FINANCIAL REPORT 2020 

Report of the Board of Directors

UPM introduction and business model

UPM leads the forest-based bioindustry into a sustainable and innovation-driven future across six business areas: UPM Biorefining, UPM Energy, UPM Raflatac, UPM Specialty Papers, UPM Communication Papers and UPM Plywood. These business areas are competitive, with strong market positions.

UPM provides sustainable and safe solutions to the growing global consumer demand. Products are made from renewable materials and are recyclable.

UPM group creates value to its stakeholders by operating separate businesses with a focus on:

•Competitive and sustainable wood sourcing, forestry and plantation operations

•Value adding, efficient and responsible global functions

•Continuous improvement (Smart) programmes

•Technology and intellectual property rights

•A global platform to build on

•Disciplined and effective capital allocation

•Compliance with applicable laws and regulations, UPM Code of Conduct and corporate policies

Clear roles and responsibilities

Each business area is responsible for executing its own strategy and achieving targets. Group direction and support from global functions enable the businesses to capture benefits from UPM’s brand, scale and integration, while navigating the complex operating environment. Capital allocation decisions take place at the group level.

Corporate responsibility is an integral part of all of our operations and a source of competitive advantage. UPM is committed to continuous improvement in financial, social and environmental performance. UPM promotes responsible practices throughout the value chain and is active in finding sustainable solutions, in co-operation with its customers, suppliers and partners.

Market environment in 2020

The COVID-19 pandemic and the related containment measures led to significant uncertainty, a sharp decline in global output and a severe global recession. Global real GDP growth is projected at -4.0% in 2020. The effects of the pandemic varied across industry sectors and caused significant fluctuations in consumer spending. Recovery in China in the second half of the year was robust but at the same time many countries were forced to slow reopening processes, while some even had to reinstate lockdowns.

The pandemic highlighted the urgent need for health and economic policy action. The global trade tensions between major economic regions such as the US and China continued with lower focus in 2020 and Brexit plans remained uncertain throughout the year. The UK-EU Free Trade Agreement was announced just before the UK’s year-long transition out of the EU ended at the end of 2020.

In Europe, economic growth is projected at around -6.7% in 2020. The containment measures to prevent the spread of the virus severely impacted the economy and brought about a reduction in consumption. Meanwhile, massive economic policy measures protected businesses somewhat and softened the rise in unemployment.

Economic growth in the US is projected at around -3.6% in 2020. The US failed to keep the spread of COVID-19 under control and the rate of unemployment was weaker than anticipated. However, the financial markets remained resilient and US stocks repeatedly hit record highs as historically large US stimulus packages raised optimism surrounding economic recovery.

In China, economic growth slowed to 2.1%. China managed to suppress the COVID-19 pandemic well. Key industries benefited from strong export. Still, the rebound was unbalanced as private consumption remained weaker and fiscal deficit continued to climb.

Even as the world focused on the pandemic in 2020, seizing the sustainability opportunity continued. As governments took urgent actions

and laid the foundations for financial, economic and social recovery, they increasingly integrated climate action into their development plans and pledged support for climate-related investments.

Inflation in advanced economies remained low and below pre-pandemic levels in 2020. However, despite the global economic recession, commodity prices increased in response to supply disruptions and the anticipation of a recovery in 2021. Oil markets were hit by the pandemic and the Russia-Saudi Arabia oil price war. UPM’s input costs were lower in comparison with the previous year, especially in fibre.

The US dollar weakened against the euro and other key currencies during 2020. Overall, the impact from changing currencies to UPM’s businesses was moderate throughout 2020.

Market demand for UPM’s products was both negatively and positively influenced by the COVID-19 pandemic, the related containment measures and the economic recession. Demand for graphic papers was the most severely affected. In Europe, demand for graphic papers was 18% lower than in the previous year. Prices decreased for all paper grades throughout the year.

Global demand growth for chemical pulp continued good in 2020 and market pulp shipments improved from the weak comparison year 2019. Growth was mainly driven by China. Pulp prices decreased significantly from the previous year and were low relative to marginal producers’ cash cost levels. However, pulp prices started to improve towards end of the year.

Demand for advanced renewable diesel and naphtha continued to evolve positively, driven by climate change mitigation targets, stricter environmental standards and sustainability.

Finland’s electricity consumption was volatile in 2020. Hydropower generation levels were good and above normal at the end of the year. The annual generation of nuclear power was somewhat lower than in the previous year. Electricity sales prices in Finland were lower.

The growth of global demand for self-adhesive label materials was strong in the first half of the year, especially in consumer goods and e-commerce-driven labelling due to COVID-19-related lockdowns and changes in consumer behaviour. In the second half of the year the demand normalised somewhat due to destocking in the customer value chain. However, demand resumed growth partly driven by the second wave of the pandemic towards end of the year.

The growth in demand for label, release and packaging papers was strong and driven by consumable goods and e-commerce. Demand for office paper in the Asia-Pacific region decreased in the first half of the year but improved in the second half. Market prices in China were lower than in the previous year but improved towards the end of the year.

Market demand for plywood in Europe slowed down in 2020. Demand for spruce plywood was good and birch plywood-related industrial applications were modest. Uncertainties in the global economy and intense competition impacted market prices.

Impact of COVID-19 pandemic

The COVID-19 pandemic and the related containment measures around the world continue to represent significant uncertainty in 2021.

Global economy

The COVID-19 pandemic and the related containment measures resulted in a sharp decline in the global economy in 2020. In the first phase of the recession, the pandemic containment measures and lockdowns around the world severely limited or temporarily stopped significant parts of the economy. It is uncertain how potent the following recovery will be and how long it will take for the world economy to reach the pre-pandemic level of activity. Despite the start of vaccinations, additional waves of the epidemic in different parts of the world remain possible.

Safety and business continuity

UPM has implemented extensive precautions to protect the health and safety of its employees and to ensure business continuity and progress of its strategic projects during the pandemic. Despite these efforts, the operation of one or more units or the supply chain and logistics could be temporarily disrupted during the pandemic and the related lockdown measures. In these circumstances some units would need to limit operations or be temporarily shut down.

So far UPM has been able to protect its employees and business continuity well.

Demand for UPM products

Many of UPM products serve essential everyday needs and may therefore see relatively resilient demand during the crisis. These products include pulp, specialty papers and self-adhesive label materials. Even in these businesses, demand is influenced by general economic activity, however.

Demand for graphic papers, plywood and timber is more prone to be impacted by the lockdowns and the recession. The lockdowns limit a wide range of consumer-driven services and retail, as well as work at the office. This has had a negative impact on printed advertising and graphic paper demand during the pandemic.

The lockdowns and the level of economic activity may also affect demand for electricity.

In Q2 2020, graphic paper demand in Europe decreased by 32% from the previous year, as particularly advertising-driven paper

consumption and office paper demand were impacted by the lockdowns across Europe. In Q3 2020, there was some recovery in demand, but graphic paper demand remained 18% lower than in the previous year. In Q4 2020, a second wave of COVID-19 was under way in Europe, with gradual introduction of new lockdowns in various countries. Graphic paper demand was 14% lower than in the previous year.

Pulp demand held up relatively well, supported by good demand for tissue and hygiene products as well as for some packaging and specialty paper products. Pulp consumption in graphic paper production decreased.

Demand grew for self-adhesive label materials and specialty papers during the lockdowns, as consumers shifted some of their spending from away-from-home categories to packaged daily consumer goods. E‑commerce continued to grow, supporting some labelling and specialty paper applications. In Q2, demand for self-adhesive labels in Europe grew by 10% from the previous year. In Q3 2020, demand for self-adhesive labels in Europe was 3% lower than in the previous year, driven by destocking in the customer value chain. In Q4 2020, demand for self-adhesive labels resumed 7% growth year-on-year, partly impacted by the re-established lockdowns.

Adjusting to different scenarios

The potential impacts to UPM are likely to differ by business and by the phase of the pandemic, lockdown measures, changes in consumer behaviour, the recession and recovery. UPM is using shift arrangements, temporary layoffs, or reduced working hours as required to adjust its operations in different scenarios. During Q3 2020, the company also announced plans to permanently reduce graphic paper production capacity and other plans to improve cost efficiency in different businesses and functions.

Projects and maintenance shutdowns

The pandemic and the required health and safety measures add challenge to large investment projects and maintenance shutdowns. UPM's transformative pulp project in Uruguay and biochemicals project in Germany are proceeding with strict health and safety controls. Despite these efforts, some changes to the detailed timeline of the projects are possible during the pandemic and the related containment measures. Currently the projects proceed in line with the planned start-up timeline.

In April TVO announced that fuel loading into the OL3 reactor would not happen as planned in June 2020, TVO announced an updated schedule in August 2020.

UPM rescheduled two pulp mill maintenance shutdowns from Q2 2020 to Q4 2020 due to the pandemic. The two shutdowns were successfully completed in Q4 with strict health and safety controls.

Financing

UPM’s financial position is strong. UPM's net debt was EUR 56 million at the end of Q4 2020. Cash funds and unused committed credit facilities totalled EUR 3.2 billion at the end of Q4 2020. This includes the sustainability-linked five-year EUR 750 million revolving credit facility signed during Q1 2020, the EUR 550 million of bilateral committed credit facilities signed during Q2 2020 and EUR 158 million equivalent rolling overdraft facility. During Q4 2020, UPM successfully issued a EUR 750 million Green Bond under its EMTN (Euro Medium Term Note) programme. The facilities and UPM's outstanding debt have no financial covenants.

