The report sheds light on the question of what the state can and should do to strengthen the Swedish business community's management of climate-related physical risks in their supply chains.

Climate-related physical risks such as storms, heat waves and floods are already causing very large damages that affect lives, health and the economy. The probability of even more serious and irreversible effects increases with further climate change. As Swedish companies are largely dependent on international value chains, the exposure to climate-related physical risks is significant, despite the fact that the effects often occur geographically far from Sweden. Our results indicate that the greatest risks for Swedish companies are in the furthest steps of the supply chain, often in developing countries.
Swedish companies state that their knowledge of how they are affected by climate change is lower than their knowledge of how their business affects the climate. Their knowledge about climate-related physical risks is also lower than for other types of sustainability risks. One of the biggest obstacles for companies that want to identify and manage their risks is the reliability of the information they receive from their suppliers and subcontractors.

Our studies show that sustainability requirements and information are conveyed in chains that often fail already in the first stage, where small suppliers are not able to make demands on larger subcontractors. Some industries and companies have begun to use new methods that enable collaboration to control risks and be able to set common requirements.

The prevention and management of climate-related physical risks must mean private investment; public investment will simply not suffice. At the same time, companies often invest in preventive measures only when they have already been affected. For example, companies that have experienced disruptions in their supply chains during the covid-19 pandemic are more likely to invest in preventive measures. We find that companies only to a very small extent report on future risks. Instead, they focus on past or present disasters.

Several good reasons for a complementary role for the state

Existing government initiatives for sustainable supply chains have so far focused on issues other than climate adaptation. Government initiatives that focus on climate adaptation have so far focused on managing domestic risks or formed part of development assistance. The supply chain's exposure and the role of the business community have very rarely been in focus. We therefore see that there is room to supplement existing government initiatives. The question is to what extent it is justified. The Swedish state has rarely taken on the role of deciding or regulating how private companies should manage their own risks, as long as they adhere to prevailing laws and regulations.

The risks posed by climate change are so significant and difficult to understand that they can be considered systemic. Individual companies therefore cannot be expected to have the overview or longer time perspective required to manage the effects. A company's investment in adapting its operations to the climate benefits other companies due to positive spillover effects. Private investment therefore risks being insufficient to reach the levels that would be socio-economically optimal. At the same time, there is a clear problem if the state takes responsibility for the risks of private business. We therefore see that government efforts should complement and stimulate, but not replace, private measures and investments.

Our studies indicate that there exist problems in self-regulation of the climate-related risks in the supply chain that can motivate government efforts. However, private initiatives form a basis to build on and we see that other larger companies in many cases have better conditions than states to identify specific risks and appropriate measures. However, many of the large companies' efforts get stuck in the supply chain, where smaller companies become a weak link. Government efforts should therefore mainly focus on supporting smaller companies that are part of longer supply chains.

The best measure to prevent the negative effects of climate change is to avoid climate change. Unfortunately, the point when society could afford to rely solely on climate mitigation has passed. There will be disasters and negative changes even if all emissions cease today. Knowledge specifically about how climate change in other parts of the world directly threatens Swedish interests in the supply chains can help ward off the idea "it does not affect us". The state should therefore have an interest in sustainable supply chain management covering all significant risks, both the business community's climate impact and the climate's impact on the business community.

Our recommendations

We recommend that the state take responsibility for stress testing the economy with regard to climate-related physical risks, in order to identify particularly system-threatening risks. We believe that the Riksbank is the authority that has the best conditions for building such a tool. We therefore recommend that the Riksdag instruct the Riksbank to test a methodology developed by the European Central Bank, as well as to develop the methodology with regard to supply chains.
The state should also take responsibility for supporting smaller companies that participate in longer supply chains. These companies are a weak link in climate adaptation work and the public benefits of their work often exceeds their incentives and resources. The Government should consider commissioning the Swedish Agency for Economic and Regional Growth to draw up a proposal for targeted support for smaller companies with foreign suppliers who want to map their sustainability risks.

We also see great added value in efforts to spread knowledge about the risks from larger to smaller companies. We therefore recommend that the government consider partial financing of industry collaborations with a focus on climate adaptation and climate-related physical risks. We also recommend that the government work to provide data on physical climate-related risks even outside the EU's borders through the European tool Climate-ADAPT.

We recommend the government to work for stricter reporting requirements in the EU directive on non-financial reporting. The legislation currently gives companies a great deal of freedom to decide which sustainability issues they want to report on. Many companies therefore choose to report only on the risks they feel they have already managed, which rarely includes climate-related physical risks. Legislation should require companies to report according to the principle of dual materiality, i.e. both how they affect and are affected by the climate (as well as other sustainability problems). We also recommend that the government work to eliminate subsidiaries' ability to refer to the parent company's sustainability report, if they otherwise meet the conditions for having to prepare a sustainability report.

Finally, we recommend that the government work to ensure that European due diligence legislation allows for cooperation and shared responsibility as an acceptable form of due diligence. We also recommend that the government work to ensure that the legislation explicitly allows, and thus encourages, technical systems such as digital supplier networks that enable companies to share information and responsibilities.