UPM Annual Report 2016

Stakeholders

In brief

Strategy

Businesses

Governance

Accounts

UPM Responsible Sourcing fundamentals

SUPPLY CHAIN RISK MANAGEMENT ENHANCED The purpose of supplier selection process and the audit is to ensure compliance with UPM’s requirements. Using external experts has improved the quality of the audits, especially in environments where accurate knowledge of local language and legislation is important. UPM’s audit partner in China is SGS, the world’s leading auditing, verification, testing and certification company. “Typically, the focus has been on occupational health and safety and environmental issues”, says Tony Yang, the expert in charge of UPM audits at SGS. “During the audits, we assess, for example, the measures UPM’s subcontractors take to maintain their facilities, the firefighting equipment available or how first aid training is carried out. Meanwhile, we also make sure that the subcontractors comply with the local and international regulations and UPM’s requirements”. Based on risk assessment, UPM defines the areas for the audit. The auditor is then responsible for conducting the audit and reporting the results. UPM’s responsibility is to ensure the suppliers address any found issues as required.

Read more on UPM Code of Conduct on p. 14, UPM’s added value

to Finnish economy on p. 54 and UPM’s value creation on p. 70-71.

Compliance

Systematic risk assessment

Transparent supplier requirements

Continuous supplier development

IMPROVED FINANCIAL PRFORMANCE

UPM uses significant amounts of recovered paper UPM is the world’s largest user of recovered paper for the production of its graphic papers, consuming 2.8 (3.1) million tonnes of recovered paper in 2016. The share of recycled fibre represents one third of all fibre rawmaterials used in UPM’s paper production. The efficiency of paper recycling depends on how the local infrastructure for national collection schemes works. UPMpurchases its recovered paper from local authorities, waste management companies and printing houses, all of which are located close to the mills in Europe. This is how UPMmaximises cost efficiency and minimises environmental impact. Energy from renewable sources UPM is both a significant purchaser and producer of energy. The majority of electrical and thermal energy is used for pulp and paper production. UPM favours a wide range of low-emission energy sources and focuses on energy efficiency and energy savings in its businesses. In 2016, 69% (67%) of the fuels used by UPM came from renewable sources. In addition to UPM’s own electricity generation, electricity is also purchased from the energy markets. Logistics form the foundation for on-time deliveries UPM delivers approximately 1.3 million truckloads (c. 25 tonne each) of products and rawmaterials around the world every year; that is one load every 25 seconds. Of all UPM deliveries, 66% are transported by rail and road and 34% by sea. The majority of UPM’s haulage is handled by contract partners. UPM aims to create strategic long-term alliances to create benefits for the company and its customers. UPM considers cost efficiency and environmental aspects in its transport operations. For example, the transport services are purchased from environmentally advanced contractors using low-emission vehicles and transport payloads are optimised. Wood sourcing and logistics services have a significant socio-eco­ nomic impact on the rural areas where UPMmills are located. In total, 5,350 harvester drivers, 5,500 truck drivers and 820 rail-road workers work indirectly or directly for UPM. The number of entrepreneurs and companies involved is 860. These numbers combined with purchases from private forest owners significantly support local livelihoods in rural Europe, the US and Uruguay. Out of a total spend of EUR 3.3 billion for UPMprimary raw materials —wood, pulp and recovered paper — 68%was purchased from local suppliers.

