UPM Annual Report 2022

BEYOND FOSSILS

UPM

BUSINESSES

RESPONSIBILITY

GOVERNANCE

ACCOUNTS FOR 2022

RISKS AND OPPORTUNITIES The operating environment exposes UPM to a number of risks and opportunities. Many of them arise from general political and economic activity and global megatrends.

EXECUTION OF STRATEGIC INVESTMENT PROJECTS

INPUT PRICE FLUCTUATIONS ON THE MAIN RAW MATERIALS AND SERVICES

The main production inputs required in the manufacturing of our products are wood, fibre, chemicals, energy and water. The prices for many of these inputs have been volatile in recent years and are expected to remain volatile for the foreseeable future. Russia’s war in Ukraine, governmental protection, geoeconomic rivalry, climate change, environmental policies and COVID-19 related governmental actions or restrictions, could continue to cause further uncertainty around the prices and availability of these inputs as well as logistics services. Management: Continuously improving resource efficiency and supply chain optimisation and diversification. New technologies. Long-term supply contracts and relying on alternative suppliers. Selected ownership of forest land and long-term forest management contracts. Opportunity: Circular economy, continuous improvement in resource efficiency and supply resilience to withstand price fluctuations offer competitive advantage.

We invest in selective strategic projects to enable profitable growth. Investment pro jects are often large and may take several years to complete. They may also involve strategic, technical and operational risks. Our large pulp mill project in Uruguay consists of several subprojects. The biochemical refinery project in Germany involves new technology and opens new markets for us. The OL3 power plant project may impact energy costs or the fair value of our energy shareholdings. The COVID-19 pandemic and the required additional health and safety measures, Russia’s war in Ukraine as well as bottlenecks in the global logistics and supply chains have added new challenges to large investment projects. Management: Stringent and continuous operational planning, steering and supervision, quality control, input procurement, scheduling as well as resource and cost monitoring. Environmental, health, safety and social impact assessments and protocols. Stakeholder engagement. Opportunity: Carefully selected and implemented growth projects improve our earnings and returns and change the positioning of the company.

Risks in the report of Board of Directors on page 132 Sensitivity to carbon pricing is presented on page 140 Main earnings sensitivities are presented on page 173

UPM’s cost structure is presented on page 174 Main currency exposures are presented on page 205

CYCLICAL AND COMPETITIVE BUSINESS ENVIRONMENT

CLIMATE CHANGE

The transition to a low-carbon economy can cause policy changes and shifts in market preferences, standards, and technologies, which in turn may result in changes to cost structures or the commercial opportunities of biomass and change the competitiveness of products, raw materials, industries, and countries. The physical impacts of climate change include more frequent and severe extreme weather conditions, which can increase droughts, floods and forest fires and cause uncertainties in business operations. Damage caused by insects and tree diseases can become increasingly common. Management: Long-term targets and science-based measures to mitigate global warming through sustainable forestry, emissions reductions and innovating novel products. Enhancing biodiversity. Opportunity: Transition opportunities include those driven by resource efficiency and the development of new technologies, emission-free electricity, products and services that could bring new markets, customers, sources of funding and competitive advantage for us. Longer forest growing season in northern hemisphere.

UPM’s current product offering competes in markets where there are competing alternatives for customers and where the shifts in supply and demand continuously influence prices. Changes in production capacity, supply chain shifts, new product or raw material development, and competitor and consumer behaviour may impact the price levels for our products and cause demand fluctuations. Rapid acceleration in digitalisation and e-commerce may expedite the decline in demand for graphic papers and simultaneously increase demand for sustainable packaging products. Management: Industry-leading balance sheet. Continuous improvement in competitiveness, resource efficiency and customer offering. Responsible operations. Business portfolio development. Opportunity: Growing need and consumer preference for renewable and recyclable solutions create business opportunities and drive demand growth.

