UPM Annual Report 2019

Innovation

412 UPM patent filings and validations in 2019 337 UPM granted patents and patent validations in 2019

We are also conducting research on other carbon capture technologies with external partners. Reduce, reuse and recycle We create circular economy solutions in the value chain of forest industry products. We see the residues and side streams as valuable rawmaterials, a source of energy and, thus, of real business opportunities. Our 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. Green liquor dregs are one of the most 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. challenging residues from pulp production, and we are currently Solid patent portfolio creates value The significance of the patents, trademarks and intellectual property rights protecting our innovations is even more pronounced in our new businesses. A solid patent portfolio boosts our 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 Our 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, we aim for breakthrough solutions in the bioeconomy, circular economy and cleantech, as well as in smart energy systems. We are 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 circular economy.

CASE

DEVELOPING A FULLY RENEWABLE BEVERAGE CARTON About 20% of a typical paperboard beverage carton is made up of fossil-based plastic. The plastic barrier coating is used for holding the liquid and to prevent migration of air and flavours through the paperboard. There was a clear market need for a fully renewable beverage carton that provides a reduced carbon footprint and excellent product protection properties. UPM Biofuels joined forces with Dow – one of the world-leading, innovative chemical companies, and Elopak – an international supplier of paper-based packaging solutions, to co-create a 100% renewable* beverage carton that is recyclable and responsibly sourced. UPM BioVerno naphtha is made from a residue of the pulp production process, and it comes from responsibly managed forests. Using naphtha as raw material for the plastic coating in liquid cartons allows reducing the carbon footprint of the packaging. Every tonne of UPM’s naphtha used for carton manufacturing reduces the need for fossil raw materials an equivalent amount. The technical properties of the carton coating and cap correspond to fossil-based materials. Sustainability of the entire value chain is certified.

INNOVATING FOR GROWTH

New sustainable alternatives on page 52 Safe and sustainable products on page 8 Climate actions on page 86 Circular economy on page 96

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. Transition to low-emission economy provides opportunities Our products offer a solution to mitigating climate change as they systematically replace fossil rawmaterials with bio-based renewable alternatives. The products store carbon for the entire duration of their lifecycle, also when recycled multiple times. In 2019, we assessed risks and opportunities relating to climate change that would potentially affect our business. As part of the assessment, we created cost abatement curves for reducing CO 2 emissions from our operations. We also initiated a study with external partners to more accurately estimate the impact that our 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 we carried out research on both soil and forest carbon storages.

Replacement of fossil materials with bio-based alternatives presents major opportunities for value creation. Developing products, services and processes is key to improving resource efficiency, sustainability and competitiveness. We develop new technologies and innovate ways to expand our offering with renewable products and solutions that can replace fossil-based materials. Research and development, bioeconomy innovations and new technologies support this transformation and expand our business portfolio. We are developing innovative and high-quality products from wood-based biomass. Wood fibre, biomolecules, residues and side streams are becoming increasingly important rawmaterials of the future. 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.

SIGNIFICANCE • The increasing demand for renewable and recyclable materials as we search for alternatives to fossil-based raw materials and increase the efficiency of resource usage • The growing consumption in emerging markets, requiring responsibly produced solutions • Bioeconomy products offer sustainable solutions to the challenges of global megatrends, such as mitigating climate change TARGETS • Developing products and innovations that replace fossil-based solutions and create added value and growth •Capturing the limitless opportunities of the bioeconomy OUR WAY • Strong expertise in forest biomass processing • Responsibility and circular economy • Resource efficiency, product stewardship and ecodesign across the entire value chain • Technological development and intellectual property rights • Partnerships and networking 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, we 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

*On mass balance basis

Accelerating the development and scale-up of new bio-based businesses

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. We have successfully entered the biofuels business

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OUR STRATEGY

OUR STRATEGY

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS