UPM-Biofore-Magazine-3-2016-EN

UPM’S STAKEHOLDER MAGAZINE 3/2016

RESPONSIBILITY BRINGS STABILITY

The strategic wisdom of ethical investment Investing in a sustainable future Focusing on human rights in business

As the leader in integrating the bio and forest industries, UPM takes responsibility for building a sustainable and healthy future for future generations. At the same time we recognize our responsibility to our employees, shareholders, customers, partners and other stakeholders. We must be able to prove every day that being profitable and increasing social value go hand in hand. This issue of Biofore discusses responsibility as an investment. Investors – as well as all other stakeholders – value responsibly operating companies that fuel positive environmental, economic and social change through business. These companies have the ability to create both shareowner value and social value in ways which are sustainable. In our main story (pages 10–13) UPM’s Chairman of the Board BjörnWahlroos states that a responsibly operating company manages risks generally better than others and will generate more stable shareholder returns in the long term. He also emphasizes the responsibility of the company to other stakeholders and society as a whole. Responsibility is the very core of UPM’s Biofore strategy. For us, responsible business means focusing not only on our own operations but on the whole value chain, and finding sustainable business solutions in active dialogue with our customers, suppliers and partners. Responsibility is a good investment

Responsible Fibre™ verified by UPM guarantees that the product meets the industry’s most demanding environmental and social responsibility criteria verified by a third party.

BIOFORE IS UPM ’ S GLOBAL STAKEHOLDER MAGAZINE

The sign of responsibility.

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Our responsibility criteria cover the whole lifecycle of a product from forestry and sourcing to sustainable production. They also cover the social responsibility aspects that are important for us. Explore and experience the world of Responsible Fibre™ at responsiblefibre.upm.com . You will see how every little choice can make a difference.

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UPM – The Biofore Company UPM leads the integration of b​io and forest industries into a new, sustainable and innovation-driven future.​ Our company consists of six business areas: UPM Biorefining, UPM Energy, UPM Raflatac, UPM Specialty Papers, UPM Paper ENA (Europe & North America) and UPM Plywood. Our products are made of responsibly sourced, renewable raw materials. They offer alternatives to replace non-renewable fossil-based materials. We develop new innovative and sustainable businesses. Biofuels, bio­ composites and biochemicals are based on our extensive know-how and strong position in the forest biomass sourcing and processing value chain. We live by our values – trust and be trusted, achieve together, renew with courage.

TWITTER @UPM News, www.twitter.com/ UPM News

UPM – The Biofore Company. www.upm.com

LINKEDIN www.linkedIn.com/ company/ UPM-Kymmene

Climate

YOUTUBE www.youtube.com/ upmdotcom

Responsibility is about values and commitment, but first and foremost, it is about actions. As always, actions speak louder than words.

Biodiversity

FACEBOOK www.facebook.com/ UPMGlobal

Water

Elisa Nilsson Vice President, Brand and Communications, UPM

Responsibility criteria

Social responsibility

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An increasing number of investors are looking to invest in responsible companies with open reporting principles.

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C ON T E N T S

10

32 Investors buy forest

03 EDITORIAL

– UPM guarantees steady timber demand and sustainable profits.

06 CONTENTS

“UPM has made balanced adjustments in a challenging environment,” says Björn Wahlroos, Chairman of the Board.

08 IN TIME

28 BIOCHEMICALS – NEW VALUE FROM WOOD

40 OTEPÄÄ RAMPS UP

UPM PLYWOOD PRODUCTION UPM’s modernized plywoodmill in Otepää, Estonia is set to double its production capacity this autumn. 43 WHAT’S BEHIND A WINE LABEL? Italian wine bottler Cielo e Terra and UPMRaflatac partner to

10 SHAREHOLDER VALUE ALWAYS COMES FIRST All strategic steps taken by UPM in recent years have served the interests of shareholders, affirms UPM’s Chairman of the Board BjörnWahlroos. 14 MEGATRENDS DRIVE PULP DEMAND Pulp is a versatile rawmaterial, and its demand is on a trajectory of constant growth, particularly in emerging markets. 19 WHY RESPONSIBLE INVESTMENT IS A WIN-WIN STRATEGY More andmore investors are investing in responsible businesses – and with very good reason. 22 FOCUSING ON HUMAN RIGHTS IN BUSINESS Business and human rights expert Anna Triponel shares insights on how the UNGuiding Principles have changed business over the last five years.

UPMBiochemicals leads the industry as a developer of wood-based chemicals.

EDITOR-IN-CHIEF Elisa Nilsson

EDITORIAL STAFF Heli Aalto, Sari Hörkkö,

14

Kristiina Jaaranen, Terhi Jokinen, Monica Krabbe, Anneli Kunnas, Johan Lindh, Sami Lundgren, Marjut Meronen, Nina Norjama, Sini Paloheimo, Aili Piironen, Annika Saari, Kaisa Vainikka, Päivi Vistala-Palonen.

30 CLEANER MARINE SHIPPING WITH UPM BIOVERNO

With the marine industry striving to drive down emissions, recent tests promise a bright future inmarine use for UPMBioVerno. 32 INVESTORS SEE FORESTS AS MORE THAN JUST TREES A growing number of local and international investors are taking an interest in Finnish forest estates – and wisely so. ‘Words Matter’ is a UPM-sponsored project that inspires vocational school students to improve their reading skills through rapmusic. 38 SUPPORTING TEACHER EDUCATION IN URUGUAY The UPMFoundation in Uruguay supports in-service training of teachers in Río Negro Department to update and strengthen their pedagogical skills. 35 RAPPING FOR LITERACY

understand and reduce environ­ mental impacts using lifecycle assessment.

