UPM Annual Report 2019

Research and development Innovations for growth and competitiveness

Material non-financial topics and key performance indicators

Green liquor dregs are one of the most challenging residues from pulp production, and UPM is currently developing several innovative processes for utilising this material in Finland and Uruguay. The More with Biofore in China research programme continued with several pilot trials to recycle effluent water back into the process, further reducing fresh water intake. Solid patent portfolio creates value The significance of the patents, trademarks and intellectual property rights protecting UPM innovations is even more pronounced in the new businesses. A solid patent portfolio boosts the competitive edge and also provides an excellent basis for value creation in the future. For example, wood-based biofuels, biochemicals and biomedicals are new business areas in which a lot of research and product development is carried out, both internally and with external partners. Extensive partner network UPM´s close-knit global partner network is comprised of customers, universities, research organisations, suppliers and start-up companies. Collaboration speeds up the development and launch of new solutions, particularly for new businesses. The partnership with European Joint Undertaking on Bio-Based Industries (BBI) focuses on bio-based products, the production of these and strengthening their competitiveness in Europe. As a shareholder in the Finnish CLIC Innovation Ltd, UPM aims for breakthrough solutions in the bioeconomy, circular economy and cleantech, as well as in smart energy systems. UPM is also a member of FinnCERES Ecosystem to collaborate on research into lignocellulose-based materials. In 2019, UPM joined 4evergreen, a new initiative by Cepi (the Confederation of European Paper Industries). The aim is to boost fibre-based packaging in a circular and sustainable economy. Developing biofuels and naphtha UPM Biofuels successfully entered into the market with its UPM BioVerno renewable diesel and naphtha. UPM BioVerno drop-in diesel is a unique, competitive and sustainable alternative to fossil fuels and first-generation biofuels and is produced from crude tall oil, a residue of pulp production. UPM’s renewable naphtha can be used either as a low-emission biocomponent for gasoline or as feedstock for replacing fossil raw materials in plastics and other chemical industry solutions. In 2019, a collaborative venture with Dow and Elopak was launched to create a 100% wood-based, fully recyclable beverage carton. UPM Raflatac and UPM Biofuels collaborated and launched UPM Raflatac Forest Film™, the first wood-based polypropylene film label material on the market. UPM is now exploring opportunities to scale up the business by studying a potential larger biorefinery in Kotka, Finland, with a wider range of sustainable feedstocks. The potential biorefinery would produce approximately 500,000 tonnes of unique, advanced fuels for use in road transportation, aviation, shipping and petrochemicals. Research on raw materials is focused on making efficient use of different forest industry residues and by-products. Alternatives made from waste and residue-based raw materials 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 Uruguay. The carinata crop produces non-edible oil that is suitable for use as feedstock for biofuels and its by-product can also be used as protein for animal feed.