Key figures

» Refer Other financial information Alternative performance measures for definitions of key figures.

Results

2020 compared with 2019

Sales in 2020 were EUR 8,580 million, 16% lower than the EUR 10,238 million for 2019. Sales decreased for UPM Communication Papers, UPM Biorefining, UPM Specialty Papers, UPM Plywood and UPM Energy, and increased slightly for UPM Raflatac.

Comparable EBIT decreased by 32% to EUR 948 million, which was 11.1% of sales (1,404 million, 13.7%).

Sales prices decreased for all UPM's business areas, mostly in UPM Biorefining and UPM Communication Papers. At the group level, the negative impact of lower sales prices was clearly larger than the positive impact of decreased variable costs.

Fixed costs decreased by EUR 140 million, partly due to temporary measures to adjust to the COVID-19 pandemic. Production and delivery volumes were lower, especially for UPM Communication Papers, as the COVID-19 pandemic and the related containment measures reduced demand for graphic papers. The industry-wide strike in Finland impacted both delivery volumes and fixed costs in the first quarter of 2020.

Depreciation, excluding items affecting comparability, totalled EUR 471 million (477 million) including depreciation of leased assets totalling EUR 73 million (72 million). The change in the fair value of forest assets net of wood harvested was EUR -25 million (26 million).

Operating profit totalled EUR 761 million (1,344 million). Items affecting comparability in operating profit totalled EUR -187 million in the period (-60 million), including EUR 90 million in restructuring

charges related to the closure of the UPM Kaipola paper mill, EUR 85 million in restructuring charges related to closure of the UPM Chapelle paper mill, EUR 23 million in restructuring charges related to the closure of the Jyväskylä plywood mill, EUR 6 million in charges related to the restructuring of the functions of UPM Communication Papers, EUR 9 million in charges related to restructuring of the functions of UPM Raflatac, earnings of EUR 12 million on the sale of the group's share in Kainuun Voima Oy and earnings of EUR 11 million on the sale of other non-current assets.

Net interest and other finance income and costs were EUR -26 million (-38 million). Exchange rate and fair value gains and losses were EUR 2 million (0 million). Income taxes totalled EUR 169 million (234 million).

Profit for 2020 was EUR 568 million (1,073 million), and comparable profit was EUR 737 million (1,119 million).

Financing and cash flow

In 2020 cash flow from operating activities before capital expenditure and financing totalled EUR 1,005 million (1,847 million). Working capital increased by EUR 93 million (decreased by 276 million).

Net debt was EUR 56 million at the end of Q4 2020 (-453 million). The gearing ratio as of 31 December 2020 was 1% (-4%). The net debt to EBITDA ratio, based on the last 12 month's EBITDA, was 0.04 at the end of the period (-0.24).

On 31 December 2020 UPM's cash funds and unused committed credit facilities totalled EUR 3.2 billion. This includes the sustainability-linked five-year EUR 750 million revolving credit facility signed in Q1 2020, the EUR 550 million of bilateral committed credit facilities signed in Q2 2020 and the EUR 158 million equivalent rolling overdraft facility.

On 13 November 2020 UPM issued a EUR 750 million Green Bond under its EMTN (Euro Medium Term Note) programme.

A dividend of EUR 1,30 per share (totalling EUR 693 million) was paid on 16 April 2020 for the 2019 financial year.

Capital expenditure

In 2020, capital expenditure totalled EUR 903 million, which was 10.5% of sales (378 million, 3.7% of sales). Capital expenditure does not include additions to leased assets.

In 2021, UPM's total capital expenditure, excluding investments in shares, is expected to be about EUR 2,000 million, which includes estimated capital expenditure of approximately EUR 1,800 million in transformative projects. Transformative projects consist of the new pulp mill, port operations, local investments outside the mill fence in Uruguay and the biochemicals biorefinery in Germany.

In April 2018, UPM announced that it would rebuild paper machine 2 at its Nordland mill in Dörpen, Germany, and convert it from fine paper to glassine paper production. The machine was equipped with new finishing equipment and started producing glassine paper in Q1 2020. The capacity after the rebuild is 110,000 tonnes per year. The total investment in Nordland was EUR 124 million.

In January 2019, UPM announced that it would invest in the refurbishment of the Kuusankoski hydropower plant in Finland. The average annual production of the Kuusankoski plant is expected to increase from the current 180 GWh to 195 GWh. The investment will be completed by the end of 2022.

