UPM Annual Report 2018

UPM AT A GLANCE

STRATEGY

BUSINESSES

SOCIETY AND ENVIRONMENT

GOVERNANCE AND COMPLIANCE

REPORT OF THE BOARD OF DIRECTORS

FINANCIAL STATEMENTS

AUDITOR’S REPORT

OTHER FINANCIAL INFORMATION

Operational risks

Financial risks Financial risks are described in consolidated financial statements 2018.

Hazard risks

TYPE OF RISK

RISK DESCRIPTION

CONSOLIDATED FINANCIAL STATEMENT NOTE

TYPE OF RISK Accident, natural event and site security

Earnings uncertainty

The main short-term uncertainties in UPM’s earnings relate to sales prices and delivery volumes of the group’s products, as well as to changes in the main input cost items and exchange rates. Most of these items are dependent on general economic developments. There are significant uncertainties related to the global economic growth in 2019. Economists continue to expect solid GDP growth in 2019 but have in recent months gradually revised down their estimates for many regions. Trade negotiations between China and the US, the undefined nature of Brexit and political uncertainties in several other countries add to the uncertainty. There are uncertainties regarding the growth outlook in developing economies, including China, which may significantly influence the overall global economy and many of UPM’s product markets in particular. Uncertainties related to trade tariffs and other possible protectionist policies add to the risks. China accounted for 11.3% of UPM’s sales in 2018. The UK has decided to leave the EU, and this is scheduled to take place at the end of March 2019. However, the nature of the exit is yet unknown. This represents increased uncertainty and risks related to economic growth, especially in the UK and the EU. The EU is the most significant market for UPM, representing 57.6% of the company’s sales in 2018. The UK accounted for 6.3% of UPM’s sales. Changes to the monetary policies of major central banks may significantly impact various currencies that directly or indirectly affect UPM. UPM’s business operations depend on a large number of suppliers and contractors. Majority of UPM’s need of wood is covered by suppliers. Other production inputs, such as chemicals, fillers and recovered paper, are obtained from suppliers. Disruptions in the supply of key inputs would impact upon manufacturing operations, for example, by interrupting or resulting in the downscaling of production or a change in the product mix. They could also cause price increases for critical inputs or shifts in the availability and price of wood. It is also uncertain how the EU energy policies may impact upon the availability and costs of fibre and energy. Investment projects in UPM's businesses such as energy, pulp, paper or biofuels are often large and take one or more years to complete. UPM has experience in such projects in various businesses and locations around the world, and applies vigorous planning, project management and follow-up processes. Participation in large projects involves risks such as cost overruns or delays, as well as non-achievement of the economic targets set for the investment. UPM currently works together with many partners without control over strategic direction and operational output. The highly competitive market situation and, for example, new developments in biofuels, bioenergy or biochemicals are likely to increase the importance of partnerships in the search for higher efficiency or new products and businesses. Partnerships, however, may create risks to the profitability, for example, through changes occurring within the partner entity or changes in how the partnership operates. UPM’s success requires a skilled workforce and diversity in thinking. UPM is continuously developing its leadership culture, evaluating its recruitment, compensation policies and career development opportunities and taking measures to attract and retain diversely skilled personnel, thereby seeking to avoid shortages of appropriately competent and diverse personnel in the future. UPM’s production and business operations depend on the availability of supporting information system and network services. Unplanned interruptions in critical information system services can potentially cause a major damage in UPM's businesses. UPM has implemented numerous administrative and technical improvements to mitigate the availability and security risks and to reduce the service interruption related recovery time to acceptable level. Climate change exposes UPM to variety of risks. Unpredictable regulation and subsidies may distort raw material and final product markets, and costs of greenhouse gas emissions may influence UPM’s financial performance. It may cause exceptional weather conditions and more severe storms, floods and draughts resulting in e.g. unpredictable wood harvesting conditions. However, transition to low-carbon economy should bring business opportunities to UPM’s renewable and recyclable products. Breach of applicable laws and regulations or corporate policies by UPM employees may lead to legal processes or serious reputational damages impacting the value of the company. The UPM Code of Conduct sets the standards of responsible behaviour. These standards apply to every UPM employee. The Code covers topics relating to legal compliance and disclosure, anti-corruption, competition law, HR practices, human rights, responsible sourcing and environmental matters. UPM’s environmental performance and social responsibility play a significant role in UPM’s ability to operate and influence the long-term success of its businesses. UPM strives to ensure that employees are aware of the legal requirements, the Code and corporate policies by regular trainings and communication. The company maintains a Report Misconduct channel on its website. Non-compliance in the supply chain may also lead to legal processes or serious reputational damages impacting the value of the company. The UPM Supplier and Third Party Code defines the minimum level of performance that UPM requires from its suppliers and third party intermediaries. UPM performs due diligence on third party intermediaries and carries out regular audits in its supply chain.

