UPM Annual Report 2023

ACCOUNTS FOR 2023

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

Unavailability of information systems as well as cybersecurity breaches UPM’s production and business operations depend on the availability of supporting information systems and network services. Unplanned interruptions in UPM's or a supplier's critical information system services, loss of critical, financial or personal data due to reasons beyond UPM’s or its suppliers' control, such as power cuts, software or telecommunication errors or other major disasters, such as fires or natural disasters, as well as user errors by UPM’s own personnel or suppliers, can potentially cause major damage to UPM’s businesses and disruptions to the continuity of operations. UPM’s or its suppliers' information systems may be exposed to various cybersecurity risks. Malicious cyber intrusion could cause leakage of sensitive information, violation of data privacy regulations, theft of intellectual property, production outages and damage to UPM’s reputation. Litigation and compliance UPM operates globally in a large number of jurisdictions and complex regulatory frameworks. UPM may from time to time be involved in litigation and other similar proceedings or it could become subject to various claims and actions based on various grounds. On a global scale, enforcement activities and jurisdictional reach regarding competition issues and anti-corruption have increased. Also, the recent development of Renewable Energy Sources Act (EEG) related lawsuits in Germany for alleged non-payment of EEG based surcharges may have an adverse impact on UPM, albeit UPM is not currently a party to any such lawsuits. Russia's war in Ukraine triggered many countries to impose several sanctions packages which may increase the risk of investigations, litigations or claims associated with alleged sanctions violations, or retaliatory litigation in Russia. The UPM Code of Conduct sets the standards of responsible behaviour and it covers topics relating to legal compliance and disclosure, anti-corruption, competition law, HR practices, human rights, responsible sourcing and environmental matters. UPM’s environmental performance and social responsibility play a significant role in UPM’s ability to operate and influence the long-term success of its businesses. UPM also measures and publishes information on its environmental, social and governance matters, for which there is an increasing risk of investigation or litigation from activist or other stakeholders on alleged misrepresentation. UPM has significant manufacturing operations or sourcing in several developing countries, some of which are perceived as highly corrupt or corrupt according to Transparency International. In these countries, there is an increased risk of corruption, for example in relation to interaction with government officials and in the use of intermediaries when applying for permits and licences requiring governmental approval. Breaches of applicable laws and regulations or corporate policies by UPM employees may lead to legal processes, sanctions and fines as well as reputational damages effecting UPM’s operations.

Industrial actions UPM is subject to risk of industrial actions, which could disrupt its business operations or the business operations of its stakeholders. Uncertainty may increase in the Finnish labour market amid the announcement of the Finnish Forest Industries Federation in fall 2020 to transfer collective bargaining to companies. For example, in the beginning of 2022, members of the Paperworkers’ Union, the Finnish Electrical Workers´ Union and the Trade Union Pro started strikes at UPM mills in Jämsänkoski, Kouvola, Lappeenranta, Pietarsaari, Rauma, Tampere and Valkeakoski, Finland. Any strike or other industrial action in UPM’s business operations or related sectors could have an effect on UPM’s business operations. For example, industrial actions in the transport sector or among other stakeholders important to UPM, may disrupt UPM’s operations. Additionally, public dissatisfaction with UPM’s labour-related decisions may, in extreme cases, lead to unanticipated boycotts or disruptions at its facilities or construction sites. A natural disaster, fire, accident or other calamity at UPM’s production facilities UPM operates a significant number of production facilities globally that are exposed to risks related to environment, fires, natural events, machinery breakdowns, site security and occupational health and safety risks. If UPM’s production facilities were to experience a major accident or were forced to shut down or curtail production due to such unforeseen events, such as a leak or spill due to malfunction or human error, this could cause major interruptions in UPM’s operations and result in significant costs in order to clean up and repair any potential damages to the production plant and the surrounding areas. Any failure to maintain high levels of safety management could also result in physical injury, sickness (including pandemics related infection outbreaks) or liability to UPM’s employees, contractors or third parties. These risks are managed through established management procedures, health and safety precautions and loss prevention programmes. UPM’s insurance programme provides coverage for insurable hazard risks, subject to insurance terms and conditions. Forests and plantations UPM’s plantations and forests may be affected by the impacts of climate change, which include more frequent and severe extreme weather conditions such as heavy rainfall, storms, floods and drought. Climate change is expected to have the biggest physical effect on UPM’s forest lands in Finland, where temperatures are expected to rise more significantly and rapidly compared with other countries where UPM owns forest. Although forest growth will likely accelerate, particularly in Finland, due to the longer growing season, extreme weather conditions will intensify, presenting new risks. The increase of droughts and forest fires are estimated to pose the most significant risks for UPM’s forests and plantations. Also, damages caused by insects and tree diseases are becoming increasingly common, which could have an effect on the value of UPM’s forest assets. Should these risks materialise, they could harm UPM’s forest and plantations resulting in production interruption and additional costs. Strategic partners UPM collaborates with many partners. For example, product development in the biofuels, bioenergy or biochemicals increases the importance of partnerships in the search for new products and businesses or higher efficiency. Partnerships may, however, create risks to UPM's profitability, for example, through changes occurring within the partner entity or changes in how the partnership operates. UPM is also subject to the risk that its strategic partners do not comply with UPM’s Code of Conduct with anti-corruption, competition law, HR practices, human rights, responsible sourcing and environmental matters.

