Risks and risk management

Description of risk

Demand for SCA’s products is influenced by several factors, such as the general economic trend, and also more specifically through trends in construction and in the building materials trade, as well as an increase in e-commerce. Other products and services can substitute SCA’s products at the same time as SCA’s products can replace other products and materials. SCA is benefiting from the substantial and growing need to replace fossil materials with renewable alternatives.

Impact: High

Change: Unchanged risk

Management and comments for the year

In most of the product areas where SCA operates, there are a number of competing producers and distinct market prices. Supply is determined by the available production capacity and price is based on supply and demand. Sales contracts can use market prices based on published price indexes, sometimes with a certain time lag to events in the market. Sales contracts can also state a price, which is valid for during the period of contract. Variations in market prices can cause significant fluctuations in profit for SCA.

Several methods are used to address the risk of a fluctuating market price. Long-term contracts at fixed prices or price hedging only occur in exceptional cases. If the impact of price movements is expected to be negative and long-term, measures can be taken to adapt the cost scenario, for example, by renegotiating agreements, capacity or personnel changes, and reviewing the business structure. A transition to alternative production can also be considered where this is possible.

The company’s innovation work aim to develop new products, services and process solutions that enhance competitiveness.

Description of risk

The market price fluctuates over time for many of the input goods and services used in the manufacture of SCA’s products. This could have a positive or negative impact on earnings. About 80% of SCA’s cost base is made up of raw materials, input goods and services. SCA’s cost structure is described in the Board of Directors’ Report.

Impact: High

Change: Unchanged risk

Management and comments for the year

Price movements on raw materials, input goods and services can be managed in several ways. SCA has an integrated value chain with a high degree of self-sufficiency in wood, energy and logistics, which contributes to risk reduction. SCA is Europe’s largest private forest owner and in 2023, 58% of SCA’s wood raw material need was sourced from its own forests and chips from its own sawmills.

Through its large forest holding and energy-efficient industrial processes, SCA is also a net
producer of bioenergy. SCA is both a major user and producer of electricity. In 2023, SCA used 2.0 TWh of electricity while the company produced 1.5 TWh of electricity. The company’s wind power leases reduced its exposure further, to a total of 0.1 TWh. The price risk may also be reduced by using financial hedges and long-term contracts. According to internal rules, the electricity price risk can be hedged for up to 36 months. For 2024 approximately 75%, for 2025 about 40% and for 2026 0% of the forecast net electricity consumption has been hedged. Under normal circumstances, no other price risks in input goods are hedged.

Transport expenses account for a large share of SCA’s cost base. Use of SCA’s own logistics operations enables the system to be optimized and risks minimized. In addition, the risk is minimized through investments, together with partners, in the production of liquid biofuel. SCA also works actively to reduce cost risk by renegotiating contracts, identifying new suppliers or replacing input goods and services where prices have risen.

Description of risk

SCA’s operations have an impact on air, water, land, noise levels and biological processes. These effects could lead to costs to prevent or limit the impact on the environment or costs to restore environments affected by SCA’s operations. Demands for restoring the environment may also relate to the impact of SCA’s previous operations.

SCA’s industrial operations in Sweden require a permit in accordance with the Swedish Environmental Code, which stipulates limits for the scope of operations and the permitted impact on surroundings. Any expansion or changes to operations may require further action. Forest operations are also impacted by the Swedish Forestry Act and the Land Acquisition Act.

Impact: Medium

Change: Unchanged risk

Management and comments for the year

SCA’s Sustainability Policy details guidelines for the Group’s work in environmental and social responsibility. Each production unit sets targets to reduce its environmental impact. The targets are based on evaluations of environmental aspects. Environmental risks are minimized through preventive work in the form of certified environmental management systems, control programs for compliance with environmental permits, and risk analyses in conjunction with acquisitions, as well a through remediation projects in connection with plant closures.

Through its Resource Management System (RMS), SCA monitors how the company utilizes energy, water, transport activities and raw materials. All employees are encouraged to report observations and incidents, which become part of preventive work and efforts to achieve continuous improvements. SCA has spent many years striving to steadily increase the share of renewable energy and minimize waste. SCA’s integrated value chain helps to increase circularity as by-products and waste streams from one
process become raw materials for another process.

Description of risk

Climate change entails risk to SCA’s operations. Changes to weather conditions could lead to drought, which in turn could lead to increased insect damage and fires. More storms increase the risk of storm damage. Timber harvesting and transportation could be impacted by a milder climate with more rain creating difficult terrain, particularly in the spring.

