UPM Annual Report 2018

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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

UPM BIOREFINING

UPM BIOFUELS

Driving cleaner traffic UPMhas been producing renewable diesel and naphtha fromwood-based residue since early 2015 at the UPMLappeenranta Biorefinery, Finland. The biorefinery’s processes transform crude tall oil, a residue of pulp making, into renewable diesel for road transport. The main product, UPMBioVerno drop-in diesel, is a competitive and sustainable alternative to fossil fuels or first-generation biofuels and is well positioned among the most sustainable biofuel alternatives available on the market. The process also generates renewable naphtha, which can be used either as a low-emission biocomponent for petrol or as feedstock for replacing fossil rawmaterials in bioplastics (read more on the right). In addition to renewable diesel and naphtha, the biorefinery produces wood-based chemicals. For example, UPM’s wood-based turpentine can be used in the production of bio- based aroma chemicals for the fragrance industry. Another residue from the biorefinery, wood- based pitch, can be used to produce inks, bitumen for roads and roofs, or used as bioliquid. UPMBioVerno renewable diesel reduces 80% of greenhouse gas emissions during its lifecycle compared with fossil diesel and significantly reduces local emissions, such as particulates and nitrogen oxides. Future demand for sustainable, high-quality advanced biofuels is predicted to be strong, driven by climate change mitigation targets, stricter environmental standards and sustainability. In Europe, renewable fuels are needed in the road transport energy mix to meet the EU’s greenhouse gas emissions reduction targets. Globally, renewable diesel demand is expected to grow as markets evolve from rural development to decarbonisation. Planning for growth In 2018, the UPMLappeenranta Biorefinery reached a new level of production following an initial turnaround in the second quarter, enabling the further development of our market position. We also continued to evaluate future opportunities for scaling up. In February 2018, we announced an Environmental Impact Assessment (EIA) for a possible biorefinery in Kotka, Finland with a 500,000-tonne annual production of advanced biofuels made from sustainable rawmaterials for use in the road transport, marine and aviation sectors. In October, the EIA for the potential new biorefinery was given to authorities for their final conclusions. The new biorefinery would be an innovative and robust concept for scaling up the business with new types of technology. The greenhouse gas emission savings delivered by this facility would be equivalent to removing 16% of the transport emissions generated in Finland. Significant efficiency gains would be enabled by the economy of scale and synergies with Lappeenranta. The potential new biorefinery would utilise several competitive and sustainable feedstocks, such as solid wood residues and other sustainable wastes and residues. UPMBiofuels has also been developing and testing a new type of sustainable biofuel feedstock by growing Brassica carinata as a secondary crop in South America. The carinata crop produces non-edible oil suitable for biofuel feedstock and protein for animal feed. This sequential cropping concept enables local farmers to make use of agricultural land in winter, generating additional income supplementing existing food production. It does not require any change to the land use, helps to prevent erosion and improves soil quality. (Read more on page 75). Focus on sustainable value chain UPM’s biofuel production is uniquely certified for sustainability, meeting the RSB and ISCC international sustainability standards. In 2018, UPM received two additional feedstock certificates fromRSB (Roundtable of Sustainable Biomaterials). The first of these was granted for the cultivation of Brassica carinata. This is the first RSB certificate to be granted in Uruguay and represents new sustainable practices for agriculture. The second certificate is the world’s first RSB low indirect land use (ILUC) risk certification, granted for both the company’s Brassica carinata oil and the crude tall oil already in use at the UPMLappeenranta Biorefinery.

OUR DIRECTION • Provide unique, sustainable, advanced biofuels and bio materials in various markets and segments • Evaluate opportunities for scaling up the biofuels business OUR STRENGTHS • Established producer of low- emission renewable diesel and naphtha for transport alternative to fossil feedstock in the petrochemical industry, e.g. bioplastics • Sustainable bio-based

UPM BIOFUELS ENTERS BIOPLASTICS WITH NEW PARTNERS

The process of making UPM BioVerno renewable diesel at the UPM Lappeenranta Biorefinery also generates renewable naphtha, an excellent raw material for renewable plastics. In March, a new collaboration with two global players signalled UPM Biofuels’ leap into the bioplastics industry. Elopak, a Norway-based supplier of paper-based packaging solutions for liquid food, joined forces with UPM Biofuels and Dow, a specialty chemicals company, to offer 100% renewable cartons that are both recyclable and responsibly sourced. This partnership is especially significant, given that Elopak’s global presence in 40 countries translates to supplying 15 billion cartons annually. Creating a 100% wood-based carton is a great example of collaboration across the value chain to find new sustainable solutions. Dow converts UPM BioVerno naphtha into renewable polyethylene, which Elopak then uses as a coating for their wood-based beverage cartons. reduces fossil raw materials use by one tonne. The sustainability of the entire value chain is also ISCC PLUS certified. Using UPM BioVerno naphtha in the production of renewable plastics is just one more example of how UPM creates value from sustainable bioinnovations. Every tonne of UPM’s wood-based naphtha that Dow converts into renewable plastics

• Uniquely certified with

international sustainability standards ISCC and RSB

UPM BIOVERNO DIESEL – A GENUINE FUEL CHOICE FOR THE FUTURE

Up to 80% lower greenhouse gas emissions than fossil diesel