Global demand for bleached pulp is predicted to grow 2.5% annually for the next ten years.

DESIGN Valve

PRINTING Erweko Oy

44 LUXURY IS NEVER OUT OF FASHION

COVER UPM Finesse Silk 200 g/m² PAGES UPM Finesse Silk 130 g/m² UPM-KYMMENE CORPORATION PO Box 380 FI-00101 Helsinki Finland Tel. +358 (0)204 15 111 www.upm.com www.upmbiofore.com

Inspiring looks, exquisite texture and a luxuriant finish: what works for fashion also makes a great fashion supplement – starting with a paper that oozes style.

22

46 WHY COMPLIANCE IS SMART BUSINESS

Operating responsibly brings a competitive edge in several ways.

Shift’s Anna Triponel helps businesses embed human rights issues in their corporate DNA.

48 INVESTING IN

A SUSTAINABLE FUTURE Investors learn how to integrate environmental, social and governance (ESG) issues into their portfolio decisions at the annual PRI in Person conference.

26 NUTRIENT RECYCLING FOR A HEALTHIER BALTIC SEA

UPM is employing novel approaches to minimize its impact on local water resources.

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I N T I M E

From Finnish woods to Chinese nurseries

DJSI LEADER FIVE TIMES IN A ROW UPM has been listed as the forest and paper industry leader in the Dow Jones Sustainability Europe Index (DJSI) for 2016–2017. This is the fifth time that UPM has retained its leadership position. In October, UPM was included on the CDP Climate A List, meaning the company received an “A” grade for its actions to mitigate climate change. This is the eighth year that UPM has received recognition from the CDP’s climate change program for its climate actions and transparent climate reporting.

Demand for Nordic timber is at an all-time high in the Chinese furniture industry, especially in the children’s furniture segment. “China is the third largest market for UPM Timber, and the furniture industry is our main end-use segment,” says Mikko Hyvärinen , Director of Sales and Supply Management. Finnish timber has a good reputation in China, and Finland is seen as a dependable business partner. “Nordic wood is perfect for children’s furniture, since it is 100% non-toxic, safe and long- lasting,” says Hyvärinen. Chinese furniture-makers appreciate the high quality and beautiful light shade of Nordic timber, which adds a touch of Scandinavia to Chinese nurseries. “UPM Timber is honoured to be involved in creating a safe and healthy environment for Chinese children to play, sleep and live in,” Hyvärinen adds.

LABEL EXPANSION IN POLAND UPM Raflatac is expanding its asset platform in Wroclaw, Poland. UPM Raflatac will strengthen its position by building a new coating line at the Wroclaw label stock factory. By installing a new coating line and related reel handling and slitting capacity additions, the company aims to meet increasing demand for self-adhesive label stock in Europe. The new line is planned to come on stream in the first half of 2018.

Old meets new in Helsinki’s market square

Plywood is the starring material in new designer market stalls that will rejuvenate Helsinki’s 200-year old Market Square. The design is based on a competition won by four Aalto University students. The prototype is a sturdy combination of plywood and canvas celebrating the simple beauty of Nordic design. The plywood was supplied by UPM. “The winning stall is original, yet connected to local tradition. The materials are surprisingly light and beautiful,” described the jury. The new stalls are set to grace the Market Square in summer 2017 when Finland celebrates 100 years of independence.

THE NAME SAYS IT ALL

Junction of innovators

You can now read Biofore Magazine and other interesting stories at www.upmbiofore.com.

UPM was looking to connect with innovators and find exciting new digital solutions for its supply chain at the

As of 1 October 2016, the UPM Paper Asia business area was renamed UPM Specialty Papers. The new name highlights the

Junction hackathon in Helsinki in November. Junction is Europe’s leading hackathon, bringing together top developers, designers and

entrepreneurs from across the world. UPM offered participants the challenge of creating digitalized solutions, services and data analytics utilizing supply chain data.

business area’s strategic focus on specialty papers and its global scope of operations.

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TEXT MATTI REMES   PHOTOGRAPHY TUOMAS UUSHEIMO, JANNE LEHTINEN

Shareholder value always comes first “All measures taken by UPM in recent years have been implemented with the best possible management of our shareholders’ assets in mind,” says Björn Wahlroos, Chairman of the Board of Directors, UPM.

B jörnWahlroos was elected as Chairman of the UPM’s Board of Directors in 2008. Even back then, the forest industry was by no means new territory to him: the prominent economic expert had become closely acquainted with the industry during his prior long career in banking. “It is nearly impossible for an investment banker operating in the Nordic region not to know the forest industry. I felt that it was the field of industry I was most familiar with and that it offered an interesting challenge,” states Wahlroos. Recent years have posedmore than enough challenges for the Board of Directors. Due to the rapidly changing business environment, the company has had to thoroughly review its future course. “UPMhas been able to make balanced adjustments to its capacity and ways of working in a very challenging environment.” Clear consensus on direction After eight years, what does Wahlroos regard as the most rewarding aspect of chairing UPM’s Board of Directors? “Collaborating with President & CEO Jussi Pesonen , by far. We come fromdifferent backgrounds, you see. Jussi is the best forest industry expert I know. I, in turn, may have been able to offer some help with financial and strategic matters, as well as insights and background related to Sweden.” According toWahlroos, the Board of Directors and the operative management share a clear consensus. All strategy work is based on the principles of increasing shareholder value and prioritizing shareholder views. “All strategic measures we have taken in recent years have been implemented with the best possible management of our shareholders’ assets inmind. There have been times when traditional industries have lost sight of this principle.”