Political decisions taken to reduce or limit the effects of climate change may affect the company in various ways. A changing climate could affect biodiversity in the company’s forests as living conditions for various species are altered. Access to fresh water may be adversely impacted by a warmer climate.

At the same time, climate change in the form of global warming is, to a certain extent, expected to have a positive impact by creating a more favorable climate for forest growth in northern Sweden.

To counteract climate change, demand is increasing for renewable and fossil-free alternatives, which favors SCA.

Impact: Medium

Change: Unchanged risk

Management and comments for the year

The main impact for the company is considered to be related to the forest and forest management. Since forest operations have a long perspective of 100 years, it is difficult to predict how different aspects of climate change will interact. A warmer climate will probably lead to higher growth in the forest but in parallel greater risk of pests, extreme weather conditions and longer periods of drought. SCA takes part in various research collaborations to increase knowledge of how the forest may be impacted by climate change and how forest operations can be adapted to best address these changes.

Transition risks could entail both risks and opportunities. Increased demand for renewable
energy and products based on renewable materials offer SCA an opportunity. Political decisions to limit climate change could positively or negatively impact the company, refer also to political risks.

The company’s industrial processes are almost fossil-free following structured efforts over
many years involving energy optimization and the replacement of fossil fuels with biofuels. The company’s largest exposure to fossil fuels is related to transportation and various measures are being taken to reduce consumption. One example is an electric timber truck that began operating in 2022 and that is being evaluated for timber transports to the paper mill in Obbola.

Description of risk

Unethical behavior or poor management of risk linked to business ethics can damage SCA’s brand and credibility. The company may also suffer fines and other legal sanctions. Through good business ethics, the company can contribute to positive development across the value chain, safeguard human rights and minimize the risk of corruption and money
laundering.

Impact: Medium

Change: Unchanged risk

Management and comments for the year

To ensure that SCA and its employees live up to the company’s core values and is not involved in or linked to unethical business practices, SCA has a Code of Conduct. This includes general rules for how SCA conducts its business and how the company’s employees are to act toward each other and in business relationships. The Code is a policy approved by the Board of Directors and is regularly reviewed. The Code includes principles on business ethics, relationships to employees, respect for human rights and environmental considerations. All employees are educated in the Code as part of the introduction for new employees and through refresher courses.

To ensure that SCA works with business partners that share these values, potential partners are evaluated before cooperation is initiated. The evaluation comprises both business issues and issues concerning existing policies and processes regarding, for example, the work environment and business ethics. Suppliers are expected to comply with SCA’s Supplier Standard, which is regulated in supplier agreements. SCA uses a number of methods to monitor and safeguard the implementation of the Code of Conduct. These include checks in connection with acquisitions, risk evaluation of the company’s own units and suppliers, and on-site audits of SCA’s units and of suppliers deemed to have a higher risk level. SCA has a whistleblower system where both internal and external parties can report suspected violations of the Code, which are processed by the
company’s Compliance Council.

Description of risk

SCA conducts operations covered by laws, rules and regulations, much of which are subject to permits. SCA may be subject to commercial disputes and other legal procedures.

Impact: Medium

Change: Unchanged risk

Management and comments for the year

SCA monitors legal developments in relevant areas to ensure regulatory compliance. The company takes the measures required to comply with regulatory changes and provides employees with relevant training. SCA is also a member of trade associations to safeguard the company’s interests on legal issues. SCA’s facilities continuously monitor their environmental impact and compliance with permits issued.

Description of risk

Events may occur that damage SCA’s reputation. This could, for example, concern an employee, contractor, supplier or business partner who fails to comply with laws and regulations or policy documents, such as SCA’s Code of Conduct. SCA could also be affected by accidents that damage the reputation of SCA and its ability to conduct the business in a safe and efficient manner.

Impact: Medium

Change: Unchanged risk

Management and comments for the year

SCA performs training sessions to ensure that knowledge about regulations is transferred to SCA’s employees and works to ensure that co-owned operations and staff in these companies comply with similar requirements.

SCA has a Supplier Standard to ensure that SCA’s suppliers and contractors adhere to the requirements imposed by SCA. SCA has systems in place to handle sudden events, such as accidents, that risk damaging confidence in SCA. The company has a procedure to ensure that new partners share SCA’s values before initiating a business collaboration. Whenever necessary, audits are conducted on-site to monitor that SCA’s performance levels are met. SCA holds discussions with its stakeholders and regularly updates information on the company’s website to satisfy various needs.

Description of risk

SCA is Europe’s largest private forest owner, with 2.7 million hectares of forest land, of which 2.1 million hectares is productive forest land. The holding is mostly in northern Sweden and in the Baltic region. There is a risk that the value of the forest holding decreases through infestation by pests, grazing moose, storms or fire. The value of the forest assets can also change, for example through variations in demand for wood raw material in SCA’s region, which in turn would impact price levels in the region.

