UPM Annual Report 2021

ACCOUNTS FOR 2021

UPM

BEYOND FOSSILS

STRATEGY

BUSINESSES

RESPONSIBILITY

GOVERNANCE

EU Taxonomy In 2020, the European Union’s Sustainable Finance Classification System (EU Taxonomy Regulation, 2020/852) was published. In 2021, the European Commission adopted the related EU Disclosures Delegated Act, which requires large financial and non-financial companies to provide information to investors about the environmental performance of their assets and economic activities. In annual reports published in 2022, large companies need to start to report the proportion of their economic activities that are considered as Taxonomy eligible. An eligible economic activity is an activity that is included in the scope of delegated acts adopted pursuant to the Taxonomy Regulation. In 2023, large companies need to report activities that are considered as Taxonomy-aligned, i.e. which comply with the criteria for environmentally sustainable economic activities. In the beginning, the focus is on activities contributing to climate objectives, climate change mitigation and adaptation, according to the EU Climate Delegated Act. Based on the regulation, UPM has carried out an assessment to identify the economic activities which would be eligible i.e. included in the scope of EU Taxonomy. The assessment was carried out with the support of several UPM functions and businesses, and led by UPM’s

OpEx UPM has included in OpEx, as defined in Disclosures Delegated Act, research and development costs as accounted for in accordance IAS 38 Intangible assets, short term lease expenses as accounted for in accordance IFRS 16 Leases, and costs of day-to-day servicing (i.e., repairs and maintenance) of property, plant and equipment as accounted for in accordance IAS 16. Costs of day-to-day servicing of property, plant and equipment include direct salaries of maintenance personnel, maintenance materials and maintenance services outsourced. In addition, as UPM owns a significant amount of forest assets, it considers forest management and support services as day-to-day servicing of assets as defined in EU Disclosures Delegated Act. OpEx is included in consolidated income statement line item Costs and expenses, refer Note 2.3. Operating expenses and other operating income . Research and development costs included in Taxonomy-eligible OpEx relate to technologies and products dedicated to the reduction of GHG emissions. These costs include mainly new biochemicals biorefinery and R&D related to the next generation biofuels refinery. Day-to-day servicing of property, plant and equipment included in Taxonomy-eligible OpEx includes maintenance costs of newsprint paper, hydropower and biofuels production facilities and combined heat power plants. Costs of day-to-day servicing of forest assets included in Taxonomy-eligible OpEx relate to forestry infrastructure maintenance, forest fire fighting, protection and environmental activities whereas forestry renewal costs, e.g., planting, growing of coppice and operation of forest tree nurseries, are included in CapEx.

Accounting Policy UPM consolidated financial statements that are prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS as adopted by the EU) and IFRIC Interpretations. UPM has calculated the KPIs using the financial information presented in group consolidated financial statements 2021. The definitions of CapEx and OpEx key performance indicators are based on group interpretation of definitions set out in the Disclosures Delegated Act. Turnover UPM has calculated turnover, as defined in Disclosures Delegated Act, based on the same accounting principles that apply for revenue in IFRS, i.e., covering all amounts derived from the sale of products and services in the course of ordinary activities. Total turnover corresponds to total sales as reported in group consolidated financial statements. Refer to Accounting policy in consolidated financial statements Note 2.2. Sales . Taxonomy-eligible turnover includes only revenue from sales of products and services generated from activities that are in the scope of the Taxonomy. The majority of UPM´s products and services contributing to the turnover are not in the scope of the EU Taxonomy. In determining the eligible turnover any specific fragments of production inputs, such as use of sustainable raw material or energy, have not been included in the eligible turnover if the main activity is not in the scope of the Taxonomy. UPM’s Taxonomy-eligible turnover includes sales of wood and wood based biomass (logs, pulpwood, forest residues etc.) to third-party customers, forestry services to forestry owners, sales of energy generated from hydropower, sales of wood-based renewable diesel for transport and renewable naphtha for transport and petrochemicals, distribution of district heat, sales of heat and power generated from biomass, gaseous and liquid fuels of renewable origin in combined heat and power plants, sales of biocomposites and sales of newsprint paper from mostly recycled content. CapEx UPM has included in CapEx, as defined in Disclosures Delegated Act, additions to tangible and intangible assets, before any depreciations, impairments, amortisation charges and fair valuations during the financial year, as accounted for in accordance with IAS 16 Property, Plant and Equipment, IAS 38 Intangible assets, IAS 41 Agriculture and IFRS 16 Leases. CapEx corresponds to cash payments to acquire fixed assets in the Consolidated cash flow statement adjusted with amounts accrued but not paid at the end of reporting period, and additions to leased assets. Refer to line items Capital expenditure and Additions to forest assets in Consolidated cash flow statement and Note 5.2. Leases in UPM consolidated financial statements 2021. Taxonomy-eligible CapEx includes purchased and leased land for afforestation, purchased growing trees, capitalised forestry renewal costs during the growth cycle, part of capitalised investments in new biochemicals refinery, capitalised investments in hydropower plants, capitalised investments in biofuels biorefinery and other capitalised development costs of Taxonomy-eligible activities towards a future beyond fossils. Capital expenditure presented in the UPM Annual report within Other financial information differs from Taxonomy-CapEx as it does not include additions to forest assets and leased assets.

