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

RESPONSIBLE AND EFFICIENT SOURCING IS BASED ON GOOD PARTNERSHIPS

94% of raw material spend is qualified against the UPM Supplier and Third Party Code

TARGETS 2030

UPM’s external purchasing spend 2018

Logistics 16%

Fibre 35%

Indirect materials and services 12%

A cost-effective supply chain is a significant part of value creation for our company. The long-term development of materials and services together with our suppliers guarantees a well-functioning and responsible supply chain.

Energy 9%

Raw materials 28%

UPM buys products, materials and services from over 24,000 suppliers globally. The company’s sourcing network includes suppliers from private forest owners to international corporations. The main sourcing categories are fibre, other rawmaterials, indirect purchases, logistics and energy. Long-term reliable deliveries, product and service quality, financial stability of the suppliers, social and environmental responsibility, and product safety are taken into consideration when selecting suppliers. Cost-efficiency and continuous development Co-operation between UPM and its suppliers is based on mutual commitment and openness. The aim of this is to ensure competitiveness, systematic performance and quality improvement. A common goal is to ensure that suppliers can provide responsibly produced, cost-competitive and innovative materials and services for UPM business units globally – in all market situations. The global economy’s good growth rate increased the demand for several rawmaterials in 2018. However, due to good risk management and long-term planning, UPMwas able to ensure the availability of the required materials. The supply chain’s long-term development work continued in several projects whereby among others, digital means are used to improve the cost efficiency and practices of the supply chain. A good example of this is the new Source-to-Pay system, which enables a more cost-efficient way of sourcing. Digital solutions were also increased in supply chain management by using RFID tags in pulp bales for example. We also try to find new ways to minimise the use of plastic in our supply chain. In this way, we want our suppliers to commit to considering ways of reducing the use of fossil rawmaterials. SIGNIFICANCE • An effective supply chain guarantees our competitiveness and the availability of commodities required for production in all market situations TARGETS • We are a reliable and future-oriented partner and we set clear requirements and expectations for our suppliers • We generate competitiveness together with our suppliers • Cost leadership, innovation, continuous development and proactive risk management

OUR WAY • We focus on long-term, co-operative relationships and promote methods for responsible sourcing • We continuously monitor our suppliers’ performance and develop processes together with our key suppliers • Having responsible practices in the supply chain creates long-term value for UPM and its stakeholders • The UPM Supplier and Third Party Code sets transparent

Sources of wood to UPM mills 2018

UPM’s forests 14%

Private forest

owners 33%

Other companies

requirements for the entire supply chain • Focus on 2030 responsibility targets

53%

The suppliers are bound by the same rules UPM is committed to responsible sourcing practices in the company’s Code of Conduct. All the minimum requirements for suppliers are defined in the UPM Supplier and Third Party Code. We require that the suppliers promote the same requirements in their own supply chains. All new suppliers are evaluated, and they must meet the requirements set for UPM’s suppliers and third parties. In 2018, 83% (82%) of UPM total spend was qualified against the Supplier and Third Party Code. All contractors working at our production facilities must be aware of UPM’s safety requirements. Various additional requirements are applied to wood, chemicals, pulp, packaging materials, safety and logistics. All UPM’s wood, pulp and recovered paper suppliers are continuously evaluated in regard to environmental issues, social responsibility and the local community. These rawmaterials are either FSC® and PEFC™ certified or comply with the FSC ControlledWood standard or Due Diligence requirements for PEFC. A prominent user of wood and recovered paper UPM is both a major forest owner and purchaser of wood. Wood is a valuable rawmaterial and we ensure its optimal utilisation by acquiring all types of wood. In 2018, UPMpurchased 27.6 (27.4) million cubic metres of wood worldwide. We are also the world’s leading user of recovered paper for the production of graphic paper. In 2018, the company used a total of approximately 2.5 (2.6) million tonnes of recovered paper. The percentage of recycled fibre is approximately 30% of all fibre raw materials used in UPM’s paper production.

The origin of wood is monitored All the wood used to produce UPMproducts is legally logged and comes from sustainably managed forests. UPM does not use wood harvested from tropical rainforests or accept wood from plantations that have been established by destroying natural forests. UPM does not accept wood from regions that do not respect the rights of indigenous peoples. All of UPM’s wood supplies are covered by third-party-verified, FSC® and PEFC™ certified chains of custody. UPM also verifies that the wood supplied to its mills is compliant with the EU Timber Regulation, the U.S. Lacey Act and other regional requirements. Continuous improvement with raw material suppliers UPM buys approximately 1.9 million tonnes of chemical pulp from external suppliers. Further requirements are set to pulp suppliers for environmental performance, social responsibility, forestry, wood sourcing and reporting. Collecting and analysing environmental and social responsibility- related data for UPM’s pulp and chemical suppliers is an integral part of the company’s supplier risk and performance management. UPM creates development plans together with the suppliers based on these analyses. UPM also monitors the performance of its other rawmaterial suppliers by performing various surveys. Over the past few years, UPM has organised responsibility-focused Supplier Days and competitions and has granted awards to its best-performing suppliers. With this kind of co-operation, we want to encourage and support suppliers from

related risks. Country of origin, acquired material and complexity of supply chain are used to determine responsibility risks. Based on the risk assessment, selected suppliers’ activities are evaluated in more detail through annual surveys, supplier audits and joint development plans. Last year, more than 200 audits were carried out. Audits are carried out by both UPM’s own trained auditors and external auditors. If any discrepancies are discovered, the supplier is required to take corrective measures. UPMmonitors the implementation of these measures and provides support for improving the suppliers’ operations if needed. Despite the chance to implement these corrective measures, some contracts may have to be discontinued due to insufficient measures or the severity of UPM’s findings. CO 2 emissions and water-related risks caused by supply chains are special focus areas for UPM. The company monitors CO 2 emissions and water consumption throughout the supply chain, and constantly encourages suppliers to improve in these areas. In 2018, we carried out a survey targeted at suppliers of rawmaterials and logistic services about their CO 2 emissions and related targets. Based on the answers, most of the partners are committed to reducing emissions which helps UPM to set accurate reduction targets for CO 2 emissions from supply chain. Global co-operation in responsible sourcing In 2018, UPM joined Together for Sustainability (TfS), a chemical industry initiative that promotes and improves sustainability practices within its supply chains. Companies involved in the initiative also distribute supplier-related information, such as independent audit reports and sustainable development assessments. (Read more on page 49.) Responsible sourcing is also an important theme in the UN Global Compact. UPM is an active member in the Action Platform promoting decent work in global supply chains.

different fields to further develop their operations. Proactive risk management and audits

UPM continued to carry out supplier risk assessments, which include supplier-specific financial, qualitative and supply and responsibility-

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CONTENTS

UPM ANNUAL REPORT 2018

UPM ANNUAL REPORT 2018