Furthermore, SCA’s forest management may conflict with the activities of reindeer herding Sami communities pertaining to land use. This is also the case when establishing wind power production on forest land. Legislation may also influence opportunities to conduct active and responsible forest management.

Impact: Medium

Change: Unchanged risk

Management and comments for the year

SCA works proactively and together with research institutes to continuously improve forestry methods and seedlings to enhance forest growth and to reduce impact on the forest landscape. SCA works in various ways and holds discussions with different stakeholders, to contribute factbased supporting data of the benefits created through a responsible use of the forest and how forest operations impact the forest landscape.

Active and responsible forest management combined with an industry that adds value to the forest raw material is essential to secure the value of the forest asset. Since 1950, the sustainable harvesting level has more than doubled at the same time as the standing volume has increased by about 70%. The risk of infestation by pests is managed through diligent soil scarification, special protection against pine weevils and procedures to minimize the risk of infestation by spruce bark beetles. The stock of grazing moose is managed through hunting on land where SCA issues hunting licenses. SCA’s forest land is spread across large areas of northern Sweden, which means forest fires and storms usually only impact a limited part of the forest holding. The forest is therefore not insured. On the basis of the fire situation in previous years, SCA has drawn up procedures to minimize the risk of forest fires, particularly during longer periods of dry weather.

SCA jointly plans with the relevant Sami communities in connection with forestry operations and wind power projects on SCA’s land. The participatory planning pertains to the adaptation of forest management activities, including the scheduling of harvest operations, the use of fertilizers, the selection of soil scarification method and the choice of tree species when replanting forests. For wind power projects, consultation may be carried out concerning the size of the wind farm and potential impact on reindeer herding with the relevant Sami communities, local residents and landowners in the area. 

Description of risk

SCA uses large quantities of forest raw material, which is partly from its own forest and partly from other landowners and forest companies. All forestry measures involve a risk of impacting biodiversity. Political decisions and legislation to protect biodiversity may impact the company.

A warmer climate will probably affect biodiversity.

Impact: Medium

Change: Unchanged risk

Management and comments for the year

SCA’s objective is to manage the company’s forests to make them at least as rich in biodiversity, nature experiences and raw material in the future as they are today. SCA is pursuing long-term and responsible forest management where nature conservation measures are applied in all forest operations. SCA strives to preserve and strengthen biodiversity in several ways. Ecological landscape planning applies to SCA’s entire land holding and forms the foundation of our approach to nature conservation. SCA makes voluntary set-asides where the company’s forests with the highest conservation values are set aside from forest management. Alternative forms of production are used and targeted actions are taken to promote biodiversity. SCA takes specific responsibility for forest species that are at risk of being negatively affected by forest management in northern Sweden and works proactively to guarantee and increase access to the right habitats for these species. The company cooperates with organizations to jointly identify and undertake measures that promote biodiversity and recreation.

SCA’s forestry management and timber procurement is certified under FSC^TM and PEFC in Sweden and the Baltic region. SCA actively refrains from purchasing timber from controversial sources. As a minimum requirement, purchased timber must comply with FSC’s Controlled Wood Standard.

Description of risk

SCA has 14 production facilities, all of which are located in Sweden. SCA also owns facilities for distribution, such as port facilities, timber terminals and forest roads in Sweden. Poor health and safety practices at the production facilities may cause ill health or a workplace accident with substantial consequences for individual employees. Some of the facilities conduct continuous production. Fires, machinery breakdowns and other types of harmful incidents could lead to production disruptions and cause delivery problems. When major projects are undertaken, there is a risk of disruption in the existing operations.

Impact: Medium

Change: Unchanged risk

Management and comments for the year

SCA has a vision of zero workplace accidents and is actively and systematically running a health and safety program to minimize the risk of personal injury and ill health. SCA applies a preventive approach to ensure a high degree of availability in production facilities and to avoid unscheduled production stops. The aim is to effectively and cost efficiently protect the employees, local residents, the environment, the company’s assets and the business, and to minimize SCA’s risk management costs. Loss-prevention activities are conducted in accordance with established guidelines, which include management’s safety walks, maintenance of plants, staff training and good orderliness. Continuous action is taken to reduce risks by using, for example, risk assessments and undertaking continuous improvements.

All wholly owned plants are insured with market-leading insurance companies to replacement cost and for the loss of contribution margin. In order to minimize the impact of ongoing projects on operations, separate project organizations are created to conduct regular follow-ups that quickly identify any disruptions and shortcomings, and take corrective action.

