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

Independent Practitioner’s Assurance Report

Report of the Board of Directors

reasonable assurance engagement. An assurance engagement involves performing procedures to obtain evidence about the amounts and other disclosures in the CR Reporting, and about the Company’s adherence to the AA1000 AccountAbility Principles. The procedures selected depend on the practitioner’s judgement, including an assessment of the risks of material misstatement of the CR Reporting and an assessment of the risks of the Company's material nonadherence to the AA1000 AccountAbility Principles. Our work consisted of, amongst others, the following procedures: • Interviewing senior management of the Company. • Interviewing employees from various organisational levels of the Company with regards to materiality, stakeholder expectations, meeting of those expectations, as well as stakeholder engagement. • Assessing stakeholder inclusivity and responsiveness based on the Company’s documentation and internal communication. • Assessing the Company’s defined material corporate responsibility topics as well as assessing the CR Reporting based on these topics. • Visiting the Company’s Head Office as well as one site in Finland and conducting one video interview with one site in Poland. • Interviewing employees responsible for collecting and reporting the information presented in the CR Reporting at the group level as well as at the site level. • Assessing how group employees apply the reporting instructions and procedures of the Company. • Testing the accuracy and completeness of the information from original documents and systems on a sample basis. • Testing the consolidation of information and performing recalculations on a sample basis. Limited assurance conclusion Based on the procedures we have performed and the evidence we have obtained, nothing has come to our attention that causes us to believe that UPM-Kymmene Corporation does not adhere, in all material respects, to the AA1000 AccountAbility Principles. Furthermore nothing has come to our attention that causes us to believe that UPM- Kymmene Corporation’s CR Reporting for the reporting period ended 31 December 2018 is not properly prepared, in all material respects, in accordance with the Reporting criteria, or that the CR Reporting is not reliable, in all material respects, based on the Reporting criteria. When reading our assurance report, the inherent limitations to the accuracy and completeness of sustainability information should be taken into consideration. Our assurance report has been prepared in accordance with the terms of our engagement. We do not accept, or assume responsibility to anyone else, except to UPM-Kymmene Corporation for our work, for this report, or for the conclusions that we have reached.

Observations and recommendations

To the Management of UPM-Kymmene Corporation

Based on the procedures we have performed and the evidence we have obtained, we provide the following observations and recommendations in relation to UPM-Kymmene Corporation’s adher­ ence to the AA1000 AccountAbility Principles. These observations and recommendations do not affect the conclusions presented earlier. Regarding Inclusivity: UPM-Kymmene Corporation has processes in place for stake­ holder inclusivity and engagement. Stakeholder Relations coordinates stakeholder engagement at the group level, while businesses are responsible for local activity. We recommend that the Company continues collaborating and sharing knowledge with its stakeholders acknowledging different segments within stakeholder groups. Regarding Materiality: UPM-Kymmene Corporation has a systematic process in place to evaluate and determine the materiality of corporate responsibility topics. Materiality analysis is updated annually. We recommend that the Company continues to enhance the use of different methods for obtaining stakeholder feedback on the materiality analysis as well as on the responsibility focus areas, performance and reporting. Regarding Responsiveness: UPM- Kymmene Corporation has processes in place for responding to stakeholder needs and concerns. We recommend that when enhancing its processes the Company acknowledges changing stakeholder needs and expectations. Practitioner’s independence, qualifications and quality control We have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Our multi-disciplinary team of corporate responsibility and assurance specialists possesses the requisite skills and experience within financial and non-financial assurance, corporate responsibility strategy and management, social and environmental issues, as well as the relevant industry knowledge, to undertake this assurance engagement. PricewaterhouseCoopers Oy applies International Standard on Quality Control 1 and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.

UPM introduction and business model UPM leads the forest-based bioindustry into a sustainable and innovation-driven future across six business areas: UPM Biorefining, UPM Energy, UPM Raflatac, UPM Specialty Papers, UPM Communication Papers and UPM Plywood. These business areas are competitive, with strong market positions. UPM provides sustainable and safe solutions to the growing global consumer demand. Products are made from renewable materials and are recyclable. UPM group creates value to its stakeholders by operating separate businesses with a focus on: • Competitive and sustainable wood sourcing, forestry and plantation operations • Value added, efficient and responsible global functions

We have been engaged by the Management of UPM-Kymmene Corporation (hereinafter also “the Company”) to perform a limited assurance engagement on selected corporate responsibility information for the reporting period 1 January 2018 to 31 December 2018, disclosed in UPM- Kymmene Corporation’s Annual Report 2018 and on its website in section “Responsibility” (hereinafter “the CR Reporting”). The assured information is indicated in the Company’s GRI Content Index 2018 on the Company’s website. Furthermore, the assurance engagement has covered UPM-Kymmene Corporation’s adherence to the AA1000 AccountAbility Principles with The Management of UPM-Kymmene Corporation is responsible for preparing the CR Reporting in accordance with the Reporting criteria as set out in the Company’s reporting instructions and the GRI Standards Sustainability Reporting Guide­ lines of the Global Reporting Initiative. The Management of UPM-Kymmene Corporation is also responsible for such internal control as the management determines is necessary to enable the preparation of CR Reporting that is free from material misstatement, whether due to fraud or error. The Management of UPM-Kymmene Corporation is also responsible for the Company’s adherence to the AA1000 AccountAbility Principles of inclusivity, materiality and respon­ siveness as set out in AccountAbility’s AA1000 AccountAbility Principles Standard 2008. Practitioner’s responsibility Our responsibility is to express a limited assurance conclusion on the CR Reporting and on the Company’s adherence to the AA1000 AccountAbility Principles based on the procedures we have performed and the evidence we have obtained. We conducted our limited assurance engagement in accordance with the International Standard on Assurance Engagements (ISAE) 3000 (Revised) “Assurance Engagements Other than Audits or Reviews of Historical Financial Information”. That Standard requires that we plan and perform the engagement to obtain limited assurance about whether the CR Reporting is free frommaterial misstatement. In addition, we have conducted our work in accordance with the AA1000 Assurance Standard 2008. For conducting a Type 2 assurance engagement as agreed with the Company, the AA1000AS (2008) requires planning and performing of the assurance engagement to obtain moderate (limited) assurance on whether any matters come to our attention that cause us to believe that UPM-Kymmene Corporation does not adhere, in all material respects, to the AA1000 AccountAbility Principles and that the CR Reporting is not reliable, in all material respects, based on the Reporting criteria. In a limited assurance engagement the evidence-gathering procedures are more limited than for a reasonable assurance engagement, and therefore less assurance is obtained than in a moderate (limited) level of assurance. Management’s responsibility