Paper business in fighting form Wahlroos believes that the smart strategic choices made by UPM’s paper business in Europe and North America (ENA) – the company’s largest business area – have beenmost important from the shareholders’ perspective. “The demand for paper has been declining continuously in developed countries, so it’s really an issue of employing delay tactics. The companies with the best resources will be the most successful in this situation.” Wahlroos notes that UPM’s paper machines outperform the competition in terms of efficiency. Optimally located production capacity and well-planned operations have additionally helped the company to uphold high capacity utilization rates at its mills. “This has enabled us to maintain profitability even in a situation which has forcedmany of our competitors into a struggle for survival.” High operational efficiency and low fixed costs helped UPMPaper ENA to achieve a strong result in the third quarter. “We still need to continue our strict cost management in the future,” Wahlroos states. New growth through innovation DuringWahlroos’ term, UPMhas advanced its Biofore strategy, which pools the strengths of the bio and forest industries to build new growth and a sustainable, innovation-driven future. “The forest industry is often considered technologically stable and rather conservative, but ‘conservative’ is not a word that describes UPM.” Wahlroos offers UPM’s biofuels business as an example: the company has already initiated commercial production of a renewable wood-based diesel fuel. UPMalso develops wood- based biochemicals. The demand for these kinds of products is expected to grow significantly over the coming years. >>

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According toWahlroos, UPMhas learned frompast mistakes. The company will continue making investments, but the process will be smarter andmore selective. By way of example, he points to UPM’s substantial investments improving the efficiency of pulpmills and increasing production capacity in Finland and Uruguay. The investments that have already been realised or are currently ongoing will increase capacity by 500,000 tonnes, which corresponds to the capacity of one traditional pulpmill. “Our investments have been targeted very precisely. We have been able to increase production capacity significantly by making relatively small investments and by removing bottlenecks in our production.” Among its largest recent investments, earlier this year UPM started up a new special paper machine in China that has increased capacity by nearly 400,000 tonnes. In addition, UPM has announced that the company is assessing the possibility of building a new short-fibre pulpmill in Uruguay. Wahlroos states that UPM’s strong balance sheet provides a solid basis for planning these and other cautiously targeted investments. “There has probably never been a comparable case in the history of the forest industry where a company can take its time considering a two-billion-euro investment without having to worry about financing. UPM is in this fortunate position today.” Responsibility brings stability Wahlroos is optimistic about the current global economic outlook, which provides a positive cue for new investments. Even so, there are economic and political risks associated with this positive trend. “The global economy is expected to grow at an annual rate of 3–4 per cent in the next five to ten years. This growth is driven by China and India. Unfortunately, this casts Europe in the role of the ‘sick man’ of the global economy.” These days investors take a long-term viewwhen assessing companies and their chances of success. Wahlroos notes that a responsible business is usually more efficient at risk management and provides a more stable profit return for its shareholders in the long run. He regards it as important for UPM to promote responsible practices in a systematic manner, both in its own business and throughout the value chain. “For me, responsibility means that we are primarily responsible to those who have invested the most resources in our company. This means that our primary responsibility is to our shareholders and our secondary responsibility is to the financiers,” he states. “In addition, we are also responsible for ensuring that the company complies with all legal regulations and the highest standards of good practice in all its operations. This way, we are also shouldering our responsibility with respect to other stakeholders and society overall.” Wahlroos additionally emphasizes the importance of adhering to a responsible human resources policy. “In recent years, we have made a special point of promoting safety at work, for example. Our efforts have paid off. UPM’s occupational safety statistics have improved dramatically.” 

“We are at a fascinating technological turning point where we are seeing major progress in the use and refinement of wood fibres. This opens up new opportunities for UPM.” Firm foothold on pulp market The pulp business is an important growth area for UPM. The demand for pulp is continuing to grow, particularly in developing economies. Wahlroos points out that the investments recently made by UPM in its production facilities will help to strengthen the company’s foothold in the pulp market. The efficiency of UPM’s pulpmills and their use of the latest technology are among UPM’s core strengths, he notes. “Another extremely significant factor is choosing the right sales strategy for pulp: in other words, we must carefully define the pulp we want to sell to others and the pulp we intend to use in our own production.” Two thirds of the pulp produced by UPM is sold to customers around the world, mainly in Europe and China. The company’s own paper businesses purchase the remaining third. “The fundamental questions involved in the pulp business are extremely interesting, because market pulp is a truly global rawmaterial.” Shareholders want dividends In recent years, reducing the company debt and strengthening the balance sheet has been a key objective for UPM. Wahlroos is happy with the results of these efforts. In the third quarter of 2016, net debt was reduced to less than EUR 1.5 billion. In 2008, the total sum stood at EUR 4.3 billion. “The huge debt was beginning to pose a risk. Our corporate credit rating had fallen into the ‘junk’ category, and climbing back up has been a tough job. Our credit ratings still haven’t improved enough, but they will continue to get better.” Meanwhile, UPMhas increased the dividends paid to shareholders year by year. “UPM’s shareholders include many large foundations, funds and foreign investors. These shareholders expect a significant portion of the company’s increased capitalization value to be distributed as dividends. In such cases the wisest thing the company can do is to listen to them and apply a stable, relatively generous dividend policy.” Balancing dividends and investment Public debate and the media sometimes voice a call for companies to invest in production instead of distributing dividends. Wahlroos warns against such generalised demands, because the situation is different for every company and industry. In his opinion, UPMhas struck a good balance between distributing dividends andmaking investments. “The greatest curse in the history of the forest industry has been overinvestment. Time and again, companies have ruined their profitability and sometimes even undermined their financial standing by letting money burn a hole in their pocket andmaking unwise investments.”