In July 2019, UPM announced that it would invest USD 2.7 billion in a 2.1 million tonne greenfield eucalyptus pulp mill near Paso de los Toros in central Uruguay. Additionally, UPM will invest approximately USD 280 million in port operations in Montevideo and USD 70 million in local investments outside the mill fence, including a new residential area in Paso de los Toros. The mill is scheduled to start up in the second half of 2022.

In October 2019, UPM announced that it would invest EUR 95 million in a Combined Heat and Power (CHP) plant at the UPM Nordland paper mill in Germany. The plant is planned to go on grid in Q3 2022. The annual cost savings of more than EUR 10 million will begin in 2023. The investment is estimated to decrease UPM's CO2-footprint by 300,000 tonnes.

In January 2020, UPM announced that it would invest EUR 550 million in a 220,000 tonnes next-generation biochemicals biorefinery in Leuna, Germany. The facility is scheduled to start up by the end of 2022.

Personnel

In 2020, UPM had an average of 18,557 employees (19,185). At the beginning of the year the number of employees was 18,742 and at the end of 2020 it was 18,014.

Further information about personnel is available in » Our People section in UPM Annual report 2020.

Uruguay pulp mill investment

On 23 July 2019, UPM announced that it would invest USD 2.7 billion in a 2.1 million tonne greenfield eucalyptus pulp mill near Paso de los Toros in central Uruguay. Additionally, UPM will invest approximately USD 280 million in port operations in Montevideo and USD 70 million in local investments outside the mill fence, including a new residential area in Paso de los Toros. The mill is scheduled to start up in the second half of 2022.

The investment will grow UPM's current pulp capacity by more than 50%, resulting in a step change in the scale of UPM's pulp business as well as in UPM's future earnings.

With a combination of competitive wood supply, scale, best available techniques and efficient logistics, the mill is expected to reach a highly competitive cash cost level of approximately USD 280 per delivered tonne of pulp. This figure includes the variable and fixed costs of plantation operations, wood sourcing, mill operations and logistics delivered to the main markets. Furthermore, the safety and sustainability performance of the value chain from plantations to customer delivery is expected to be on an industry-leading level.

Competitive wood supply

Eucalyptus availability for the mill is secured through UPM’s own and leased plantations, as well as through wood sourcing agreements with private partners. The plantations that UPM owns and leases in Uruguay cover 434,000 hectares. They will supply the current UPM Fray Bentos mill and the new mill near Paso de los Toros.

State of the art mill design

The pulp mill has been designed as an efficient single-line operation. The machines, materials, level of automation and standards enable a high operating rate and maintainability, as well as high energy output. This ensures excellent safety, high environmental performance and low operating costs during the long lifecycle of the mill.

The mill is designed to fully meet the strict Uruguayan environmental regulations, as well as international standards and recommendations for modern mills, including the use of the latest and best available technology (BAT). The mill's environmental performance will be verified through comprehensive and transparent monitoring.

The mill's initial annual production capacity is 2.1 million tonnes, and the environmental permits enable further capacity potential. When in operation, the mill generates more than 110 MW surplus of renewable electricity.

Efficient logistics set-up

An efficient logistics chain will be secured by the agreed road improvements, extensive railway modernization and port terminal construction.

The Public-Private-Partnership agreement between the government and the construction company for the construction of the central railway was signed in May 2019. Works on the central railway are proceeding with earth moving and levelling, but the overall rail project is currently behind the original schedule by several months. UPM has a contingency plan in place to ensure logistics with truck transportation in case of a delay.

UPM is proceeding with the construction of a deep-sea pulp terminal at Montevideo port with an investment of approximately USD 280 million. Direct rail access from the mill to a modern deep-sea port terminal creates an efficient supply chain to world markets. The Montevideo deep-sea port also enables synergies in ocean logistics with UPM’s existing Uruguay operations.

UPM has entered into a port terminal concession agreement in 2019 and signed an agreement on rail logistics services in October 2020. Both agreements are considered in accordance with IFRS 16 Leases. The total amount of such lease payments is expected to be USD 200 million.

Significant impact on the Uruguayan economy

Based on independent socioeconomic impact studies, the mill is estimated to increase Uruguay’s gross national product by about 2% and the annual value of Uruguay’s exports by approximately 12% after completion.

In the most intensive construction phase, more than 6,000 people will be working on the site. When completed, approximately 10,000 permanent jobs are estimated to be created in the Uruguayan economy of which approximately 4,000 would involve direct employment by UPM and its subcontractors. About 600 companies are estimated to be working in the value chain.

The mill will be located in one of Uruguay's many free trade zones and will pay a fixed annual tax of USD 7 million. The mill's value chain is expected to contribute USD 170 million in annual taxes and social security payments and to contribute USD 200 million annually in wages and salaries.

