UPM Annual Report 2022

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ACCOUNTS FOR 2022

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

They work closely with UPM’s mills, businesses and business-specific research centres in various countries. UPM’s first forestry research centre specialising in eucalyptus plantations began operations in Paysandú, Uruguay. The centre’s research work is mainly focused on developing genetic materials with high productivity, optimal wood quality and tolerance to the pests and diseases that can affect plantations. The new centre contains state-of-the art laboratories and equipment, as well as specific greenhouses and nurseries for various research and development purposes. Developing R&D competences R&D supports our growth and responsibility targets globally and enhance technology-triggered business opportunities and protect performance in existing businesses. The strong focus is on the growth businesses and close collaboration with customers and production. We continuously develop our competences for the future needs of our businesses. Competence development is essential for the entire organisation, including both technical capabilities and ways of working. We focused especially on our digi and data and chemistry capabilities. We also started an apprenticeship training to educate new laboratory technicians and piloting plant operators for our growing needs in these areas. In addition to internal competence development, we collaborate with universities and vocational schools to enhance mutual learning, for example through the Aalto International Talent mentoring programme. UPM Biochemicals - ramping up new business The world’s first industrial-scale biorefinery in Leuna is rapidly taking shape, while a robust business platform is almost complete and new customer partnerships confirm a promising commercial future. Manufacturers in multiple sectors must reduce their carbon footprints urgently. UPM’s new generation of biochemicals, sourced from sustainably managed forests, will enable brands to redefine their net zero targets, significantly reduce their scope 3 emissions and switch out of fossil-based chemical feedstocks for good. Our biochemicals will support the transition of the chemicals industry towards a renewable circular bioeconomy. The EUR 750 million-investment at Leuna is rapidly taking shape, in anticipation for start-up by the end of 2023. The biorefinery will be the first industrial-scale facility of its type ever built, requiring precision in every detail of planning and construction. The biorefinery will convert solid wood into next generation biochemicals: bio-monoethylene glycol (BioMEG) and renewable functional fillers. In addition, the biorefinery will produce bio monopropylene glycols (BioMPG) and industrial sugars. After confirming in January 2022 that the completion of the biorefinery would be delayed, we successfully navigated the challenges stemming from the global supply chain disruptions. Substantial progress has been made on-site: the concrete foundations have been laid; the huge pipe rack that will bear the grid for utilities has been built and the first structures are almost complete. [SPU1] Along with developing the facility, we are preparing the business to become fully operational. We have hired and started training the operations personnel and established reliable supply chains. We have also extended our feedstock sourcing network, resulting in the first deliveries of wood on site in November. This has enabled us to begin testing our wood handling and processing operations. The networks we have built with partners in the forest value chain have helped us to address the benefits of wood use in wider policy discussions. We took important steps to bring our products to global markets. We presented our lignin-based Renewable Functional Filler (RFF) solutions, UPM Biomotion™, at the world’s biggest rubber industry trade

fair (DKT IRC) in Nuremberg, further strengthened our distributor network. We were ranked by the European Rubber Journal as the most important sustainability project in the elastomers and rubber industry. Our renewable monoethylene glycols (bMEG), UPM BioPura™, were shortlisted by Packaging Europe magazine as one of the standout innovations for its 2022 Sustainability Awards. We also announced commercial partnerships for UPM BioPura that will transform the carbon footprint of value chains in different industries. For manufacturers like Dongsung Chemical (a supplier to global footwear brands) and Haertol (a leading engine and battery coolant producer), this is an opportunity to both advance their net zero commitments and achieve a competitive advantage in their global markets, where demand for sustainable products is increasing. In 2022 we also staffed our research and application development laboratories, ensuring high quality, continuous process optimisation and ongoing research and development activities around our portfolio of biochemicals. While fully focusing on completing the project and ramping up the business, we have also built the fundamentals for further growth in Biochemicals. We have brought together a team of experts to assess and study future applications for biochemicals. We are exploring opportunities to address needs in additional chemical value chains, utilising side-stream products or based on the technological platform we are now completing. A heightened focus on reduced carbon emissions means the demand for renewable materials will continue to increase. We are actively working to optimise processes and material streams to further reduce emissions, seeking carbon neutrality - or even carbon negativity - of the products produced in our biorefinery. The sustainable sourcing of biomass is a vital factor for our commercial partners. The wood used to produce UPM’s renewable biochemicals is 100% certified and sourced from regional beechwood forests in and around Leuna, conserving biodiversity and natural ecosystems. All the wood used is fully traceable and supported by a verified third-party chain of custody. UPM Biomedicals - advancing biomedical innovations UPM Biomedicals is at the forefront of innovation and commercialisation, with a particular focus on life science and clinical applications. UPM Biomedicals develops and supplies innovative and sustainable wood-based biomedical products for medical and life science applications. The main component in our products is high-quality nanocellulose, refined from birch wood. All products are animal-free. We actively collaborate with universities, research centres and key industrial partners in the fields of high-throughput drug screening, personalised medicine, cell therapies, 3D bioprinting, tissue engineering and advanced wound care. More than 520 patents and patent applications protect our existing and future products. In life sciences, our main products are GrowDex®, a range of hydrogels for 3D cell culturing, and GrowDase™, an enzyme to release living cells from the gel. The nanocellulose ensures excellent compatibility with even the most demanding cells, such as stem cells and patient-derived cells. In 2022, we completed a pilot study of GrowDex use in a cell-based model of a liver. Liver models are used in testing the toxicity of almost every new pharmaceutical candidate. The first mini-livers and other mini-organs are currently growing in UPM’s own cell laboratory to better support our customers and product development team. GrowInk™ is a range of bioinks for 3D bioprinting, used in areas like cancer research, where models of tumours can be printed to test