Earlier this year UPM started up a new special paper machine in China that has increased capacity by nearly 400,000 tonnes.

“We are at a fascinating technological turning point where we are seeing lots of progress in the use and refinement

of wood fibres. This opens up new opportunities for UPM.”

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TEXT MATTI REMES   PHOTOGRAPHY TUOMAS UUSHEIMO, JANNE LEHTINEN

Pulp is a versatile raw material, and its demand is on a trajectory of constant growth, particularly in emerging markets. UPM has strengthened its foothold in these growing markets by investing in all its pulp mills.

UPM’s annual pulp production capacity will reach 3.7 million tonnes next year.

Anssi Klinga

I n recent years, UPMhas made major investments in order to streamline its pulp production and increase its production capacity in both Finland and Uruguay. As a result, the company’s annual pulp production capacity will reach 3.7 million tonnes next year, reports Anssi Klinga , Senior Vice President at UPMPulp. UPM’s overall pulp capacity has grown by more than 500,000 tonnes since 2013. Two thirds of this pulp is sold to customers around the world, mainly in Europe and China, with UPM’s own paper businesses purchasing approximately one third. “The long-term outlook for the global pulpmarket is excellent, as several megatrends will increase pulp demand in the long run. This is why our recent investments have been timely,” Klinga explains. Upgraded production capacity “We have carried out carefully targeted investments at all of our mills in order to increase production capacity as cost-efficiently as possible,” Klinga

Megatrends drive pulp demand

Continuous improvements are also being made to production processes. “We have focused on employee competence andmill maintenance and achieved excellent results in these areas. UPMpulp mills are extremely competitive by global comparison, and our recent improvements will make us even stronger,” Klinga says.

says. Upgrades have beenmade at the Pietarsaari, Kymi and Kaukas mills in Finland and the Fray Bentos mill in Uruguay. Last year a new pulp drying machine was completed at the Kymi mill. With this added drying capacity, the Kymi mill has been able to increase its annual pulp production by more than 170,000 tonnes. In July,

UPMannounced further production expansion at Kymi mill to be completed by the end of 2017. “Through these investments, we have successfully expanded our pulp production capacity by a total of 500,000 tonnes in recent years, which is equivalent to the entire annual output of a medium-sized pulpmill,” Klinga explains.

>>

Large modern assets allow growth through debottlenecking with high pay-off at low risk

PIETARSAARI pulp production expansion 70,000 t

FRAY BENTOS pulp production expansion 100,000 t

KYMI pulp production expansion 170,000 t

KAUKAS pulp mill efficiency improvement

KYMI pulp production expansion 170,000 t

2014

2015

2016

2017

Capacity increase since 2013 more than 500,000 tonnes with investments of ~EURm 350

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the demand for pulp-based products,” says Petri Jokinen , Senior Principal at PöyryManagement Consulting. A rapidly growing product group are tissue products such as toilet paper, facial tissue, hand towels and paper handkerchiefs. The demand for pulp-based board and other packaging materials is also growing. “The lifestyle of the increasingly wealthy middle class is becoming more westernized. Instead of buying products from traditional outdoor markets, consumers increasingly buy packaged products at supermarkets,” Jokinen describes. The rapid growth of e-commerce will also push demand for packaging materials, which are needed for the transport of ordered goods. Growing packaging needs will also increase demand for pulp-based labels and other specialty products. Consumption on the rise in China China is an increasingly important player in the global pulpmarket, already accounting for approximately one third of global pulp consumption. According to Jokinen, the recent deceleration of China’s economic growth will not have the same effect on pulp as it will on the demand for metals and other capital goods. “In China, the focus of the economy is shifting from investment to household consumption. This means that the demand for packaging and personal care products will grow.” Jokinen expects the Chinese pulp market to remain on a growth track for a long time. “It will take decades before the country’s standard of living is at the western level.” Jokinen adds that the demand for pulp is also growing in other emerging economies, including other densely populated countries in Asia. “Indonesia, Vietnam and India are at different stages of development, but the middle-class populations of all three countries are growing