Project schedule and capital outflow 

The mill is expected to start up in the second half of 2022. The project is proceeding according to the planned schedule. Approximately 3,000 people are currently working on the project at the various construction sites. Due to the COVID-19 health emergency, special protocols are in place and UPM is swabbing all workers at the pulp mill site in Paso de los Toros returning to work after the holiday period in January 2021.

At the pulp mill site in Paso de los Toros, civil works are progressing in all main process areas, including wood handling, recovery island, fibre line, drying and bale unloading according to the plans. Moreover, the mechanical erection phase started in January 2021 as planned.

The temporary and permanent housing construction are also proceeding as planned, with about 90% of the works completed, and housing areas are already in use by the construction workers.

At the pulp terminal in Montevideo, main pier and tank area construction are proceeding and the pulp warehouse and unloading area erection is ongoing.

The main part of the total capital expenditure of USD 3 billion will take place in 2020-2022. UPM will hold 91% ownership of the project and a local long-term partner which has also been involved in UPM Fray Bentos, owns 9%. UPM’s investment will mainly be financed from operating cash flow complemented by regular group financing activities.

Biochemicals refinery investment

On 30 January UPM announced that it would invest EUR 550 million in a 220,000 tonnes next-generation biochemicals refinery in Leuna, Germany. The biorefinery is scheduled to start up by the end of 2022.

The biorefinery will produce a range of 100% wood-based biochemicals, which will enable a switch from fossil raw materials to sustainable alternatives in various consumer-driven end-uses. The investment opens totally new markets for UPM, with large growth potential for the future.

An industrial scale biorefinery will convert solid wood into next generation biochemicals: bio-monoethylene glycol (BioMEG) and lignin-based renewable functional fillers. In addition, the biorefinery will produce bio-monopropylene glycol (BioMPG) and industrial sugars.

Once the facility is fully ramped up and optimized, it is expected to achieve the ROCE target of 14%.

A combination of sustainable wood supply, a unique technology concept, integration into existing infrastructure at Leuna as well as the proximity to customers will ensure the competitiveness of operations. The safety and sustainability of the value chain will be based on UPM’s high standards.

InfraLeuna GmbH, in the state of Saxony-Anhalt, offers very competitive conditions for constructing a biorefinery with its existing permitting processes, logistics arrangements and infrastructure for various services and utilities. In October 2020, UPM has entered into service agreements with InfraLeuna GmbH related to wood handling, wastewater treatment and other utilities, which will be recognised as lease assets and liabilities under IFRS 16 Leases upon commencement date. The total amount of such lease assets and liabilities is estimated to be EUR 100 million.

Construction of the biorefinery at Leuna has commenced. Permitting has proceeded in accordance with German legislation and the first permits have been received as planned. Detailed engineering and procurement activities are proceeding at full speed.

Biofuels business development

In January 2021, UPM announced that it moves forward with biofuels growth plans and starts the basic engineering phase of a next generation biorefinery. The potential biorefinery would have an annual capacity of 500,000 tonnes of high-quality renewable fuels including sustainable jet fuel. The products would significantly reduce carbon footprint in the road transport and aviation, as well as replace fossil raw materials with renewable alternatives in chemicals and bioplastics. In the feedstocks, UPM’s wood biomass-based residues and side streams play a substantial role. In addition, it would use sustainable liquid waste and residue raw materials.

UPM is proceeding with a detailed commercial and basic engineering study to define the business case, select the innovative technology option and estimate the investment need. During the study UPM will also review the operating environment primarily in two locations: Kotka, Finland and Rotterdam, the Netherlands.

The estimated duration of this basic engineering phase is minimum 12 months. If all preparations are concluded successfully, UPM would initiate the company’s standard procedure of analyzing and preparing an investment decision.

OL3 power plant project

Teollisuuden Voima Oyj (TVO) is in the process of constructing a third nuclear power plant unit, OL3 EPR, at the Olkiluoto site (OL3). UPM participates in OL3 through its shareholding in Pohjolan Voima Oyj (PVO), which is the majority shareholder in TVO. UPM’s indirect share of OL3 is approximately 31%. The OL3 plant supplier, a consortium consisting of AREVA GmbH, AREVA NP SAS and Siemens AG (Supplier), is constructing OL3 as a turnkey project.

The start of regular electricity production, originally scheduled for April 2009, has been revised several times by the Supplier. TVO announced in August 2020 having received an updated re-baseline schedule on the commissioning of OL3 from Supplier. According to the schedule fuel will be loaded into the reactor in March 2021, OL3 will be connected to the grid in October 2021, and regular electricity production will start in February 2022.

The new management of Areva, the supplier party, is preparing a financial solution to complete OL3 project by the end of the guarantee

period. TVO is also negotiating with the supplier on the terms of completing the OL3 project.

