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

Material non-financial topics and key performance indicators

Material risks and their management is described on pages 106–109 of the Report of Board of Directors and in the Annual Report on pages 30–31. Information on the company’s risk management system is available on the corporate website in the governance section and in the Corporate Governance Statement 2018, which is also available as a separate report on the corporate website upm.com/governance . More information about performance related non-financial topics is available in the general section of the Annual Report and on the UPM website upm.com .

TOPIC

MANAGEMENT

KEY PERFORMANCE INDICATOR 2018 RESULTS

Governance/ Anti- Corruption

Corruption related risks are identified and assessed in connection with the company’s risk management process. These risks are managed and mitigated by training, communication, due diligence procedures, audits and practical guidelines specifically targeted at anti- corruption and anti-bribery. UPM Code of Conduct training is mandatory to all employees and anti-bribery training to all salaried employees.

100% coverage of participation in UPM Code of Conduct training (continuous)

99% (98%) of active employees completed UPM Code of Conduct training.

Human rights UPM is committed to respecting human rights based on its Code of Conduct. UPM has a process for assessing human rights at UPM site level, including community relations and local sourcing, as well as for risk assessments and audits for suppliers.

Continuous supplier auditing based on systematic risk assessment practices

Approximately 210 supplier audits were conducted based on identified risks, including human rights topics

Research and development New growth and competitiveness through innovations Innovation and R&D programmes are essential in the development of new products and technologies. They support UPM businesses in ensuring competitiveness in the future. In 2018, UPM spent EUR 106 million (86 million) on research and development, making up 7.6% (5.5%) of UPM’s operating cash flow. In addition to direct R&D expenditure of EUR 52 million (51 million), the figure includes negative operating cash flow and capital expenditure in developing businesses, development of transformative business prospects and digitalisation projects and initiatives. The focus of research and development spend was on studying new technologies, developing businesses and processes development. A global network of research centres supports UPM’s activities in R&D both in new and existing businesses. Developing biofuels An excellent example of an innovative alternative to a fossil-based product is UPM BioVerno, wood-based renewable diesel and naphtha produced from crude tall oil, a residue of pulp production. UPM has been producing UPM BioVerno renewable diesel and naphtha from wood-based residues since early 2015. UPM BioVerno drop-in diesel is a unique, competitive and sustainable alternative to fossil fuels and first-generation biofuels. UPM’s renewable naphtha can be used as a biocomponent for gasoline or to replace fossil raw materials in bioplastics. In 2018, UPM carried out an environmental impact assessment (EIA) for a potential biorefinery in Kotka, Finland. The conclusion from EIA authorities is expected at the beginning of 2019. The UPM Kotka biorefinery would produce approximately 500,000 tons of advanced fuels from many sustainable raw materials, for road and marine transport and air traffic applications. The products can replace fossil- based raw materials also in the chemical industry. Research on raw materials is based on the efficient use of different residues and by-products of the forest industry. Alongside tall oil, other waste and residue-based raw material alternatives that do not compete with food production are being tested. UPM Biofuels is developing a new feedstock concept by cultivating Brassica carinata as a sequential crop in South America. The Carinata crop produces non-edible oil suitable as feedstock for biofuels and as protein for animal feed as a by-product. UPM is cultivating and testing Brassica carinata with selected local farmers in Uruguay. Progress in the biochemical business UPM Biochemicals is developing wood-based chemicals and strong growth is expected for the market already in the coming years. Biochemicals will offer renewable alternatives and mainly replace chemicals made from fossil raw materials. Product segments include glycols and lignin products. Development is in the pre-commercial phase. UPM is aiming for industrial-scale concepts by actively developing and testing suitable technologies.

In 2018 UPM continued to assess the potential for building a biorefinery in Germany. This brand new industrial-scale biorefinery would produce 150,000 tons of bMEG (bio-monoethylene glycol), bMPG (bio-monopropylene glycol) and lignin from hardwood. Potential end-use segments include textiles, bottles, packaging, de-icing products, composites and resins, for example. Through commercial and engineering studies, UPM ascertains the technical and economic readiness and attractiveness of the overall concept. Active development work is also carried out with potential customers. Lignin products replace oil-based materials Bio-based and sustainable products are developed from lignin obtained from wood raw material, for a variety of end uses. The development and commercialisation of these products continued in 2018. Lignin can be used in resins, glues, bioplastics and polyurethane, for example. UPM BioPiva lignin is based on technology, developed by UPM, which can replace up to 70% of the oil-based raw materials in resins. The biomedical product range expands UPM is continuing to develop biomedical products in collaboration with researchers at Biomedicum in Helsinki, Finland. GrowDex®, a nanocellulose hydrogel, commercialised by UPM, is suitable for 3D cell culturing and related applications, for example in medical development and research. GrowDex® is biocompatible with human cells and tissue. UPM is also launching an advanced wound dressing product, based on nanocellulose-based films that are applied to wounds. Recycled material use is growing in biocomposites UPM Biocomposites is developing innovative and sustainable composite products for various outdoor building material uses and consumer products. The patented UPM ProFi production process is a good example of a circular economy: cellulose fibres and polymers from self-adhesive label waste are used to create high-quality composite products. One of the main targets is to increase the use of recyclable materials in products: for example, in the new UPM ProFi Piazza decking, the proportion of recyclable materials is already 75%. UPM Formi composite material, made from cellulose fibres and polymers, is suitable for a variety of applications, from furniture to consumer electronics. UPM Formi complies with the requirements set by the EU for reinforced plastics in relation to circular economy, and its carbon footprint is up to 50% lower compared with traditional plastics. In 2018, we launched a new UPM Formi 3D biocomposite, developed especially for 3D printing.