and becoming more affluent. The expansion of the pulpmarket will continue for several decades in these countries.” Less recycled fibre, more pulp “Contrary to what might seem logical, reduced consumption of printing papers does not reduce the demand for pulp. In fact, the demand for pulp may even increase,” Klinga says. Printing papers are recycled after use, and the recycled fibre is used as rawmaterial for making products such as tissue and board. When the amount of available printing paper decreases, there will be less recycled fibre available, and hence more need for pulp. The decreased consumption of printing paper is thus perhaps surpris­ ingly beneficial for pulp demand, because only a small portion of pulp is used in the production of printing paper, whereas new pulp will be needed to make up for the decreased availability of recycled fibre. Pulp bales travel best UPM’s recent investments will further strengthen the company’s position as an international pulpmarket leader, says Klinga. “A growing volume of pulp is needed for products that are manufactured close to consumers. For instance, in the case of tissue, it is not profitable to transport the end product fromEurope to China, so local production plants do the manufacturing.” Pulp bales are the most cost- efficient solution for transporting raw material, even over long distances to markets that have no rawmaterials available locally for pulp production. The majority of the pulp that UPM sells in China arrives in bales from the Fray Bentos mill in Uruguay. China lacks sufficient rawmaterials to cover its growing pulp demand, whichmeans that pulp imports will continue in the future.

Recent investments will further strengthen UPM’s position as an international pulp market leader.

Increase in end use

THE COMPETI- TIVE EDGE OF ECOLOGICAL PULP Corporate responsibility is becoming increasingly important in the pulp market, states Anssi Klinga, Senior Vice President at UPMPulp. The raw material used for manufacturing UPMpulp is wood that complies with the principles of sustainable forestry. The company furthermore always knows the precise origin of all of the wood that it uses. “Responsibility starts with sustainable wood sourcing, but it is also critical to act responsibly along the entire production chain, from forests to pulpmills and pulpmills to customers. Corporate responsibility is also benchmarked by performance in areas such as work safety, employee competence, continuous improvement at mills, transparent reporting and dialogue with stake­ holders,” Klinga emphasizes.

Mt 500

Megatrends accelerate the demand for wood fibres

Decline in Graphic papers

400

Strong growth in Container­ boards (brown fibre) Healthy growth in other White Papers & Boards

300

High population growth areas in Asia, Africa and the Middle East enter the world of “disposable products” (tissue & hygiene products, food packaging)

+++

200

100

0

The ageing population is a driver of the growing hygiene segment (products for the elderly)

++

2010 2020 2030

Source: UPM

Pulp demand is expected grow in the future. The trend is supported by urbanization and the increasing purchasing power of consumers.

The urbanisation trend is going strong. Growing urban demand for food and other consumables is increasing the need for packaging products (carton board, container board, tissue, specialty)

+++

Market to grow 2.5% per year Consulting company Pöyry estimates that the global demand for bleached chemical market pulp will grow by approximately 2.5% per year for the next ten years. This trend is supported by global megatrends, first and foremost urbanization and the increasing purchasing power of consumers. “The disposable income of the middle class is growing, particularly in emerging markets. This will increase

Fast growing e-commerce requires increasing amounts of cost efficient and sustainable packaging solutions (carton board, container board, specialty)

++

Continued penetration of digital solutions is reducing demand for graphic papers demand and decreasing the availability of white recycled fibres

+

>>

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TEXT MATTI REMES   PHOTOGRAPHY UPM; COURTESY OF THE INTERVIEWEES

Due to global population growth and growing consumption, the planet’s limited resources need to be used more efficiently, states Petri Jokinen, Senior Principal at PöyryManagement Consulting. More renewable resources should be used instead of increasing made of sustainable rawmaterial is an ecologically sustainable solution compared to many other alternatives.” Klinga believes that the range of pulp-based products will expand in the future because pulp is such a versatile and renewable rawmaterial. Pulp- basedmaterials can be used to replace oil-based plastics, for instance. Pulp is also used in biomedical innovations such as UPM’s GrowDex® hydrogel, which is used for cell culturing in laboratory environments. consumption of non-renewable natural resources. “Pulp that is

Why responsible investment is a win-win strategy

More and more investors are investing in responsible businesses – and with very good reason. Ethical companies are usually more efficient at risk management and yield more stable long-term profits.

Tonnes of trust

The majority of UPM’s pulp customers are growth-seeking industry leaders with a need for ever-increasing volumes of rawmaterials. “Such customers want to do business with a reliable supplier who is able to deliver pulp of uniform quality to meet their growing needs,” says Anssi Klinga, Senior Vice President at UPMPulp. Advanced technical customer service is one of UPMPulp’s business cornerstones. “We collaborate with our customers to find solutions to help them optimize their production and improve their competitiveness. Our technical specialists know the challenges that paper manufacturers face and ensure that our customers are able to create the best possible products using our pulp.” Klinga emphasizes that customer expectations must be met every single day. “UPMPulp’s customer promise can be summarized in these words: ‘Tonnes of trust’.” Partnering expands portfolio One of UPM’s strengths is its extensive portfolio of pulp products. The range includes northern softwood pulp, birch pulp and eucalyptus pulp. “UPM’s position on the global pulpmarket has been strengthened by our collaboration with Canadian pulpmanufacturers Canfor Pulp,” says Klinga. The two companies entered into a sales andmarketing collaboration agreement in 2014. As a result, UPM’s pulp sales network represents Canfor Pulp products in Europe and China, while the Canadian company sells UPMpulp products in North America and Japan. The next step will be expanding the collaboration to South Korea, where both companies are already doing business. As of January 2017, Canfor’s sales company in Seoul will begin selling UPMpulp in South Korea. “This is a unique collaborationmodel that offers our two companies the opportunity to provide customers with a wide range of northern softwood pulps, birch and eucalyptus pulp andmechanical pulp. Our customers benefit from the wide range of technical customer service available via both our companies,” Klinga concludes. 