All wood is covered by a third-party verified chain of custody certificates under the FSC® and PEFC™. In 2016, 84% (84%) of the wood used in the UPMmills is certified. UPM verifies that the wood rawmaterial supplied to its mills is procured according to the requirements of EU Timber Regulation, the US Lacey Act and other regional jurisdictions. The Finnish authorities audited UPM’s compliance with the EUTR regarding the deliveries of chips fromRussia and the same was done for the pulp fromBrazil by the German authorities. Aiming at continuous improvement together with pulp and other paper raw material suppliers UPM buys approximately 1.8 million tonnes of chemical pulp from external suppliers. Specific requirements are set for pulp suppliers with regard to environmental performance, social responsibility, forestry, wood sourcing and performance reporting. Collecting and analysing the environmental and social performance- related data of UPM’s pulp and chemical suppliers is an integral part of the company’s supplier risk and performance management. Based on the results of these analyses, the development plans are made together with the suppliers. In 2016, UPMRaflatac invited the best performing suppliers to participate in the Label Life Award competition on corporate responsibility. The award recognises UPMRaflatac’s suppliers’ efforts in achieving good environmental and social performance and generates further co-operation among the participating companies. Since 2012, UPMPaper ENA and UPM Specialty Papers have conducted a Supplier Performance and Responsibility Survey to follow responsibility of their key suppliers. In 2016, 42 key suppliers were evaluated and some 170 improvement proposals were identified. To motivate its suppliers to further improve their performance, UPM awards the most responsibly performing suppliers annually. The packaging supplier Paul & Co. received the UPMBest in category supplier award for the second time in a row.

Read more: www.upm.com/responsibility

Transparent supplier requirements are the basis for responsible sourcing UPM’s supplier risk assessment covers financial, quality, environ­ mental, social, economic and delivery related risks. Based on the risk assessments, UPM selects the suppliers whose performance is assessed in more detail. UPMuses tools such as annual questionnaires, audits and joint development plans. In 2016, UPM Sourcing function provided comprehensive risk assessment training to key personnel as well as training on operational health and safety issues to personnel visiting suppliers’ production units regularly. The human rights-related risk assessment of the supplier base has been enhanced since 2013. Consequently, the number of risk assess­ ment-based supplier audits has increased with a comprehensive geo­ graphical coverage. Some of the audits covered the entire upstream supply chain. In case of any non-conformance, the supplier is required to take corrective actions. UPM follows the progress and supports the supplier to develop its performance, when needed. However, no significant negative impacts have been identified.

Wood is the primary raw material UPM is both a major forest owner and a purchaser of wood. UPM sources all wood assortments to ensure the optimal utilisation of this valuable rawmaterial. In 2016, UPM sourced 27.8 (26.1) million cubic metres of wood globally. The majority of wood is purchased from private forest owners who numbered over 25,000. A network of local entrepreneurs is responsible for UPM’s harvesting, logistics and forestry operations. Wood Sourcing and Forestry in Finland indirectly employs approximately 2,000 persons via entrepreneurs. In 2016, Wood Sourcing and Forestry trained its 45 key contractors in Finland in business management. The trainings will continue in 2017. Tracing the origin of wood is a prerequisite for UPM All wood UPMuses in its products is legal and comes from sustainably managed forests. UPM does not accept mixed tropical hardwood from rainforests, nor does it accept wood from plantations that have been established by destroying rainforests. UPM does not source wood in areas where indigenous peoples’ rights are not respected.

Electricity sourcing TWh

UPM’s external purchasing spend

Sources of wood to UPM mills 2016

WOOD DELIVERIES TO UPM MILLS 1,000 m 3

2016

2015

20

Import 12%

Company forests 17%

Logistics 16%

Finland

18,619

17,697

16

Fibre 31%

Germany

2,030 1,297

1,543 1,013

State forests 3%

12

Indirect materials and services 14%

Austria

8

Private forests 32%

United Kingdom

368 344 165 544

271 272 135 867

4

Delivered sale/ incl. sawmills 36%

Russia Estonia

Energy 10%

0

07

10 09 08

11 12 13 14 15 16

Raw materials 29%

United States

■ Market purchase ■ Condensing, shareholdings ■ Nuclear, shareholdings ■ Hydro, shareholdings ■ Hydro ■ CHP

of raw material spend qualified against UPM Supplier Code

94%

TARGETS 2030

Uruguay

4,469

4,293

27,776

26,090

Total

CONTENTS

60

61

UPM Annual Report 2016

UPM Annual Report 2016