INFORMATION TECHNOLOGY AVAILABILITY AND INCREASING CYBERCRIME ACTIVITY

OPERATIONAL HAZARDS, HEALTH AND SAFETY ISSUES AND BUSINESS INTERRUPTION

Our business operations depend on the availability of supporting information systems and network services. Unplanned interruptions in critical information system services can cause disruptions to the continuity of operations. The information systems may be exposed to a cyber-intrusion that could cause leakage of sensitive information, violation of data privacy regulations, theft of intellectual property, production outages or damage to reputation. Management: We systematically maintain and further develop our measures for cybersecurity protection. Opportunity: Sophisticated IT systems enable efficient operations and optimised performance, as well as new customer services and data security.

Our operations are exposed to risks arising from the environment, fires, natural events, machinery breakdowns, site security and occupational health and safety. A major incident at a UPM site or at a critical part of the supply chain could cause a shutdown or curtail production. Any failure to maintain high levels of safety management could also result in physical injury, sickness or liability to employees, contractors or third parties. Management: We systematically maintain and further develop our management, safety, security and loss prevention programmes as well as insurance protection and business continuity. Development of process safety. Opportunity: Industry-leading environmental performance provides competitive advantage. Health and safety performance strengthens engagement, efficiency and productivity.

GEOPOLITICAL AND ECONOMIC UNCERTAINTY

CHANGES IN POLICIES, LEGISLATION AND

STAKEHOLDER EXPECTATIONS

FINANCIAL RISKS

The recent global increase of crises may turn the focus of nations inwards and deteriorate international co-operation in trade or science critical to climate change mitigation or dealing with health crises. Management and opportunity: Continuously engaging with universities, international co-operation, and public affairs and advocacy. Growing public debt levels, while enabling fiscal support for the pandemic, the war in Ukraine, and the energy and food crisis, may not be sustainable under tighter economic conditions and a threat of a sovereign debt crisis may result. Management and opportunity: Strong balance sheet. Continuously improving operating efficiency and diversification of sourcing and sales channels. Financial risks include foreign exchange and interest rate fluctuations, challenges in refinancing, counterparty or credit risks or changes in taxes. Changes to the monetary policies of major central banks may significantly impact interest rates and consequently various currencies that directly or indirectly affect UPM. Our foreign exchange rate risk primarily relates to the US dollar, British pound sterling and Japanese yen. Management: Continuous hedging of net currency exposure. Hedging the balance sheet. Continuous improvement in competitiveness. Disciplined planning and selection of investments. Business portfolio development. Opportunity: Diverse business portfolio and geographical presence, focus on competitiveness and strong balance sheet may present strategic opportunities in a changing currency environment.

Russia’s war in Ukraine and the resulting economic sanctions, soaring inflation and interest rates, energy crisis in Europe, geoeconomic rivalry between the US and China, as well as political uncertainties in several countries continue to cause uncertainty in trade policies, economic growth, rule of law and challenge competitiveness and predictability for companies with international value chains and operations in several countries. The testing relationships between businesses, governments and society, and the rapid COVID policy change in China may stress the economic and political environment and cause local challenges to our operations or influence demand or input costs for our products. Management: Monitoring through international trade associations. Compliance. Continuous improvement in competitiveness. Disciplined planning and selection of investments. Business portfolio development. Opportunity: Diverse business portfolio, geographical presence and responsible business practices may present opportunities for supply chain optimisation or strategic opportunities (incl. M&A) in an economic downturn.

The rising concern of the cost of living crisis and the strain on natural ecosystems have intensified expectations for companies to deliver economic, social and environmental benefits and complement the actions of governments. Changes in regulation, taxation or subsidies could have an effect on our performance, competitiveness and the costs and availability of raw materials. Unpredictable and rapid changes in EU policies or local legislation may occur as a response to the war in Ukraine. Environmental regulations may continue to become more stringent. As policies, legislation or stakeholder expectations, or the application of them, change, additional costs in complying with more stringent requirements may be imposed on us. Management: Responsible operations in the value chain enhance the ability to operate and influence long-term business success, including environmental management systems, sustainable forestry and compliance. Opportunity: Creating value for society, as a company and through our renewable and responsible solutions, is an integral part of our strategy. The bioeconomy offers new opportunities for value creation and business growth.

EMERGING RISKS

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UPM ANNUAL REPORT 2022

UPM ANNUAL REPORT 2022