A ccording to a study conducted at Aalto University, responsible environmental and social practices and good governance have positive effects on a company’s long-termfinancial performance. “However, this is only true of companies whose corporate sustainability strategy is put into action rather than just remaining at the

Pulp-based materials can be used to replace oil-based plastics.

level of empty words,” says Hanna Silvola , Assistant Professor at the Aalto University School of Business. According to Silvola, the benefits apply particularly to companies that are industry frontrunners in sustainability. The rewards of doing the right thing Companies that operate responsibly can benefit inmany different ways. For starters, it fosters a

positive image that generates further market interest in the company’s products and services, thus providing a competitive advantage. The corporate executives interviewed by Silvola’s research group also stated that responsible companies find it easier to secure funding. “When a company openly discloses information on its operations and risks, the cost of capital is lower.” Silvola points out that responsibility initiatives are most profitable when incorporated into the company’s operative management, using score cards and rewards, for example. Setting clear objectives andmeasurement of the results is essential. Hanna Silvola

>>

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PERFORMANCE OF S&P 500 VS. S&P 500 ESG

companies in which NBIM invests. “As a large, long-term investor, we usually have good access to senior management and specialists in the companies that we invest in. We let the companies knowwhat we expect from them and encourage them to show openness in their public disclosure and communication.” Skaar is happy with the rising trend of disclosure of ‘non-financials ’ such as emission figures. “Comprehensive non-financial information is important to us, as it helps us understand the effects good governance and environmental and social issues may have on the risks and profits related to our investments. We therefore encourage companies to disclose this informationmore extensively.” Skaar believes things are moving in the right direction. An increasing number of companies recognize that corporate responsibility helps them put their values and goals into action andmeet stakeholder expectations. A good example of the growing interest in sustainability is the UN’s voluntary Global Compact initiative, whose member companies commit to responsible business practices in areas such as human rights, working conditions, the environment and anti- corruption. In the last 15 years, the number of companies participating in the Global Compact has grown from a couple of dozen to more than 8,000. UPM joined the Global Compact in 2003. In January, the UN invited UPM to join Global Compact LEAD, which consists of 50 of the most sustainably advanced companies across all geographical regions and industry sectors. UPM is the first forest industry company and also the first Finnish company ever to receive such an invitation.  UN Global Compact points the way

world’s biggest investors, is regarded as a frontrunner in responsible investment. NBIM controls the Norwegian Government Pension Fund, which is financially backed by Norwegian oil profits. At the end of August, the market value of the NBIM’s portfolio was approximately EUR 797 billion. “Responsible investment is an integrated part of our investment process. We are a long-term fund with investments inmore than 9,000 companies,” says Marthe Skaar , NBIM’s Manager of communications and external relations. Under its current mandate, the fund can invest 60% in equities, 35–40% in fixed-income securities and up to 5% in real estate globally outside Norway. “As a large investor, NBIMalso wants to contribute to the develop­ ment of international principles and industry standards related to corporate responsibility,” adds Skaar. Steering sustainability Climate change and children’s rights have been NBIM’s focus areas for the last decade. NBIMassesses corporate disclosures on these issues on an annual basis. “We see these areas as important pillars in well-run companies within a long-termhorizon,” Skaar points out. The third focus area is sustainable water management. In 2015, NBIM published a revised version of its NBIM Investor Expectations: Water Management guide. The purpose of the guide is to express howNBIMexpects companies to manage the challenges and opportunities related to water resources. UPMwas one of the companies consulted by NBIM for input and discussions during the drafting of the guide, as UPM ranks among the top performers in NBIM’s framework assessing water disclosure in corporate reporting.

S&P 500 ESG INDEX TR

400

300

200

Marthe Skaar

S&P 500 INDEX TR

INDEX

100

“We see climate change, children’s rights and sustainable water management as important pillars in well-run companies within a long-term horizon,” says Marthe Skaar.

0

3/09

9/11

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Sustainability pays off: Integrating financially material ESG information into investment decisions can lead to outperformance, as depicted in the above chart. Since 2009, the S&P 500 ESG index, which uses a weighting scheme based on an ESG Factor Score, has outperformed the S&P 500 in a back test.

THE GROWTH OF THE UN GLOBAL COMPACT Number of business participants 2000–2015.