Description of risk

SCA’s operations are affected by political decisions and administrative rules, primarily in Sweden where SCA has most of its operations, but also at EU level. This impact could be from general regulations, such as rules covering taxation and financial reporting, but also by more specific regulations and practices. These include political decisions pertaining to forest management, transportation and permit processes. Political decisions may restrict future harvesting levels.

Impact: High

Change: Unchanged risk

Management and comments for the year

SCA is working to monitor and evaluate changes in its surroundings, amended legislation and political decisions that lead to a change in circumstances for the company. SCA is a member of national and international trade associations. A few key areas for SCA include the ownership and right to the use of forest land, European and global legislation in the field of energy and the environment, and attitudes toward biofuel. SCA monitors developments in prioritized areas, such as forest management, biodiversity, fossil-fuel use, ecolabels, issues relating to waste and emissions to water and air. It is important for SCA to monitor EU emission rights trading, regulations concerning waste and circular economy initiatives.

Description of risk

In 2023, SCA’s ten largest customers accounted for about 37% of SCA’s sales. The risk of too great a dependency on an individual customer is that lost sales from these customers could have a negative impact on SCA’s earnings.

Impact: Medium

Change: Unchanged risk

Management and comments for the year

SCA works continuously to build relations with existing and new customers in order to reduce the consequences of lost sales from established customers. Generally, customers in the pulp and paper segments are major companies, such as tissue manufacturers and corrugated board manufacturers. Within the Wood business area, SCA has developed new customer segments over the years. Traditionally, solid-wood products are distributed by wholesalers. SCA has built up business relationships with distributors in the building materials trade, which are focused on distribution to consumers, including the DIY segment. In addition, certain construction components are manufactured for sale directly to industry.

Description of risk

SCA is dependent on a large number of suppliers. The loss of key suppliers could result in costs for SCA and problems in the value chain. Suppliers that fail to comply with SCA’s Supplier Standard could also cause problems for SCA. Global or regional crises may have a negative impact on the supplier’s capacity to meet its commitments and on the mobility of goods and services.

Impact: Medium

Change: Reduced risk

Management and comments for the year

To reduce this risk, SCA has supply contracts with multiple suppliers. For wood raw material purchased externally, SCA has created a purchasing organization with about 80 timber purchasers, distributed between local offices across the region and through these has relationships with approximately 18,000 private forest owners. SCA may also sell silvicultural services to these forest owners. About 170 contractors are responsible for most of the harvesting, about 100 for transportation of wood raw material to SCA’s industries and around 90 for silviculture.

For the most important input goods and services, there are a number of suppliers available in the market. This is also often the case for suppliers of maintenance services and building services. As SCA has access to several suppliers, it has reduced the risk of non-delivery resulting from delivery problems at an individual supplier. Active efforts have helped to manage disruptions linked to the current crisis in Ukraine, resulting in no major impact on the company’s operations.

An SCA Supplier Standard has been established that addresses, for example, working conditions, health and safety, business ethics and human rights. SCA’s suppliers must agree to follow the standard and may be required to undergo an audit. The audits are planned and carried out from a risk perspective to ensure that deliveries are from suppliers that fulfill SCA’s requirements.

Description of risk

SCA relies on IT systems in its operating activities. Disruptions or faults in critical systems may have a direct impact on production and important business processes. Errors in the handling of financial systems can affect the company’s reporting. Unauthorized intrusion into SCA’s systems may result in financial losses and other damage. These risks grow in an increasingly technically complex and interlinked world.

Impact: Medium

Change: Unchanged risk

Management and comments for the year

SCA has established a management model for IT that includes governance, standardized IT processes and an organization for IT security. The IT security work includes a continuous risk assessment, the introduction of preventive measures, use of security technology, procedures for business continuity management and internal audits. Standardized processes are in place for the implementation of new systems, changes to existing systems and daily operations. The majority of SCA’s system landscape is based on well-established systems. The company’s approach has been adapted and changes in accordance with the General Data Protection Regulation (GDPR). Employee awareness of the risks is raised through courses in IT security.

Description of risk

SCA needs access to skilled and dedicated employees. The company must have an ability to attract and retain talent and safeguard the availability of competent managers to achieve established strategic and operational objectives.

Impact: Medium

Change: Unchanged risk

Management and comments for the year

SCA’s objective is that workplaces are to be accident-free and healthy, and the company has a proactive approach toward the health and well-being of employees. The company carries out management training courses to develop and support managers in their leadership role.