Group Portfolio strategy Capital allocation Business targets Code of Conduct Responsibility targets Businesses Business area strategies Commercial excellence Operational excellence Cost efficiency measures Focused growth projects Innovation Clear roles and responsibilities

Outcomes Top performance Competitive advantage Value creation Stakeholder and societal value License to operate

Each business area is responsible for executing its own strategy and achieving targets. Group direction and support from global functions enable the businesses to capture benefits from UPM’s brand, scale and integration, while navigating the complex operating environment. Capital allocation decisions take place at the group level. Corporate responsibility is an integral part of all of our operations and a source of competitive advantage. UPM is committed to continuous improvement in financial, social and environmental performance. UPM promotes responsible practices throughout the value chain and is active in finding sustainable solutions, in co-operation with its customers, suppliers and partners.

• Continuous improvement (Smart) programmes • Technology and intellectual property rights • A global platform to build on • Disciplined and effective capital allocation • Compliance with applicable laws and regulations, UPM Code of Conduct and corporate policies

Market environment in 2018

Global growth in 2018 started at a healthy level following the strong growth experienced in 2017. However, increasing uncertainty surrounding the global economic outlook, decelerating growth in international trade and effects of trade measures imposed by the United States against China led to deteriorating business and investor confidence. Overall global real GDP growth remained strong for 2018 at 3.2%. US economic growth of 2.9% accelerated in 2018, with tax cuts and an increase in consumer spending stimulating demand. This combined with higher US interest rates led to the US dollar performing strongly against most other currencies in 2018. On average, the euro remained stronger than in 2017. As many emerging economies rely on dollar- dominated financing, the economic outlook of those regions weakened. In Europe, cyclical upturn moderated early in the year and economic growth returned to a normal pace of around 2.0%. Employment improved from the previous year and inflationary pressures strengthened moderately. Brexit negotiations were concluded between the UK and the EU, but the results were rejected by the UK Parliament. Political uncertainty also increased gradually in Germany and France. In China, economic growth slowed to 6.6% and investment activity was modest. The trade dispute with the US increased uncertainty during the second half of the year. China implemented a tight monetary policy to drive financial deleveraging but announced stimulation measures towards the end of the year. Overall inflation increased modestly in 2018, mainly due to higher energy prices. In the summer of 2018, the price of oil was some 50% higher compared to the previous year. However, the peak was followed by a dramatic drop in oil prices in November resulting from oversupply and uncertainties in global economic growth. Costs for of UPM’s main inputs, such as wood, chemicals, adhesives, films and logistics, increased compared to those of the previous year. Market demand was mostly favourable for UPM’s businesses and products. Sales prices increased in all businesses and mitigated the impact of higher input costs.

Global chemical pulp demand was strong in H1 2018. Market balance was further tightened as supply was restricted due to production outages in the industry. In H2 2018, uncertainties in the global economy, gradually slowing growth in China and destocking in the value chain reduced global pulp shipments somewhat. Pulp prices continued to increase to record levels in Q3 2018 but moderated towards the end of the year. Demand for advanced renewable diesel and naphtha continued to be strong, driven by sustainability targets and stricter environmental requirements. European institutions agreed on the Renewable Energy Directive (REDII), which will increase the use of renewable energy to 32% by 2030 and requires 14% bioenergy to be used in transport. Electricity consumption in Finland increased. From March 2018, the Nordic hydrological balance was noticeably below the long-term average level. Electricity sales prices were significantly higher due to Nordic hydro situation and increased commodity and CO 2 prices. Demand for both self-adhesive label materials and label and release papers increased during the year, particularly in Asia. Demand grew also in Europe and North America although slowed down during H2. Demand was driven by strong e-commerce growth and increasing private consumption. Office paper demand continued to grow in Asia in H1 2018 and prices increased. However, in H2 2018, office paper shipments were impacted by the slowing growth and destocking in China. In Europe, demand for graphic paper grades was 6.0% lower than in the previous year. The decline in demand was steady, while capacity conversions and exits kept the market balance tight. Prices increased across all paper grades. The market environment for plywood was favourable in Europe. Demand growth was driven by further improvements in the building and construction industry. Demand for plywood-related industrial applications, such as vehicle floors and LNG carrier insulation materials, were strong. Demand for construction-driven sawn timber was also good.

Helsinki 18 February 2019 PricewaterhouseCoopers Oy

Sirpa Juutinen Partner Sustainability & Climate Change

Jussi Nokkala Director Sustainability & Climate Change

UPM ANNUAL REPORT 2018 98

UPM ANNUAL REPORT 2018 99

CONTENTS