“Responsibility targets should be as simple as possible, going all the way down to the level of individual employees. In energy saving initiatives, for example, clear numerical targets can be set for electricity and fuel consumption.” Smart risk management International studies confirm that an increasing number of investors are looking to invest in responsible companies with open reporting principles. These companies are considered a safer investment with greater promise of yielding steady, long-termprofits. Risk management is in fact the key motive for many responsible investors. Investors also believe that responsible companies keep up with the times and are able to successfully tap into ethically conscious market trends. A good example of this is new products and services that help fight climate change. Norges Bank Investment Management (NBIM), one of the

NBIM is one of UPM’s shareholders. According to Skaar, deforestation is one of the risk factors to which NBIM pays particular attention. “When we investigate possible investment choices, we focus on areas such as sustainable forestry practices and certification schemes related to paper production.” Active ownership In some cases, NBIMdecides to divest if a company’s long-term risks look too high. Last year, NBIMdivested its stake in 73 companies following an assessment of environmental and social risk factors. Skaar emphasizes, however, that active ownership is the most important way for NBIM to influence the companies in which it invests. This starts with voting and contributing statements at annual general meetings. Skaar reveals that NBIMparticipated inmore than 3,500 annual general meetings in 2015. She also emphasizes the importance of continuous dialogue with the

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TEXT VESA PUOSKARI   PHOTOGRAPHY JANNE LEHTINEN, SUVI-TUULI KANKAANPÄÄ, UPM; COURTESY OF THE INTERVIEWEE

FOCUSING ON HUMAN RIGHTS IN BUSINESS U PMand the IlmarinenMutual Pension Insurance Company invited Anna Triponel to Helsinki in September to give a comprehensive presentation on human rights in business. “UPM’s aim for the event was to increase understanding of human rights within business in order to establish a more comprehensive dialogue on the subject with stakeholders and investors,” says Nina Norjama , Director of Responsibility Development at UPM. The conversation concentrated on themes such as the key drivers for respecting human rights and related international legislation, as well as the recognition and assessment of human rights risks in business and supply chains. UPMpresented a case on responsible sourcing practices and supplier audits, and Ilmarinen gave an overview of its policy on human rights due diligence concerning the companies in which it chooses to invest. “Nowadays, it’s difficult for companies to turn a blind eye to human rights issues due to various risks that could have a significant impact on their business,” says Triponel, a project associate from Shift, the leading centre of expertise on the UNGuiding Principles. “Expenses are often difficult to quantify, but once a crisis hits, companies will regret not paying attention to human rights from the outset,” she adds. There is a growing tendency for governments, international financial bodies and the EU to integrate human rights agendas into their regulations. “For example, theModern Slavery Act impacts all companies over a certain size that conduct business in the United Kingdom. Furthermore, OECD countries are setting up national contact points to address allegations of human rights abuses.” Pressure is also coming from inside companies, as employees’ values are drivers for respecting human rights. Specifically,

Business and human rights expert Anna Triponel shares insights on how the UN Guiding Principles have changed business over the last five years.

there are more andmore millennials who want to do the right thing and work for responsible companies. Embedded in corporate DNA “Through the UNGuiding Principles, companies are thinking about their responsibilities and the kind of practical measures they can put into place to respect the human rights of all people affected by their business,” says Triponel. ‘Embedding’ is the key word here, she adds. Businesses must create the right environment and take active measures to ensure that a policy can be effective. “Youmight have a policy commitment on paper, but that doesn’t mean a thing if it’s not embedded. Companies have to take practical measures so that human rights become part of their culture and DNA,” Triponel explains. “This can relate to things like contractual provisions, training or performance incentives for workers. There are many different measures that together signify commitment to respecting human rights in reality.” Giving people a voice Workers and other potentially impacted stakeholders play a key role in helping companies identify where their impacts may be, and what they should be doing about them. “Companies are increasingly setting upmechanisms to engage people on the ground. For instance, this might involve engaging specific NGOs, workers and trade unions or creating effective channels to hear about people’s concerns and complaints,” Triponel says. “Prevention andmitigation efforts are focused on attempting to stop potential impacts before they happen, or to reduce their severity as much as possible. This is essentially risk management with the lens focused on risks to people, to avoid harm to people,” she emphasizes.

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Rights of protection for the child

Right to health

Examples of internationally recognized human rights Source: Modified version of original Shift diagram

Right to education

UPM is committed to full compliance with the United Nations Universal Declaration of Human Rights. This includes rights such as freedom of thought, opinion, expression, religion and the right to assemble peacefully, as well as the right to freedom from any discrimination based on race, age, nationality, wellbeing of its employees. It aims to empower and engage employees at all levels of the organization through responsible leadership. UPM endeavours to promote the observance of human rights as defined by the UN both in its own operations and those of its stakeholders. The use of forced or child labour is not tolerated under any circumstances. It is up to everyone to make their workplace inspiring, diverse and inclusive. All employees are required to do their utmost to ensure a safe, healthy workplace for everyone working at UPM. Employees are additionally encouraged to take an active role in their personal and professional development and growth to ensure UPM’s future business success. UPM RESPECTS PEOPLE AND HUMAN RIGHTS gender or sexual orientation. UPM promotes the health and

Rights to freedom of thought, conscience and religion

Right to form and join trade unions and the right to strike

Rights to liberty and security of the person

Right to freedom of association

Right to work

Right to an adequate standard of living

Right to enjoy just and favourable conditions of work

Right to equality before the law, equal protection of the law, and rights of non-discrimination