TYPE OF RISK

UPM operates a significant number of manu­ facturing facilities globally, mostly UPM owned, and is also the largest private owner of forest land in Finland. UPM also owns a significant plantations area in Uruguay. UPM is exposed to risks in areas such as occupational health and safety, environment, fire, natural events and site security. These risks are managed through established management procedures and loss prevention programmes. UPM’s insurance programme also provides coverage for insurable hazard risks, subject to insurance terms and conditions.

Credit risk

4.6 Working capital

Liquidity and refinancing risk

5.1 Capital management

Interest rate risk

6.1 Financial risk management 6.1 Financial risk management 6.1 Financial risk management

Foreign exchange risk Electricity price risk

Non-financial information Global megatrends represent many long-term opportunities and challenges for UPM towards 2030 and beyond. They are also driving demand for sustainable solutions and responsible business practices. To steer its responsibility activities, UPM has established a set of responsibility focus areas with targets and key performance indicators. They are reviewed every year based on a materiality analysis (page 51). The focus areas cover economic, social and environmental responsibility. Economic responsibility at UPM covers economic performance, good governance and compliance, as well as responsible sourcing. Social responsibility focuses on respecting human rights, occupational health and safety and UPM’s role as a responsible employer. Environmental responsibility includes sustainable products, the climate and use of forests, as well as water use and waste reduction. Product stewardship is a key element of UPM’s responsibility practices. UPM’s Biofore strategy guides the company in achieving its responsibility targets for 2030 and in contributing to the Sustainable Development Goals (SDG) of the 2030 Agenda for Sustainable Development published by the UN. Based on international frameworks and commitments UPM respects international human rights agreements and agreements concerning labour rights, including the UN Declaration of Human Rights, the ILO Declaration on Fundamental Principles and Rights at Work, and the OECD Guidelines for Multinational Enterprises. UPM is also a signatory of the UN Global Compact initiative, whose ten universal principles are derived from international agreements in the areas of human rights, labour standards, the environment and anti-corruption. In 2018, UPM was again named a Global Compact LEAD company for its commitment to the UN Global Compact. We were one of only 34 global companies to receive this recognition, and the only representative of the forest industry and Finland. UPM follows the Finnish Corporate Governance Code issued by the Securities Market Association and complies with all of its recommendations. UPM Code of Conduct and other corporate policies UPM’s decision making, management and operations are guided by UPM values and the UPM Code of Conduct. Legal compliance and responsible practices are the foundation of all of UPM’s businesses and create long-term value for both UPM and its stakeholders. The UPM Code of Conduct emphasises UPM’s commitment to business integrity and responsible business operations, manifesting the company’s guiding principles.

Supply chain management, availability and price of major inputs

The UPM Code of Conduct is complemented by more detailed policies approved by the Board of Directors, rules approved by the Group Executive Team, and our business areas and global functions. These policies and rules cover such topics as the treasury, disclosures, insider matters, anti-bribery, competition law, confidentiality, contract management, human resources, the environment, forestry, information security and data protection, and safety. UPM requires its suppliers, third party intermediaries and joint venture partners to apply the same principles as in the UPM Code of Conduct and to fulfil criteria concerning social and environmental responsibility. These requirements are defined in the UPM Supplier and Third Party Code. Roles of the group management and functions in leading non-financial matters The Board of Directors, with the assistance of the Audit Committee, is responsible for monitoring compliance with applicable legal and regulatory requirements and with the UPM Code of Conduct and other corporate policies. In addition, the Audit Committee oversees procedures for treatment of complaints and concerns received by the company, anonymous or otherwise. As part of the committee’s compliance review, the committee is provided with a quarterly report by the company’s Chief Compliance Officer, and a report of submissions under the company’s Report Misconduct channel by the Head of Internal Audit. The Group Executive Team, headed by the President and CEO, is in charge of the management of corporate responsibility, determining courses of action and guiding development work. In practice, corporate responsibility efforts take place in businesses and functions, and in the Group’s Responsibility team, which co-ordinates the projects carried out by businesses and functions. UPM Legal Function and its Compliance team manage legal compliance programmes and arrange related training at regular intervals for specific target groups, which have been defined based on risk assessments. UPM Sourcing organisations follow clearly defined selection and follow-up processes when evaluating suppliers. Strategic fit, service range, product performance, quality, price and sustainability are the key factors when selecting and evaluating suppliers. While executing strategies, UPM and its business areas, functions and production units are exposed to a number of risks and opportunities. Each business area, function and unit is responsible for identifying, measuring and managing risks related to its own operations, and for reporting on risk exposures, risk management activities and results to its own management team and to the Risk Management Function.

Project execution

Partnerships

Ability to recruit and retain diversely skilled employees

Availability and security of information systems

Climate change

Risks related to non- compliance in own operations and supply chain

UPM ANNUAL REPORT 2018 108

UPM ANNUAL REPORT 2018 109

CONTENTS

ACCOUNTS