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

CLIMATE ACTIONS AND ENERGY EFFICIENCY Our direction – Beyond Fossils – requires transition to a low-carbon economy. Forests, wood-based products and low-carbon energy all play a unique role in climate change mitigation. The use of fossil fuels must be rapidly reduced.

CAPACITY TO GENERATE POWER THROUGH OWN POWER PLANTS AND SHAREHOLDINGS

BRASSICA CARINATA FARMS ABSORB CARBON DIOXIDE FROM THE ATMOSPHERE Climate change is mitigated by emission cuts and by binding atmospheric carbon dioxide to plants and soil. UPM is doing research to evaluate the size of the carbon sink generated by its Brassica carinata – a potential new feedstock for biofuel production – cultivation areas in Uruguay. Brassica carinata is an oilseed crop especially suited to the sustainable production of biofuels. The rest of the seed can be used for animal feed while the plant residual biomass can contribute to increasing carbon concentration in soil. Together with research partners, UPM is building a research agenda to estimate the impact of these carbon sinks. We estimate, for example, the concentration of carbon and biomass in soil. Even a slight increase in soil carbon storage improves carbon capture from the air. The sustainability criteria of the RSB certification guarantee that we have reduced greenhouse gas emissions, as well as maintain biodiversity and environmental and social responsibility throughout the value chain. The aim is to increase the com mercial acreage annually from the current 10,000 hectares of farm land in collaboration with local farmers. Extreme weather conditions will increase globally due to the magnitude of climate change. The change in variables like heavy rain falls, wind and snow damages or drought are posing a threat to the balance of nature. In collaboration with the Finnish Meteorological Institute (FMI), we are now actively doing research on how climate change will affect UPM’s business operations in the long run. Antti Mäkelä , Head of Climate Change and Extreme Weather Group at the Finnish Meteorological Institute, describes that according to the most plausible climate scenario the global reduction of carbon dioxide emissions will be partially achieved. ”In South America there will be more rainfall even with rising temperatures, so drought will not be as big a problem in these tropical and subtropical areas.” ”Winters in Finland will be warmer and shorter and there will be more rain. Warm winters will make harvesting wood more difficult as the soil will not freeze. Increasing rainfall will increase the potential of hydropower. Climate change also accelerates forest growth. The more carbon there is in the atmosphere, the more efficient is photosynthesis.” Evaluating the impact of different climate scenarios supports us in assessing the risks and opportunities related to climate change. While our operations are vulnerable to physical climate risks, the solutions that reduce emissions and help adapting to this change create new business opportunities in transition to low-carbon economy. READ MORE: upmbiofuels.com NEW ANALYSED DATA ABOUT THE IMPACTS OF CLIMATE CHANGE

Nominal MW

Hydropower Nuclear power

732 587 222

Condensing power UPM Energy in total

1,541 1,398

Mill site combined heat and power (CHP)

