UPM Annual Report 2020

platforms, digital customer experience, digital supply chain and intelligent operations. After having created a rich portfolio of digital projects and initiatives, we created a solid operating model that facilitates data driven decision making in 2020. As part of the model, data governance management forms an important decision-making body for overseeing the strategic focus areas, data principles and related initiatives. Also in 2020, we created the Data Management Office (DMO) and started to work on UPM’s Digi and Data strategy to achieve more impact and business value from the digital and data-driven opportunities. 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 the European Joint Undertaking on Bio-Based Industries (BBI) focuses on bio-based products and strengthening their competitiveness in Europe. As a shareholder in the Finnish company 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 2020, UPM Specialty Papers collaborated with 4evergreen Alliance, a initiative by CEPI (the Confederation of European Paper Industries) to further accelerate the fibre-based packaging in the circular economy. UPM Raflatac joined a new global industry-wide consortium CELAB (Creating the Circular Economy for Labelling) to boost liner recycling in the labelling industry. UPM Biofuels joined the BIKE project promoting sustainable biomass value chains for biofuels in Europe. The new era of biochemicals In January, UPM made the decision to invest EUR 550 million in a biochemical refinery in Leuna, Germany. The investment will open completely new markets for us, with large growth potential for the future. The new-to-the-world biorefinery will produce a range of 100% wood-based biochemicals, which will enable a switch from fossil raw materials to sustainable alternatives in various consumer-driven end-uses such as textiles, plastics, PET bottles, packaging and variety of rubber applications. The total annual capacity of the biorefinery will be 220,000 tonnes. The main products will be bio-monoethylene glycol (BioMEG) and lignin based renewable functional fillers. The biorefinery will also produce bio monopropylene glycol (BioMPG) and industrial sugars. In 2020, detailed engineering, procurement and permitting processes of the project were proceeding at full speed. The construction activities for the biorefinery began in October with the official groundbreaking ceremony. The biorefinery is scheduled to start production by the end of 2022. UPM’s biochemicals respond to customers’ increasing needs for renewable alternatives. Strong demand-led growth is expected globally as biochemicals are intended mainly to replace chemicals made from fossil raw materials. The products can be used to replace oil, gas or coal-based materials. Customers don’t need to make changes in their existing value chains as UPM’s biochemicals perform consistently in existing production processes and recycling infrastructure. Moreover, they will significantly reduce the CO 2 footprint of the end-use products. The renewable biochemicals have a huge number of potential industrial and consumer applications. Our go-to market strategy focuses

We have also 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 with new types of technology concepts and biomass-based raw materials. Our new state-of-the-art R&D Biofore Base in Lappeenranta, Finland, combines research, piloting and analytics, and unites our technologies, globally accumulated experience and expertise in the new and existing businesses. Strategic research further accelerates the commercialisation of bio-based solutions into viable industrial processes in a cost-efficient way. In 2020, special focus was placed on new value chains in our growth businesses: biochemicals, biofuels and specialty packaging. Innovating climate-positive products Our products offer solutions to mitigating climate change as they systematically replace fossil raw materials with bio-based renewable alternatives. Carbon bound from the atmosphere remains in our products over their lifetime, even if they’re recycled several times. We are committed to a climate-positive product portfolio. Many of our products are already proven to be climate positive. In 2020, we initiated a study on climate-related substitution and the carbon storage effects of our products with two research institutes, the German IFEU (Institut für Energie- und Umweltforschung) and the Finnish Environment Institute (SYKE). In the future, we aim to scientifically verify the climate impacts of all our products. One example of our research related to climate change mitigation is renewable hydrogen. Potential commercial applications using various technologies are evaluated with the aim to lower CO 2 emissions. We also became a member of the European Clean Hydrogen Alliance. Focus on sustainability and circular economy solutions Our R&D activities are guided by our aim to meet our 2030 responsibility targets and integrate contribution to the UN Sustainable Development Goals (SDGs) into product development. In 2020, we renewed our sustainable product design concept. One step was the updating of our ecodesign questionnaire to cover SDGs. We carried out a pilot case in the development of sustainable lignin products. In 2021, the work will continue with sustainable packaging and other business areas. Special focus on sustainable product development will be put on circularity. We are also examining new ways to utilise sustainable fibre-based materials that are being developed for growing end-uses, such as textiles, nonwovens, hygiene products and flexible packaging. New solutions are developed in collaboration with our businesses, technology partners and customers by using revised ecodesign approach as part of sustainable product development concept. We see the residues and side streams as valuable raw materials and thus real business opportunities. 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, supporting the journey from innovation to business. We have 2,713 patents and patent applications, and 1,360 trademarks globally. A solid patent portfolio boosts our competitive edge. Licensing of innovations and technologies provides an excellent basis for value creation with customers and technology partners. More value from digital opportunities We aim to significantly increase the speed and quality of decision making, culture of data utilisation and innovation by leveraging high quality, compliant and modern common data services. Much of what we focus on relates to building the data foundation, including common

KEY PERFORMANCE INDICATOR Employee engagement and enablement indices overall favourable score above external high performing norm by 2030

TOPIC

MANAGEMENT

2020 RESULTS

Responsible leadership

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. Third party verified environmental certificates and labels tell customers about the environmental performance of our products. UPM favours the use of renewable and other carbon-neutral 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 third party verified chains-of-custody to ensure that wood is legally sourced from sustainably managed forests.

Employee engagement index 71% (71%) favourable. This is 2%-points below the external high performing norm. Employee enablement index 75% (74%) favourable. This is 2%-points above the external high performing norm. 82% (88%) of employees had completed individual goal settings or annual discussions. 63% (65%) had a development plan documented. No (one) fatal accident, two (three) serious accidents TRIF was 5.3 (7.1) for UPM workforce and 6.2 (6.8) including contractors. Responses to the Employee Engagement Survey’s Diversity and Inclusion index 71% (70%) favourable

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

82% (83%) 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 20% compared to 2015 and 6% compared to 2019.

Water

10% reduction in wastewater volume achieved since 2008 for the UPM average product. 89% (89%) of all UPM’s process waste was recovered and recycled. The total amount of waste to landfills increased by 3% compared to 2019. 83% (82%) 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 129–133 of the Report of Board of Directors and in the Annual Report on pages 36–37. Information on the company’s risk management system is available on the corporate website in the governance section and in the Corporate Governance Statement 2020, 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 .

Research and development Innovating for the future

developing businesses, transformative business prospects and digitalisation projects. Accelerating the development and scale-up of new molecular businesses Molecular bioproducts form one of UPM’s three strategic focus areas for growth. The biorefinery investment in Leuna, Germany, will enable a switch from fossil raw materials to wood-based sustainable alternatives in various consumer-driven end-uses such as textiles, plastics, PET bottles, packaging and pharma or cosmetics products.

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 2020, UPM spent EUR 189 (121) million on research and development, making up 18.8% (6.6%) of UPM’s operating cash flow. In addition to direct R&D expenditure of EUR 41 (53) million, the figure includes negative operating cash flow and capital expenditure in

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