KEY PERFORMANCE INDICATOR

Waste TOPIC

MANAGEMENT

2022 RESULTS

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.

No process waste sent to landfills or to incineration without energy recovery by 2030

90% (89%) of all UPM’s process waste was recovered and recycled. The total amount of waste to landfills decreased by 40% compared to 2021. 86% (84%) of all wood used by UPM is sourced from certified forests.

Forest

All fibre certified by 2030

Biodiversity UPM aims to improve biodiversity with tangible actions for maximising positive impacts and mitigating possible negative impacts on land, in stream waters or in mill operations.

Positive impact on forest biodiversity in Finland (continuous)

Overall positive development measured, all subindicators positive

Material risks and their management is described on pages 132-137 of the Report of Board of Directors and in the Annual Report on pages 32–33. Information on the company’s risk management system is available on the corporate website in the governance section and in the Corporate Governance Statement 2022, 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

Our focus in 2022 Implementing sustainable product design concept

Our 2030 responsibility targets and our contribution to the UN SDGs are integrated into our R&D activities and product development. We want our products to create value for our stakeholders during the whole product lifecycle. We started to implement the sustainable product design concept and worked on cases for new product development to form solid sustainability value propositions. At UPM Specialty Papers, the concept was successfully used from development to the new packaging paper launch. The new concept will be adopted gradually in all of our businesses. Our approach applies lifecycle thinking and lifecycle assessment data, both of which are incorporated in sustainable product design practices. We use different sustainability tools, such as Life Cycle Assessments (LCAs), and biodegradability and recyclability testing in product development. LCAs are a good tool to support businesses in sustainability communication. Innovating climate-positive products Our biochemicals biorefinery under construction in Leuna, Germany, will enable a switch from fossil raw materials to wood-based alternatives in textiles, plastics, PET bottles, packaging as well as pharma and cosmetics products. We introduced UPM BioPura™, renewable monoethylene glycols (bMEG) produced from carbon-neutral feedstocks. We are in the basic engineering phase of a next-generation biofuels biorefinery. This biorefinery would produce high-quality renewable fuels, including sustainable jet fuel. The products would significantly reduce the carbon footprint of road transport and aviation, as well as replace fossil raw materials with chemical and plastic alternatives. We are also examining new ways to utilise renewable fibre-based materials for textiles, nonwovens, hygiene products, labels and flexible packaging for example. We also look into opportunities provided by UPM’s four Biofore Base research centres accelerate the development of bio-based products. The new Leuna Biofore Base in Germany works in connection with the upcoming biochemicals refinery and specialises in developing new molecular bioproducts. The centres focus on research, piloting and analytics enabling seamless collaboration with customers, value chain partners and research organisations such as universities. green hydrogen and biogenic CO2. Expanding R&D infrastructure

Innovation and R&D programmes are essential in the development of new products and technologies. Research and development expenses cover the development of new technologies, businesses and processes. In 2022, UPM spent EUR 414 (266) million on research and development, which accounted 81.5% (21.3%) of UPM’s operating cash flow. In addition to direct R&D expenditure of EUR 55 (46) million, the figure includes negative operating cash flow and capital expenditure in developing businesses, transformative business prospects and digitalisation projects. The patents, trademarks and intellectual property rights protecting our innovations supports the journey from innovation to business. We have more than 3,000 patents and patent applications, and nearly 1,400 trademarks globally. Licensing innovations and technologies provides an excellent basis for value creation with customers and technology partners. As an example, at the end of 2022, UPM Biochemicals owned 592 patents and patent applications and another 433 patents and patent applications were held by partners, covering technology and products 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 business solutions. Our network includes the Circular Bio-based Europe Joint Undertaking (BBI) and the European Chemical Industry Council (CEFIC). We are a part of the Renewable Carbon Initiative (RCI) and a member of the 4evergreen alliance, an initiative created by CEPI to raise the overall recycling rate of fibre-based packaging to 90% by 2030. We also joined EUROPEN, the European association that strives towards carbon neutrality of the packaging value chain. We want to take part in the developments that reduce greenhouse gas emissions. In 2022, we actively participated in Hydrogen Cluster Finland, the EU’s Clean Hydrogen Alliance and participated in the Roundtable on Clean Hydrogen in industrial applications. throughout the value chain. Extensive partner network