SCA follows an established process for succession planning to ensure the supply of leaders and specialists. SCA works with strategic skills supply to secure access to the right expertise in the short and long term. Employees are developed through traditional training, coaching and learning as a part of everyday work as well as annual performance reviews. The company uses targeted initiatives to attract critical expertise and to strengthen the employer brand. The company also offers local training initiatives to gain access to talent in areas where there is a skills shortage. Salaries and other conditions are to be adapted to the market and linked to SCA’s business priorities. SCA strives to maintain good relationships with union organizations. 

Description of risk

SCA’s focus on exports makes SCA’s operations highly dependent on currency. About 90% of sales are conducted in currencies other than SEK. Most purchasing is conducted in SEK. Only a minor share of purchasing is carried out in other currencies. Fluctuations in currency rates have a substantial impact on SCA’s revenue and thereby on earnings.

Impact: High

Change: Unchanged risk

Management and comments for the year

The table shows the net flows for the three largest currencies in 2023, and the total of other foreign currencies, measured as sales in each foreign currency less purchases in the same currency. In accordance with SCA’s Financial Policy, this exposure is hedged as follows:

Balance sheet items in foreign currency are hedged, as is exposure in major  approved and contracted investments in non-current assets.

According to the policy, transaction exposure regarding expected future net flows may also be hedged for up to 18 months. At December 31, 2023, the company had hedged roughly the following shares of the expected net exposure from sales minus purchases. For EUR, 75% for the first quarter, 70% for the second quarter, 40% for the third quarter and 20% for the fourth quarter of 2024, as well as 5% for the first quarter of 2025, and for USD, 80% for the first quarter, 75% for the second quarter, 50% for the third quarter and 30% for the fourth quarter of 2024, as well as 10% for the first quarter of 2025. These had the following average exchange rates, EUR/SEK 11.53, USD/SEK 10.69.

Translation exposure, meaning the risk to which SCA is exposed when translating foreign
subsidiaries’ balance sheets and income statements to SEK, is less important as the total assets in these companies only amount to approximately 2% of SCA’s total assets. Translation exposure in the foreign subsidiaries is not currency-hedged.

Description of risk

Credit risk refers to the risk of losses due to a failure to meet payment obligations by SCA’s counterparties in financial agreements or by customers.

Impact: Medium

Change: Increased risk (impact and/or likelihood)

Management and comments for the year

Credit exposure in accounts receivable amounted to SEK 2,858m as per December 31, 2023. Credit risk in accounts receivable is managed through credit checks of customers using credit rating companies. Credit limits are set and regularly monitored. Accounts receivable are recognized at the amount that is expected to be received based on an individual assessment of each customer. The financial credit exposure, in which the counterparty is a financial actor or a pension fund manager, amounted to SEK 2,960m as per December 31, 2023. The objective is that financial counterparties must have a credit rating of at least A– from at least two credit rating institutes. 

Description of risk

Liquidity and refinancing risk is the risk that SCA is unable to meet its payment obligations as a result of insufficient liquidity or difficulty in raising new loans.

Impact: Low

Change: Unchanged risk

Management and comments for the year

As of December 31, 2023, SCA’s gross debt amounted to SEK 13,726m and the average duration, including unutilized credit facilities, to 3.7 years (taking into account lease liability in accordance with IFRS 16). Unutilized credit facilities amounted to SEK 6,249m at the end of the year, and cash and cash equivalents to SEK 502m.

To ensure good access to loan financing at attractive terms, SCA has a clear objective to maintain an investment grade rating. During the year, the credit rating agency Standard and Poor’s (S&P) repeated SCA’s credit rating as “BBB” with a stable outlook.

SCA is to maintain financial flexibility in the form of a liquidity reserve consisting of cash and cash equivalents and unutilized credit facilities totaling at least 10% of the Group’s annual sales. SCA limits its refinancing risk by having a good distribution in the maturity profile of its gross debt. The gross debt must have an average maturity in excess of three years, taking into account unutilized credit facilities.

Surplus liquidity should primarily be used to amortize external liabilities. As of December 31, 2023, SCA’s financing mainly comprised one credit facility from a group of four banks with high credit ratings, bilateral loans and credit facilities from several banks and issued commercial papers and bonds. 

Description of risk

Interest rate risk relates to the risk that movements in the interest rates could have a negative impact on SCA.

Impact: Medium

Change: Unchanged risk

Management and comments for the year

SCA’s policy is that the average interest rate duration period shall be within the interval 3–36 months. SCA’s average interest rate duration for the gross debt, including derivatives and excluding lease liability in accordance with IFRS 16, was about 15 months as of December 31, 2023. The risk is managed using fixed-interest loans or through interest rate derivatives.