type of risk. It is in these sectors that we expect to find the greatest knowledge about physical climate-related risks. These sectors are manufacturing of (i) vehicles; (ii) electronics and electrical appliances; (iii) buildings and infrastructure; (iv) machinery; (v) metals, plastics and chemicals; (vi) textile and clothing.

There is coherence between the specific risks that companies in textiles and clothing as well as electronics and electrical appliances identify as greatest in this analysis (e.g. lack of fresh water for textile companies) and the risks we identified as most significant in the previous report. This coherence does not exist for companies in other sectors.

Companies do not monitor all suppliers

As already mentioned, the physical climate risks are generally upstream the supply chain and many times in developing countries. The importance of these suppliers can easily be underestimated as they often account for the simplest and lowest priced parts of the supply chain. However, a chain is not stronger than its weakest link and cheap inputs are not always easily substitutable. It is hence critical for Swedish companies to know the geographical location of suppliers’ factories and logistic solutions.

In a previous analysis (Tillväxtanalys PM 2020:17), we have concluded that Swedish companies in the automotive sector do not have detailed knowledge of their supply chains. The management of sustainability risks is partly based on brand companies (such as Volvo cars and Scania) imposing sustainability requirements on their direct suppliers. These requirement include that these suppliers shall impose similar requirements on their suppliers, which in turn must impose similar requirements, etc. (the so-called cascade method). However, we were able to conclude that this cascade chain is often broken already after the first stage of the supply chain, as direct suppliers (even large companies) often do not pass on requirements to their suppliers.

An important conclusion from this current study is that companies in other sectors also have similar weaknesses in the monitoring of supply chains. Almost 80 percent of companies with more than 250 employees make demands according to the cascade method. However, among all the companies that responded to the questionnaire, including the smaller ones, it is only 40 percent who make any sustainability demands on their suppliers. It is therefore likely that many sustainability requirements will be lost already in Sweden. A contributing reason for this is the lack of assessment of the fulfillment of the requirement. According to our questionnaire, only a third of the large companies that put the requirement on their supply chain also do an assessment of the fulfillment.

The companies implement measures but they are not motivated by the physical climate risks

In another report (Tillväxtanalys PM 2020:09), we have found that Swedish companies generally do not discuss climate-related risks in their sustainability reporting. When they report on this issue, it is usually at a general and vague level. From this report, we can thus not know whether the companies are really implementing any proactive measures that reduce the risk of physical climate-related events.

From the questionnaire, we can conclude that many companies, but far from all, implement measures that reduce the vulnerability to disruptions in their supply chains. However, physical climate-related risks are very rarely a motive for implementing these measures.

Many companies will improve their knowledge and monitoring of their supply chains

From the questionnaire, we can conclude that the companies expect that they will improve their ability to manage physical climate-related risks in the coming 10 years. This especially applies to improved knowledge about physical climate-related risks. Regarding monitoring of the supply chains, half of the companies expect they will have significantly better control on the geographical location of suppliers in 10 years. This is a prerequisite for the assessment of climate-related risks, which are determined by the location of factories and logistics.

Reliability of information will continue to be a challenge and small companies face challenges

Improved knowledge of physical climate-related risks and the geographical location of the supply chain links is not sufficient for an effective management of these risks. It also requires companies to be able to trust their suppliers' information, such as information on what measures suppliers take to reduce their physical climate-related risks. The companies believe that barriers to trust will persist the coming 10 years.

Our results also indicate that small companies with less than 50 employees can be a barrier to the management of physical climate risks in supply chains. Small companies is a large group of companies that stand out in the questionnaire by having less knowledge and monitoring of their supply chains. In addition, they less often demand actions from their suppliers which would result in less vulnerability to physical climate-related events.

A large Swedish company that wants to manage its physical climate-related risks therefore needs to deal with shortcomings not only in foreign suppliers but also in how Swedish small companies, which become de facto intermediaries, handle their supply chains. However, this will also increase the administrative burden for small companies in Sweden, which in itself may affect their competitiveness.

The state could have a role in the management of both these barriers, by supporting measures improving the availability of reliable information and by supporting small businesses to deal with this form of risk. These are two complex areas, not least considering that developing countries account for a disproportionately large part of the Swedish business community's exposure to climate-related physical risks and that small companies are an heterogeneous group with significant variation in exposure to physical risks.