Responsible sourcing

UPM requires its suppliers, third party intermediaries and joint venture partners to apply the same principles as in the UPM Code of Conduct. These supplier requirements are defined in the UPM Supplier and Third Party Code. UPM continuously develops leadership capabilities, management teams and working environments. UPM measures work environments, team work and leadership with an annual engagement survey and has a leadership development programme portfolio that supports self- leadership, leading people and leading businesses. Programmes cover topics such as inspiring leadership, coaching, conversation and feedback skills, innovations and leading complexity. UPM has a systematic process for goal setting and creating development plans for all employees globally to ensure high performance and continuous professional development. UPM has a comprehensive safety management system which promotes a proactive and engaging safety culture. UPM uses means such as safety audits and reporting on safety related near-misses and safety observations. UPM wants to develop organisational culture and local conditions to ensure an inclusive and diverse working environment. UPM has committed to, and promotes, diversity and inclusion in its policies. UPM reviews the diversity status of all its businesses and functions regularly. The composition of UPM key management teams and inclusiveness is discussed and development actions planned and implemented. Ecolabels help customers make responsible choices and provide stakeholders with important information. Third- party verified environmental certificates and labels tell customers about the environmental performance of our products. UPM favours the use of renewable and other carbon- neutral energy sources and strives to continuously improve its energy efficiency across all its operations. UPM's goal is to minimise the impact of its operations on water resources, safeguard the natural water cycle in forests, and maintain the functioning of aquatic ecosystems. Circular economy means both financial and environmental efficiency. UPM aims to reuse materials and products, reduce the amount of solid waste and increase recycling and recovery in its operations.

80% of total supplier spend qualified against UPM Supplier and Third Party Code (continuous)

83% (82%) of supplier spend qualified against UPM Supplier and Third Party Code.

Responsible leadership

Employee engagement and enablement indices overall favourable score above external high performing norm by 2030

The employee engagement index is 71% favourable. This is 3 percentage points below the external high performing norm. The employee enablement index is 72% favourable. This is 1 percentage point below the external high performing norm. 89% (89%) of employees had completed individual goal settings or annual discussions, and 61% (62%) had a development plan documented. No fatalities in 2018, two serious accidents

Learning and development

Goal setting discussions are held and development plans created for employees, completion rate 100% by 2030 No fatalities or serious accidents in UPM operations Total recordable injury frequency (TRIF) <2 levels permanently reached including contractors 95% favourable in the Employee Engagement Survey's Diversity and Inclusion index by 2030

Safe working conditions

TRIF was 6.9 for UPM workforce and 6.6 including contractors.

Diversity

Responses to the Employee Engagement Survey’s Diversity and Inclusion index 68% (67%) favourable

Product stewardship

All applicable products eligible for ecolabelling by 2030

85% (85%) of UPM sales were eligible for ecolabelling.

Climate

Fossil CO 2

emissions from its own

Fossil CO 2 emissions reduced by 4% compared to 2017. However, the increase in 2011 due to Myllykoski acquisition has not been compensated yet. 14% reduction in wastewater volume achieved since 2008 for the UPM average product. 90% (89%) of all UPM’s process waste was recovered and recycled. The total amount of waste to landfills decreased by 2% compared to 2017. 81% (85%) of all wood used by UPM is sourced from certified forests.

combustion and purchased electricity (Scope 1 and 2) reduced by 30% by 2030 (compared to 2008) Wastewater volume reduced by 30% by 2030 (compared to 2008)

Water

Waste

No process waste sent to landfills or to incineration without energy recovery by 2030

Forest

UPM is committed to sustainable forestry and uses third- party verified chains-of-custody to ensure that wood is legally sourced from sustainably managed forests.

All fibre certified by 2030

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