TOPIC

MANAGEMENT

KEY PERFORMANCE INDICATOR 2019 RESULTS

Innovation and R&D programmes are essential in the development of new products and technologies. Research and development funding is primarily being used on studying new technologies and developing businesses and processes. A global network of research centres provides support for UPM’s activities in R&D, both in new and existing businesses. In 2019, UPM spent EUR 121 (106) million on research and development, making up 6.6% (7.6%) of UPM’s operating cash flow. In addition to direct R&D expenditure of EUR 53 (52) million, the figure includes negative operating cash flow and capital expenditure in developing businesses, development of transformative business prospects and digitalisation projects and initiatives. Molecular bioproducts form one of UPM’s three strategic focus areas for growth and are at the core of innovating for a future beyond fossils. UPM has successfully entered the biofuels business and built a profitable and sustainable business platform. Development is currently ongoing, with the aim of expanding the biofuels business and making a similar entry into the biochemicals business. In 2019, UPM built Biofore Base, a new state-of-the-art R&D piloting plant and expanded R&D operations in Lappeenranta, Finland. It unites UPM’s technologies, globally accumulated experience and expertise. Operations will range from strategic research to commercial scale-up that further strengthen UPM’s expertise and enhance future capabilities. Biofore Base will also accelerate the development and commercialisation of bio-based solutions into viable industrial processes in a cost-efficient way. To support UPM’s new business development, the Biofore Base is designed with the scope to further expand on a global scale. In 2020, special focus will be on expanding into new value chains with new partners and research organisations. UPM products offer a solution to mitigating climate change as they systematically replace fossil raw materials with bio-based renewable alternatives. The products store carbon for the entire duration of their lifecycle, also when recycled multiple times. In 2019, UPM assessed risks and opportunities relating to climate change that would potentially affect the business. As part of the assessment, cost abatement curves were created for reducing CO 2 emissions from our operations. UPM also initiated a study with external partners to more accurately estimate the impact that products have on the climate by substituting fossil-based or other competing alternatives, for example. Sustainably managed forests form a cost-competitive carbon capture technology and UPM carried out research on both soil and forest carbon storages. UPM is also conducting research on other carbon capture technologies with external partners. Reduce, reuse and recycle UPM creates circular economy solutions in the value chain of forest industry products. Residues and side streams are seen as valuable raw materials, a source of energy and, thus, of real business opportunities. Research into pulp and paper mill side streams is aimed at finding more efficient ways to utilise by-products such as sludge, ash, green liquor dregs and waste heat. Accelerating the development and scale-up of new bio-based businesses Transition to low-emission economy provides opportunities

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 anticorruption and anti-bribery. UPM Code of Conduct training is mandatory to all employees and anti-bribery training to all salaried employees. 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. 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. Thirdparty verified environmental certificates and labels tell customers about the environmental performance of our products. UPM favours the use of renewable and other carbonneutral energy sources and strives to continuously improve its energy efficiency across all its operations. Strengthened targets for scope 1 and 2 to be in line with the commitment to Science Based Targets and 1.5° pledge. 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. UPM is committed to sustainable forestry and uses thirdparty verified chains-of-custody to ensure that wood is legally sourced from sustainably managed forests.

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

96% (99%) of active employees completed training for the revised UPM Code of Conduct. Training started in September 2019.

Human rights

Continuous supplier auditing based on systematic risk assessment practices

185 supplier audits were conducted based on identified risks, including human rights, social and environmental topics. In addition, about 300 contractor reviews with focus on working conditions were carried out. 84% (83%) of supplier spend qualified against UPM Supplier and Third Party Code. Employee engagement index 71% (71%) favourable. This is 3%-points below the external high performing norm. Employee enablement index 74% (72%) favourable. This is on par with the external high performing norm. 88% (89%) of employees had completed individual goal settings or annual discussions. 65% (61%) had a development plan documented. One fatal accident and three serious accidents TRIF was 7.1 (6.9) for UPM workforce and 6.8 (6.6) including contractors. Responses to the Employee Engagement Survey’s Diversity and Inclusion index 70% (68%) favourable

Responsible sourcing

80% of total supplier spend qualified against UPM Supplier and Third Party Code (continuous) Employee engagement and enablement indices overall favourable score above external high performing norm by 2030

Responsible leadership

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

Diversity

Product stewardship

All applicable products eligible for ecolabelling by 2030

83% (85%) of UPM sales were eligible for ecolabelling.

Climate

Fossil CO 2 emissions from its own combustion and purchased electricity (Scope 1 and 2) reduced by 65% by 2030 (compared to 2015) Wastewater volume reduced by 30% by 2030 (compared to 2008) No process waste sent to landfills or to incineration without energy recovery by 2030

Fossil CO 2

emissions reduced by 15%

compared to 2015

Water

10% reduction in wastewater volume achieved since 2008 for the UPM average product. 89% (90%) of all UPM’s process waste was recovered and recycled. The total amount of waste to landfills decreased by 2% compared to 2018. 82% (81%) of all wood used by UPM is sourced from certified forests.

Waste

Forest

All fibre certified by 2030

Material risks and their management is described on pages 129–131 of the Report of Board of Directors and in the Annual Report on pages 28– 29. Information on the company’s risk management system is available on the corporate website in the governance section and in the Corporate Governance Statement 2019, 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.

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UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

REPORT OF THE BOARD OF DIRECTORS

REPORT OF THE BOARD OF DIRECTORS

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