When completed, OL3 will supply electricity to its shareholders on a cost-price principle (Mankala-principle) which is widely applied in the Finnish energy industry. Under the Mankala-principle electricity and/or heat is supplied to the shareholders in proportion to ownership, and each shareholder is, pursuant to the specific stipulations of the respective articles of association, severally responsible for its respective share of the production costs of the energy company concerned. OL3 will increase UPM Energy’s electricity generation capacity significantly. The new power plant unit is expected to be highly efficient and meet the highest safety standards. Its power generation will be CO2 -free and Olkiluoto will have a secure solution for the final disposal of used fuel.

Events during the year 2020

On 27 January, several Finnish labour unions began extensive labour actions in the Finnish forestry industry.

On 27 January, UPM announced its commitment to the United Nations Global Compact’s Business Ambition for 1.5°C, joining leading companies in a promise to pursue science-based measures to limit the global temperature rise to 1.5°C. UPM will strive to mitigate climate change and drive value creation by innovating novel products, committing to a 65% CO2 emission reduction from 2015 levels by 2030 and by practicing sustainable forestry.

On 28 January, UPM announced that it has started the employee consultation processes for the potential closure of the UPM Chapelle newsprint mill in Grand-Couronne, France.

On 30 January, UPM announced that it would invest EUR 550 million in a 220,000 tonnes next generation biochemicals refinery in Leuna, Germany. The facility is scheduled to start up by the end of 2022.

On 30 March, UPM withdrew its outlook for 2020, due to the uncertainty caused by the COVID-19 pandemic for the rest of the year.

On 8 April, an Olkiluoto 3 ERP unit nuclear fuel loading permission application was submitted. TVO also announced, that due to the COVID-19 pandemic, fuel loading into the reactor will not happen as planned in June 2020, and that it is possible that regular electricity production will be delayed respectively.

On 15 May, UPM announced that UPM and the new Government of Uruguay had signed a memorandum of understanding on pending items related to UPM’s growth project in Uruguay. UPM will accelerate the earlier planned USD 60 million financing of the road infrastructure development and invest USD 68 million in electrical grid reinforcement.

On 18 May, UPM announced that it would sell its 50% share in Kainuun Voima Oy to Kajaanin Energiatuotanto Oy, owned by the city of Kajaani. In addition, the city of Kajaani will acquire five properties owned by UPM. The total amount of share and real estate transactions was EUR 19 million. The transaction was completed on 1 July.

On 2 June, UPM announced the plan that it has started a consultation process for the potential closure of the UPM Jyväskylä plywood mill in Finland. The plywood mill is producing spruce and birch plywood and it employs 167 people. UPM has recognized restructuring charges of EUR 22 million as items affecting comparability in its Q2 2020 results. The planned actions would result in annual savings of approximately EUR 11 million.

On 16 July, UPM announced the decision to permanently close the UPM Chapelle newsprint mill in France, reducing annual capacity of newsprint by 240,000 tonnes. The number of people affected was 228. UPM recognizes restructuring charges in total of EUR 78 million, whereof EUR 61 million as cash costs. EUR 45 million was booked as items affecting comparability in Q1 2020 and EUR 33 million in Q2

2020. The action will result in annual savings of approximately EUR 30 million.

On 21 July, UPM announced the decision to permanently close the UPM Jyväskylä plywood mill. The reduction in personnel is 147.

On 26 August, UPM announced the plans for the permanent closure of the UPM Kaipola paper mill in Finland, the sale of the UPM Shotton paper mill in Wales and the streamlining of UPM Communication Papers business function teams.

The planned closure of the three paper machines at UPM Kaipola would impact approximately 450 positions and lead to a permanent reduction of 720,000 tonnes of graphic paper capacity, thereof 450,000 tonnes of newsprint and 270,000 tonnes of coated mechanical paper. UPM Communication Papers plans to reorganise and streamline its business function teams would affect approximately 170 positions in more than 10 countries. UPM’s plan to sell its UPM Shotton paper mill for conversion purposes would impact production capacity of 250,000 tonnes of newsprint.

In addition, UPM announced UPM Biorefining and UPM Specialty Papers plans to reorganize and streamline activities in the Finnish pulp mills, UPM Forest and the UPM Tervasaari mill in Finland. UPM will begin the employee consultation process at its Kymi, Kaukas and Pietarsaari pulp mills. These plans would lead to a reduction of 110 positions. In the Finnish forest organization, the planned measures would affect maximum 60 positions. At UPM Specialty Papers, the planned measures would impact approximately 50 positions at the UPM Tervasaari mill.

UPM will recognise restructuring charges of approximately EUR 115 million (EUR 55 million cash impact and EUR 60 million as write-offs) as items affecting comparability in its Q3 2020 results, mainly related to the planned actions at UPM Communication Papers. The planned actions would result in total annual cost savings of approximately EUR 75 million.

