UPM Annual Report 2022

ACCOUNTS FOR 2022

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

6. Risk management 6.1 Financial risk management

Treasury shares At 31 December 2022, the company held 411,653 (411,653) of its own shares, 0.08% (0.08%) of the total number of shares. Reserves EURm 2022 2021 Fair value reserve 3,062 2,012 Hedging reserve -627 -96 Share-based payments reserve 25 21 Total other reserves 2,460 1,938 Reserve for invested non-restricted equity 1,273 1,273 Translation reserve 449 329 Total reserves 4,182 3,539 Fair value reserve This reserve represents the cumulative net change in the fair value of investments in equity securities comprising mainly of the fair value change of the energy shareholdings. Amounts are recycled only within equity upon the disposal of the asset. Hedging reserve This reserve comprises the cumulative net change in the fair value of the effective portion of cash flow hedging instruments related to hedged transactions that have not yet occurred and the cost of hedging when recognised in OCI. Amounts are recognised in profit or loss when the associated hedged transactions affect profit or loss or as part of the acquisition cost of property, plant and equipment. In 2022, a gain of EUR 5 million (9) was reclassified from the hedging reserve to other financial income and expenses as a result of inefficiency.

Share-based payments reserve The share-based payments reserve is used to recognise the fair value at the grant date of the share incentive plans, Performance Share Plan and

Deferred Bonus Plan, over their vesting period. Reserve for invested non-restricted equity

12 months net risk currency flow and hedges 2022

The objective of financial risk management is to protect the group from unfavourable changes in financial markets and thus help to secure profitability. The objectives and limits for financing activities are defined in the Group Treasury Policy approved by the Board of Directors. In financial risk management various financial instruments are used within the limits specified in the Group Treasury Policy. Only such instruments which market value and risk profile can be continuously and reliably monitored are used for this purpose. Financing services are provided to the group entities and financial risk management carried out by the central treasury department, Treasury and Risk Management. Foreign exchange risk As a consequence of the global nature of its business, UPM is exposed to risks associated with changes in exchange rates, primarily with respect to USD, GBP and UYU. Foreign exchange risk arises from contracted and expected commercial future payment flows (transaction exposure), changes in value of recognised assets and liabilities denominated in foreign currency and changes in the value of assets and liabilities in foreign subsidiaries (translation exposure). The objective of foreign exchange risk management is to limit the uncertainty created by changes in foreign exchange rates on the future value of cash flows earnings and in the group’s balance sheet. Changing exchange rates can also have indirect effects, such as change in relative competitiveness between currency regions. Transaction exposure The group hedges transaction exposure related to highly probable future commercial foreign currency cash flows on a rolling basis over the next 12-month period based on forecasts by the respective business areas. Transaction risk arises from the changes in currency rates of highly probable transactions, which are expected to take place in currencies other than the functional currency of the entity. The group’s policy is to hedge an average of 50% of its estimated net risk currency cash flow. Some highly probable cash flows have been hedged for longer than 12 months ahead while deviating from the risk neutral hedging level at the same time. At 31 December 2022, 51% (49%) of the forecast 12-month currency flow was hedged. The group enters into external forward contracts, which are designated at group level as hedges of foreign exchange risk of specific future foreign currency flows. Cash flow hedge accounting is applied when possible. If hedge accounting is not possible, fair value changes of the hedging instrument are recognised through profit and loss immediately. At the end of 2022, UPM’s estimated net risk currency flow for the next 12 months was EUR 2,291 million (1,886 million). The weighted hedging rate by currency against EUR were USD 1.05, UYU 46.18 and GBP 0.87. In addition to commercial foreign currency flow, the group has hedged risk currency flow related to investments. Cash flow or fair value hedge accounting is applied. At the end of 2022 the hedged net risk currency flow was EUR 141 million (EUR 360 million).

Reserve for invested non-restricted equity includes, under the Companies’ Act, the exercise value of shareholders’ investments in the company unless otherwise decided by the company. Translation reserve This reserve includes the foreign currency differences arising from the translation of foreign operations, and the effective result of transactions that hedge the group’s net investments in foreign operations. There were no reclassifications from the translation reserve to profit or loss during the period resulting from inefficiency of net investment hedges. Accounting policies Transaction costs directly relating to the issue of new shares or share options are recognised, net of tax, in equity as a reduction in the proceeds. Where any group company purchases the parent company’s shares (treasury shares), the consideration paid, including any directly attributable incremental costs (net of tax), is deducted from equity attributable to the owners of the parent company until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the owners of the parent company.

-300 0 300 600 900 1200 1500 1800

EURm

USD GBP

UYU Other

Hedges

Currency flow

12 months net risk currency flow and hedges 2021

-300 0 300 600 900 1200 1500 1800

EURm

USD GBP

UYU Other

Hedges

Currency flow

Hedging reserve

Translation exposure The group has several currency denominated assets and liabilities on its balance sheet such as foreign currency bonds, loans and deposits, group internal loans and cash in other currencies than functional currencies. UPM aims to fully hedge this balance sheet translation exposure, however, UPM might have unhedged balance sheet exposures within the limits set in group Treasury Policy. At 31 December 2022 the unhedged balance sheet exposures in net of interest-bearing assets and liabilities amounted to EUR 8 million (9 million). Hedge accounting is not applied and all fair value changes of hedging instruments are recognised through profit and loss immediately. The group has also accounts receivable and payable balances denominated in foreign currencies and UPM aims to fully hedge the net exposure in main currencies. The nominal values of the hedging instruments in net of accounts payable and receivable hedging were EUR 410 million (352 million). Hedge accounting is not applied and all fair value changes of hedging instruments are recognised through profit and loss immediately. UPM's net investments in foreign subsidiaries are also subject to foreign currency translation differences. The exchange rate differences arising from translation of foreign subsidiaries are accumulated as a separate component of equity in the translation reserve relate mainly to USD, CNY and GBP. Currency exposure arising from the net investment in foreign subsidiaries is generally not hedged. However, at 31 December 2022, part of the foreign exchange risk associated with the net investments was hedged, major ones in China and Uruguay, and net investment hedge accounting has been applied. The average

ELECTRICITY PURCHASE AND SALES HEDGES

CURRENCY CASH FLOW HEDGES

COST OF HEDGING

EURm

TAX

TOTAL

2022 Hedging reserve, at 1 January Amounts reclassified to profit and loss

-32 65 24 -15 42

-84

-1

22 -94

-96

401

4 1

376

Amounts reclassified to acquisition cost of a fixed assets Change in fair value of hedging instruments recognised in OCI

—

—

25

-1,131

-15 -11

228 155

-932 -627

Hedging reserve, at 31 December

-814

ELECTRICITY PURCHASE AND SALES HEDGES

CURRENCY CASH FLOW HEDGES

COST OF HEDGING

EURm

TAX

TOTAL

2021 Hedging reserve, at 1 January Amounts reclassified to profit and loss

57

-26 85

-2 -1

-1

28 63 -14

-5

-16

Amounts reclassified to acquisition cost of a fixed assets Change in fair value of hedging instruments recognised in OCI

-14 -70 -32

—

—

—

-143

2

38 22

-172

Hedging reserve, at 31 December

-84

-1

-96

204

205

UPM ANNUAL REPORT 2022

UPM ANNUAL REPORT 2022

UPM FINANCIAL REPORT 2022

204

UPM FINANCIAL REPORT 2022

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