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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.

Cyclical and competitive business environment

Climate change

Geopolitical and economic uncertainty

Changes in policies, legislation and stakeholder expectations

Execution of strategic investment projects

Input price fluctuations on the main raw materials and services

Information technology availability and increasing cybercrime activity

Operational hazards, health and safety issues and business interruption

Financial risks

Emerging risks

Cyclical and competitive business environment

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 main inputs, and cause demand fluctuations. Rapid acceleration in digitalisation and e-commerce may expedite the decline in demand for
communication 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.

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 or damage UPM's or suppliers' production assets. 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, CO2 -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.

Geopolitical and economic uncertainty

Russia’s war in Ukraine, the conflict in Gaza, the continuing high interest rate environment, energy price volatility in Europe, rivalry between the US and China, policies of the new US presidential administration, as well as political uncertainties in several countries continue to cause uncertainty in trade policies, economic growth and the 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 growing international focus on military conflicts, hybrid activities and a protectionist approach to trade may stress the economic and political environment and cause local challenges to our operations or influence demand, sales prices or input costs for our products.

Management: Monitoring through international trade associations. Compliance. Continuous improvement in competitiveness. Continuous monitoring of geopolitical landscape. 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.

Changes in policies, legislation and stakeholder expectations

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 e.g. US or EU policies or local legislation may occur. 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 or fines for non-compliance 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.

Execution of strategic investment projects

We invest in selective strategic projects to enable profitable growth. Investment projects are often large and may take several years to complete. They may also involve strategic, technical and operational risks. Our biochemical refinery project in Germany involves new technology and opens new markets for us. The recent high inflation and interest rate environment, price uncertainty of construction materials, and availability of skilled labour 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.

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. Ongoing military conflicts, governmental protection, geoeconomic rivalry, climate change, supply chain disruptions, environmental policies and other 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.

Information technology availability and increasing cybercrime activity

Our business operations depend on the availability of supporting information systems and network services. Unplanned interruptions in critical information system services can disrupt the continuity of operations. Information systems may be exposed to cyber-intrusions that could result in the leakage of sensitive information, violation of data privacy regulations, theft of intellectual property, AI-generated misinformation or disinformation, production outages or damage to reputation.

Management: Information security governance, roles, and responsibilities are defined as a part of the UPM Digital Safety Rules approved by the Group Executive Team. The UPM Information Security Management System, approved by the IT Management team, further defines related processes and practices to ensure the integrity and protection of our systems, services, and data.

Every individual involved in UPM operations (employees, suppliers, customers) plays a role in cybersecurity protection. Trainings ensure up-to-date knowledge to understand risks, identify threats, and report deviations
We systematically maintain and continuously develop measures for cybersecurity protection. We perform audits and assessments of our IT infrastructure, systems and services, and we actively monitor and respond to threats and vulnerabilities
Cybersecurity is incorporated into our business continuity plans as a part of our risk management processes
Our cybersecurity requirements extend to our business partners and suppliers

Opportunity: Sophisticated IT systems enable efficient operations, optimized performance, new customer services and data security.

Operational hazards, health and safety issues and business interruption

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 and cause business interruption.

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.

Financial risks

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.

Emerging risks

Artificial Intelligent (AI) -generated misinformation, disinformation or other adverse effects of AI technologies could erode trust of democratic processes, deepen polarised views and increase sophisticated cybercrime events. Such events could lead to e.g. erroneous deliveries, non-payments of delivered products or high-value decisions based on falsified information and documents.

Management and opportunity: Strong balance sheet. Maintaining and developing cybersecurity protection. Ensuring AI governance to unlock advantages of AI. Biodiversity refers to the diversity and variation of species and ecosystems on our planet. According to the UN, and despite ongoing efforts, biodiversity is deteriorating worldwide. Our operations are widely linked to biodiversity, and most significant impacts on biodiversity arise from wood sourcing activities. Deterioration of biodiversity could lead to slower forest growth which could impact the availability and increase costs of wood for UPM in the long term. Biodiversity loss arising from wood sourcing could lead to claims against UPM or restrictions to wood use.

Management and opportunity: Global 2030 Forest Action Programme combines measures on climate, biodiversity, soil, water and social contribution. Biodiversity is instrumental in maintaining healthy forest growth.