finance and responsibility teams. EU NACE Classification (Statistical Classification of Economic Activities in the European Community) was used as reference in activity identification. In 2022, UPM will continue the assessment with a thorough evaluation of the alignment of activities with the sustainability criteria defined in the regulation. The identified eligible activities focus on the climate change mitigation objective. The identified activities are: sustainable forest management, hydropower generation, biofuels and biocomposites businesses, paper production from mostly recycled content, part of renewable energy generation, sales of heat to local communities, part of the ongoing investment in a biochemicals refinery in Germany, some water transportation activities as well as R&D activities towards a future beyond fossils. In addition, water and wastewater related activities have been considered in the assessment. However, as those are not products or services of UPM, thus not directly contributing to UPM turnover, those have not been considered as Taxonomy-eligible activities. UPM´s main businesses are not included in the scope of EU Taxonomy. The identified eligible activities correspond with following categories of the EU Taxonomy:

Relevant for turnover

Relevant for CapEx

Relevant for OpEx

Activity no EU Taxonomy activity

UPM activity

Afforestation

Sustainable forest management Sustainable forest management

n/a

X X X X X X

X X X X X X

1.1 1.3

Forest management

X

Part of the current investment in a biochemicals refinery in Germany

3.14

Manufacture of organic base chemicals

X X X X

4.5

Electricity generation from hydropower Manufacture of biogas and biofuels for use in transport Cogeneration of heat/cool and power from renewable non-fossil gaseous and liquid fuels Cogeneration of heat/cool and power from bioenergy District heating/cooling distribution

Electricity generation from hydropower

4.13

Biofuels business

4.15

Sales of heat to local communities

4.19

Part of renewable energy generation

X

X

X

4.20

Part of renewable energy generation

X

X

X

Paper production from mostly recycled content and biocomposites business

5.9

Material recovery from non-hazardous waste

X

X

X

Sea and coastal freight water transport, vessels for port operations and auxiliary activities Close to market research, development and innovation

6.10

Some water transportation activities

X

X

X

9.1

R&D activities towards a future beyond fossils

n/a

X

X

Non-financial undertakings falling under the scope of the Non-Financial Reporting Directive are required to disclose the KPIs, the turnover, CapEx (capital expenditure) and OpEx (operating expenses) in relation to economic activities which are Taxonomy-eligible as defined in Disclosures Delegated Act as well as such eligibility disclosures in relation to economic activities which are non-eligible under the Taxonomy.

The eligibility-related financial information to be disclosed pursuant to Article 8 of the Taxonomy Regulation is presented below. The group has ensured that activities are accounted only once when calculating KPIs.

Absolute turnover, EURm

Proportion of turnover, %

Absolute CapEx, EURm

Proportion of CapEx, %

Absolute OpEx, EURm

Proportion of OpEx, %

2021

Taxonomy-eligible activities Taxonomy-non-eligible activities

1,017 8,798 9,814

10 % 90 %

237

14 % 86 %

80

15 % 85 %

1,429 1,666

444 524

Total

100 %

100 %

100 %

140

UPM FINANCIAL REPORT 2021 141 UPM ANNUAL REPORT 2021 141

UPM ANNUAL REPORT 2021

UPM FINANCIAL REPORT 2021 140