On 28 August, TVO announced that it had received an updated schedule from the plant supplier Areva-Siemens consortium for the commissioning of the OL3 EPR plant unit. According to the schedule, the fuel will be loaded into the reactor in March 2021, the plant unit will be connected to the national electricity grid in October of the same year and regular electricity generation will start in February 2022.

On 21 September UPM announced that it has been recognised as a UN Global Compact LEAD participant for its strong commitment to responsible business. UPM has held LEAD participant status since 2016.

On 6 October, UPM announced plans to simplify organisation and increase efficiency at UPM Raflatac and in global functions. The plans would reduce approximately 100 positions at UPM Raflatac and 70 positions from global functions. The plans would result in annual savings of approximately EUR 12 million.

On 15 October, UPM announced that employee consultations were concluded and the UPM Kaipola mill in Finland will be closed permanently. The number of persons affected will be 448. The mill was closed in early January 2021.

On 5 November UPM established a EUR 3 billion Euro Medium Term Note (EMTN) programme and launched a Green Finance Framework. UPM's framework was rated with the highest grade, CICERO Dark Green.

On 13 November UPM issued its first Green Bond under the EMTN programme with a nominal value of EUR 750 million. The bond matures in November 2028 and pays a fixed coupon of 0.125%. There are no financial covenants connected to the bond.

On 16 November UPM announced that it has been listed as the forest and paper industry leader in the Dow Jones European and World Sustainability Indices (DJSI) for 2020–2021.

On 18 November UPM announced that it has applied for listing of a EUR 750 million Green Bond under its EMTN programme to Irish Stock Exchange plc, trading as Euronext Dublin.

On 2 December UPM announced that it has completed the employee consultation process in global functions and decrease the number of positions by 67. UPM has also concluded the consultations regarding the reorganisation and restructuring at the Finnish pulp mills and UPM Forest and reduce 135 positions.

On 8 December UPM announced that is has been recognised with CDP’s Triple A score for tackling climate change and taking actions to ensure sustainable forest management and water security.

Events after the balance sheet date

On 19 January, UPM announced that it would invest EUR 13 million in UPM Raflatac’s new production line in Nowa Wieś, Poland. The investment will increase UPM Raflatac’s Direct Thermal (DT) Linerless annual production capacity by 100 million m2. The new production line is expected to be operational at the end of 2021.

On 28 January, UPM announced that it moves forward with biofuels growth plans and starts the basic engineering phase of a next generation biorefinery.

Outlook for 2021

The global economy is expected to start recovering in 2021 from the deep downturn experienced in 2020. World regions will progress at different pace, and China is leading this development. Demand for most UPM products is influenced by overall economic activity and hence, depends on the shape and rate of the economic recovery.

The COVID-19 pandemic continues to cause significant uncertainty in 2021. In 2020, lockdowns had a significant negative impact on graphic paper demand but supported the strong demand for self-adhesive labelling materials and specialty papers. Opening of the economies are likely to allow for some normalisation of these demand impacts. However, further waves of the pandemic and related lockdowns remain possible.

In the beginning of 2021, pulp prices are expected to increase compared with Q4 2020. Paper prices are expected to decrease moderately, compared with Q4 2020.

UPM will continue to implement measures to decrease fixed and variable costs.

UPM’s comparable EBIT in H1 2021 is expected to be lower than in H1 2020, due to lower paper prices and higher maintenance activity. Comparable EBIT is expected to recover in H2 2021.

Business area reviews

UPM Biorefining

UPM Energy

2020 compared with 2019

Comparable EBIT for UPM Biorefining decreased due to lower pulp sales prices. Wood and other variable costs were lower. Fixed costs were higher due to the more expensive scheduled maintenance shutdowns in 2020. The strike in Finland in the first quarter of 2020 impacted delivery volumes.

The average price in euro for UPM’s pulp deliveries decreased by 24%.

Market environment

•Global chemical pulp demand was good in 2020. Demand growth was mainly driven by China. Global shipments of market pulp improved from the weak year 2019.

•In 2020, the average European market price in euro was 16% lower for NBSK and 22% lower for BHKP, compared to 2019. In China the average market price in US dollars was 7% lower for NBSK and 19% lower for BHKP, compared to 2019.

•Good demand for advanced renewable diesel and naphtha.

•Demand for sawn timber was strong in Q4 2020. Market prices remained stable.

Sources: FOEX, UPM

1) 2020 items affecting comparability include EUR 3 million charges related to restructuring of ownership in Alholmens Kraft power plant, EUR 12 million gain on sale of group's share in Kainuun Voima Oy and EUR 5 million income relating to reversal of unused restructuring provisions. 2019 items affecting comparability relate to restructuring of ownership in Meri-Pori power plant.