Mill site hydropower

Mill site power generation in total

1,405 2,946

Total UPM

ELECTRICITY GENERATION THROUGH OWN POWER PLANTS AND SHAREHOLDINGS TWh

We favour the use of renewable and other carbon-neutral energy sources. Biomass-based fuels account for 70% (69%) of our fuel usage. As the use of weather-dependent energy sources increases, the need for balancing power in energy systems will also grow. In Finland, UPMhas significant assets in hydropower, the most effective and sustainable method of producing balancing power. Paper and pulp mills, which use power and heat in their production processes, represent the majority of UPM’s total energy consumption. Most of the energy is consumed in the manufacture of mechanical pulp, pumping and paper drying. Steam and electricity are generated simultaneously by combined heat and power (CHP) plants at all pulp mills, and almost all paper mills. At some mills, all or part of the energy is We strive to continuously improve energy efficiency across all our operations. With the help of energy audits, innovations and internal campaigns, energy efficiency in production has improved. Electricity consumption per tonne of paper has decreased by 4% over the past ten years. However, UPM did not reach its annual energy efficiency target of 1% in 2018. As a result of the energy-saving investments carried out in 2018, UPM reduced its energy costs by EUR 3.2 (3.0) million, avoided 23,000 (39,000) tonnes of CO 2 emissions and achieved a 95,000 (92,000) MWh reduction in energy consumption. The annual savings were EUR 4.1 (5.1) million, 28,000 (61,000) t of CO 2 and 118,000 (143,000) MWh. A climate actions project, established in 2017, continued in 2018 in collaboration with UPM experts from different areas. The aim is to ensure that UPM can reduce its fossil CO 2 emissions and achieve its 30% reduction target by 2030. Together with the FinnishMeteorological Institute (FMI) UPM began research into how climate change will affect UPM’s business operations in the long run (read more on the right). UPM also evaluated the sources of its CO 2 emissions more thoroughly and established an R&D-led decarbonisation working group. Reducing CO 2 emissions 2018 was the second full year of the More with Biofore in China research programme. The UPMChangshu paper mill has already achieved a 2% improvement in its energy efficiency. In Russia, UPMPlywood is expanding its Chudovo plywood mill and investing in a new 19 MWbiomass boiler. Most of the mill’s heat energy will be generated using wood-based by-products from plywood production, such as bark, chips and dust. The project is estimated to be completed by the end of Q3 2019. In Finland, UPMPlywood replaces the old biomass boiler at its Joensuu mill. UPM Energy will refurbish the Kuusankoski hydropower plant and TVO’s Olkiluoto 3 EPR-type nuclear power plant unit is scheduled to commence regular electricity production in January 2020. In Germany, the project to install a new 80MWbiomass boiler at the UPMHürth paper mill is underway. UPM’s paper mills are also aiming to find new power supply partners, which have lower CO 2 emissions in power production. produced by external and co-owned power plant companies. Continuous improvement in energy efficiency

2018 2017

SIGNIFICANCE • Climate change is creating both risks and opportunities, and requires action • The global climate agreement aims to keep the average temperature rise at a level that does not threaten nature and society • Forests that act as carbon sinks and wood-based products have a unique role in climate change mitigation • UPM is both a significant energy producer and a user of energy TARGET • Create climate solutions and innovate for a future beyond fossils OUR WAY • Ensure wood supply from sustainably managed forests • UPM’s biodiversity programme and our positive impact make forest ecosystems less vulnerable to the impact of climate change • Wood-based and recyclable products that replace fossil-based materials • Efficient use and an increasing share of renewable and low-emission energy • Continuous improvement of energy efficiency • Best Available Techniques (BAT) • Focus on 2030 responsibility targets

Mill CHP

5.6 2.9 4.7 0.6

6.2 3.3 4.4 0.3

Hydropower Nuclear power

Condensing power

Total

13.8 14.2

FUELS USED FOR HEAT GENERATION TWh

2018 2017 19.2 19.6

Black liquor

Bark and other biomass

8.3 1.5

8.7 1.3

Heat recovered from TMP production

Renewable fuels total

29.0 29.6

Peat

1.0 0.4

0.9 0.6 7.8 0.6 3.2

Purchased heat

Natural gas

7.1

Oil

0.6 2.8

Coal Total

40.9 42.7

UPM’s fossil carbon dioxide emissions

UPM’s acidifying flue gases

1,000 t

mio t

mio t CO 2

12 11 10

13 14 15 16 18 17

12 11 10

13 14 15 16 18 17

2 from on-site energy generation (mio t) 2 from purchased electricity (mio t)

■ Total SO 2 ■ Total NO X

■ CO ■ CO

Paper production Chemical pulp production

In 2018, on-site CO 2 emissions (Scope 1) decreased due to lower emissions in paper mills. CO 2 of purchased electricity (Scope 2) decreased due to purchases with lower CO 2 factors in Finland, Germany and the US. 2017 figure has been corrected.

In 2018, the emissions increased slightly at UPM's pulp mills due to increased pulp production.

4% Reduction in CO 2 emissions

29% Reduction in acidifying flue gases since 2008

70% Share of renewable fuels

TARGETS 2030