Governmental protection and trade protection measures, amplified by Russia's war in Ukraine and the economic sanctions imposed as a response, could also have an effect on the price and availability of raw materials as countries may, for example, enact further export ban policies to protect forests or to bolster their domestic industries, which could have a material effect on the cost and availability of raw materials for UPM. It is also uncertain how the EU energy policies may affect the availability and costs of fibre and energy. Significant increases in the prices of UPM’s major inputs could increase UPM’s operating expenses. Supplier and subcontractor network and raw materials procurement UPM’s business operations depend on a large number of suppliers and contractors. The majority of UPM’s need of wood is covered by suppliers, and other production inputs, such as chemicals, fillers and recovered paper, are fully obtained from suppliers. Disruptions in the supply of key inputs or transportation services could have a significant effect on manufacturing operations. This could, for example, result in interruption or downscaling of production, change in the product mix or increased costs resulting from price increases for critical inputs or transportation services as well as shifts in the availability and price of wood. Due to Russia's war in Ukraine, the EU has imposed bans on wood exports and imports and transportation operations directly applying to sourcing of wood and other raw materials from Russia. Supplier consolidation could also limit the number of suppliers from which UPM would be able to source its production inputs and could materially affect the prices paid by UPM for these inputs. The UPM Supplier and Third Party Code defines the minimum level of performance that UPM requires from its suppliers and third-party intermediaries. UPM carries out supplier risk assessments on, for example, operational, financial, quality and responsibility perspectives. Based on the risk assessment, selected suppliers’ activities are evaluated in more detail through annual surveys, supplier audits and joint development plans. If any non-conformities are discovered, the supplier is required to take corrective measures, which UPM follows up on. Some contracts may also be discontinued due to the seriousness of the finding or insufficient corrective measures. Management and execution of large investment projects Investment projects in UPM’s businesses are often large and take one or more years to complete. Participation in large projects involves risks, such as cost overruns or delays, shortage of labour, financial distress of suppliers, or accidents as well as non-achievement of the economic targets set for the investment. Currently, UPM’s largest ongoing investment project is the construction of a new biochemicals refinery in Germany. This project involves the development of new business concepts and technologies. UPM is responsible for many projects in several of its countries of operation at any given time. All projects involve technical and operational risks, and projects require continuous operational planning, steering and supervision, quality control, input procurement, scheduling as well as resource and cost monitoring. Managing several projects requires that UPM has sufficient resources and efficient processes. Port congestion issues, transportation bottlenecks, accidents in transit, and rising logistics or construction costs, all of which could be resulting from external events or market conditions beyond the control of UPM, may have an effect on the execution or profitability of investment projects. UPM’s transformative biochemicals project in Germany is proceeding, but despite efforts, some changes to the detailed timeline of the project may occur due to events affecting project workers, suppliers or infrastructure.

Partnership arrangements may also be too rigid to enable timely changes required, for example, in connection with changes in the market conditions or the economy. UPM’s partners may have different targets with respect to the business of the partnerships. As UPM may not have sole control over strategic direction and operational output of these entities, its partners may have the right to make certain decisions on key business matters with which UPM does not agree. In some cases, strategic partners may choose not to continue partnerships that they have with UPM. Russia's war in Ukraine and the resulting adverse economic conditions may cause financial stress to a strategic partner and trigger unexpected negotiation or other processes causing delays or cost increases for UPM. Intellectual property rights of third parties Molecular bioproducts form one of UPM’s three strategic focus areas for growth. Initiatives within this strategic focus area are technology intensive and require increasing investments in such technologies either through internal development or through third party licences or technological partnerships. In addition to UPM’s own IPR portfolio, UPM licences certain technologies developed by third parties. Evaluating the rights related to the third party technologies UPM uses or intends to use is increasingly challenging. Licensing third party technology exposes UPM to such risks as the increase of overall licensing costs, loss of negotiation power, the validity of such licensing arrangements and potential infringement claims, which could restrict UPM’s ability to use certain technologies, prevent the delivery of UPM’s products and/or result in costly and time-consuming litigation. Risk related to IPR claims and disputes relating to technological partnerships have been assessed to increase. Building capabilities to growth areas The success of UPM’s business largely depends on the ability to build and retain the necessary new capabilities required for future growth. UPM is continuously developing its employee experience, leadership culture, evaluating its recruitment, compensation policies and career development opportunities and taking measures to attract and retain diversely skilled personnel and individuals with rare and pivotal specialist knowledge for current and future growth areas. Financial risks Financial risks are described in consolidated financial statements 2023.

CONSOLIDATED FINANCIAL STATEMENT NOTE

TYPE OF RISK

Credit risk

4.6 Working capital

Liquidity and refinancing risk

5.1 Capital management

Interest rate risk

6.1 Financial risk management 6.1 Financial risk management 6.1 Financial risk management

Foreign exchange risk Electricity price risk

Counterparty risk

6.2 Derivatives and hedge accounting

136

137

UPM ANNUAL REPORT 2023

UPM ANNUAL REPORT 2023

UPM FINANCIAL REPORT 2023

136

UPM FINANCIAL REPORT 2023

137