Tiina Landau

Rights of protection of the family and the right to marry

Right to privacy

explains Tiina Landau , Senior Advisor for Responsible Investments at Ilmarinen. “We expect companies to comply not only with national legislation but also with the principles of the UNGlobal Compact, including international labour and human rights, anti-corruption and freedom of association,” she explains. “In our analysis we also look at issues such as excessive working hours, poor wages andmistreatment of migrant workers.” Active ownership About a year ago Ilmarinen adopted its own sustainability rating system. “Currently we have sustainability ratings for over 3,000 companies. From the system, our portfolio managers immediately see the sustainability risks related to those companies. Our rating systemhas four categories: There are some 600 companies in the two lowest categories,” says Landau. “If we suspect that a company is violating regulations and we know themwell, we can then have a direct conversation with the company. Another option is to contact them through our service provider together with a larger investor group to find out

whether we need to react to the issue.” The primary objective of active ownership is for companies to pursue a responsible course of action. “Selling ownership and blacklisting is the last resort, and only used if engagement with the company does not lead to the preferred outcome,” adds Landau. Complying with international norms The most serious cases are companies that have systematically violated norms or caused significant damage through their operations. “Violations are easier to confirm if companies have caused themdirectly with their own actions. Finding evidence that a company is responsible for the wrongdoing of suppliers is more difficult,” notes Landau. “If discussions with a company result in an engagement process, our goal is to ensure that the undesirable activity ends and that similar violations are not repeated in the future,” she adds. “Responsibility requirements have become much tougher lately. It’s no longer enough for companies just to follow local rules – they have to comply with international norms as well.” 

Rights of minorities

“It is all about having channels for workers and community members to express their concerns about working conditions and other company impacts. They mustn’t live in fear of raising their voice. That really is at the heart of all of this.” Blind spots in audits Supplier audits play a role, but audits alone are an insufficient method of knowing exactly what is going on. “Many recent factory collapses or cases of modern slavery have happened in factories that had been audited previously,” notes Triponel. “We are moving towards a new system of audits that is less of a compliance tick-box approach andmore a way of looking at how to work with business partners to develop their human rights risk management processes.” Actions with different stakeholders, including peer companies and governmental authorities, can also play an important role in tackling the root causes of systemic human rights issues facing companies. Triponel admits that there is still a lack of visibility inmany companies’ supply chains, whether concerning migrant flows, sub-contracting of labour or poor environmental standards that then negatively impact on people. “There is still a lot of work to be done, but it is encouraging to see the level of uptake of the UNGuiding Principles by companies.”

THE STRATEGIC SIDE OF ETHICAL INVESTMENT Why is sustainability becoming strategically important for institutional investors? Ilmarinen Mutual Pension Insurance Company explains its sustainability rating system.

Beyond just looking for a reliable return on investment, Finnish pension company Ilmarinen also takes into consideration environmental, social and governance (ESG) issues when making investment decisions. “We have three sustainability principles guiding our investments. Our key values are in compliance with international norms, active ownership and integration of sustainability analysis into investment decisions,”

Source: UPM Code of Conduct

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TEXT MATTI REMES   PHOTOGRAPHY TUOMAS UUSHEIMO

A good example is offered by the UPMRauma mill, where efficient collaboration in effluent treatment has significantly reduced the amount of nutrients ending up in the Baltic Sea. Since 2002, the mill has been co-treating both its own and the city’s effluents. According to Päivi Rissanen , Director, Environment & Responsibility, UPMPaper ENA (Europe &North America), the different types of effluent balance each other out very well in biological treatment. “The city’s effluents have surplus nutrients that need to be removed during the treatment process, whereas forest industry effluents are lacking in nutrients and need to be enriched in order to remove the organic load,” Rissanen says. By co-treating the two effluent types, virgin nutrients no longer need to be added to the process. Other recycled nutrients can be used if needed.

NUTRIENT RECYCLING for a healthier Baltic Sea

Nearly 100% of nutrients recovered

Committed to a cleaner Baltic Sea Rissanen describes nutrient recycling as a good example of the circular economy, where natural resources are recycled and reused as many times as possible. “For example, phosphorus is an exhaustible resource that will eventually run out. The Rauma mill’s co-treatment model shows that it’s possible to use recycled nutrients in new applications at other production facilities.” UPM is currently identifying other possible sources of similar nutrients near its other mills. Possible options would be the sidestreams and effluents from other industries or biogas plants. UPM’s target is to start using 100% recycled nutrients in all of its effluent treatment plants by 2030. This target is written into UPM’s commitment to the Baltic Sea Action

Group (BSAG), which promotes the restoration of the Baltic Sea’s ecological balance. One of the BSAG’s main tools is to secure commitments from companies and organizations pledging concrete actions to improve the ecological status of the Baltic Sea. UPM is a long-termdonator and supporter of the BSAG. Responsible water management is also included in UPM’s Biofore Share and Care programme, which fosters collaborative initiatives with partners in areas that support UPM’s responsibility targets. “We want to highlight the significance of water resources and sustainable water management all around the world,” Rissanen emphasizes. 

Advanced nutrient recovery and recycling practices have directly reduced pollution of local water resources. “Nearly 100% of the nitrogen and phosphorus in the city’s effluents can be reused at the co-treatment plant, so they no longer contribute to the eutrophication of the sea ,” notes Rissanen. The waste heat derived from the effluents is used to dry out sludge from the treatment plant, which is in turn used in energy and Rauma city’s district heating production. The ash generated in the process is reused in landscaping applications. Rissanen points out that co-treatment brings welcome cost savings. The City of Rauma would otherwise have had to make further investments in nitrogen removal at its own effluent treatment plant.

In line with its sustainable water management principles, UPM is employing novel approaches to minimize its impact on local water resources.

UPM Rauma Mill’s efficient collaboration in effluent treatment has significantly reduced the amount of nutrients ending up in the Baltic Sea.

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