2020 compared with 2019

Comparable EBIT for UPM Energy decreased due to lower electricity sales prices. Hydropower generation was higher. Fixed costs for nuclear were higher due to the low comparison period.

UPM’s average electricity sales price decreased by 13% to EUR 36.5/MWh (41.9/MWh).

Market environment

•In Finland, Sweden and Norway, 2020 was the warmest year on record. The Nordic hydrological balance was above normal at the end of December. In Finland, the hydrological situation was good.

•The CO2 emission allowance price of EUR 32.7/tonne at the end of 2020 was higher than at the end of 2019 (EUR 24.6/tonne).

•The average Finnish area spot price on the Nordic electricity exchange in 2020 was EUR 28.0/MWh, 36% lower than in 2019 (44.0/MWh).

Sources: The Norwegian Water Resources and Energy Directorate, Svensk Energi, Finnish Environment Institute, Nord Pool, NASDAQ OMX, Bloomberg, UPM

UPM Raflatac                                      UPM Specialty Papers

1) 2020 items affecting comparability include restructuring charges. 2019 items affecting comparability include EUR 2 million gain on sale of non-current assets and EUR 4 million of restructuring charges.

2020 compared with 2019

Comparable EBIT for UPM Raflatac increased, due to improved mix and margin management. Delivery volumes were higher. Fixed costs were lower.

Market environment

•In H1 2020, demand was particularly strong in the daily consumer goods and e-commerce-driven labelling due to the COVID-19-related lockdowns and changes in consumer behaviour. In Q3 2020, demand declined in Europe compared to the previous quarter due to destocking in the customer value chain. In Q4 2020, demand resumed growth partly driven by the second wave of the pandemic.

•In North America, demand was steady at a good level in 2020.

Sources: UPM, FINAT, TLMI

1) 2020 items affecting comparability include gains on sale of non-current assets.

2020 compared with 2019

Comparable EBIT for UPM Specialty Papers increased mainly due to lower input costs. Delivery volumes increased. Sales prices were lower.

Market environment

•In H1 2020, fine paper demand in the Asia-Pacific region weakened due to COVID-19-related lockdowns. In H2 2020, fine paper demand improved.

•In H1 2020, China fine paper market prices decreased to low levels. In H2 2020, prices started to increase towards end of the year.

•Demand growth for label, release and packaging paper was strong in 2020. Demand was driven by consumable goods and e-commerce as demand for durable goods was negatively impacted by COVID-19 and uncertainties in economy. Sales prices remained stable in 2020.

Sources: UPM, RISI, Pöyry, AWA

UPM Communication Papers                UPM Plywood

1) 2020 items affecting comparability include EUR 74 million restructuring charges and EUR 11 million impairment charges related to closure of Chapelle mill in France, EUR 43 million restructuring charges and EUR 47 million impairment charges relating to closure of Kaipola mill in Finland. EUR 6 million charges relate to restructuring of business functions and EUR 11 million income to prior capacity closures. 2019 items affecting comparability include EUR 15 million restructuring charges and EUR 12 million impairment charges related to closure of PM2 at UPM Rauma mill, and EUR 24 million restructuring charges and EUR 1 million impairment charges related to closure of PM10 at UPM Plattling mill. EUR 6 million charges relate to prior capacity closures and establishment of new Business Service Hub in Poland.

2020 compared with 2019

Comparable EBIT for UPM Communication Papers decreased due to lower delivery volumes. The COVID-19 pandemic and the related lockdown measures impacted graphic papers demand. The strike in Finland impacted production in Q1 2020. Sales prices were lower and more than offset the positive impact of lower variable costs. Fixed costs decreased. The average price in euro for UPM’s paper deliveries decreased by 11%.

Market environment

•In 2020, demand for graphic papers in Europe was 18% lower than in the previous year. Newsprint demand decreased by 18%, magazine papers by 18% and fine papers by 18%.

•In 2020, publication paper prices in Europe were 12% and fine paper prices 6% lower compared to 2019.

•In 2020, demand for magazine papers in North America decreased by 25% compared to 2019. The average price in US dollars for magazine papers decreased by 6% compared to 2019.

Sources: PPI/RISI, Euro-Graph, PPPC

1) 2020 items affecting comparability include EUR 15 million restructuring charges and EUR 8 million impairment charges related to closure of Jyväskylä plywood mill in Finland.

2020 compared with 2019

Comparable EBIT for UPM Plywood decreased slightly mainly due to lower delivery volumes and sales prices. Delivery volumes were impacted by the strike in Finland in Q1 2020. Fixed costs were significantly lower.

Market environment

•In H1 2020, demand for spruce plywood was solid. In H2 2020, demand was strong.

•In H1 2020, demand for birch plywood-related industrial applications was negatively impacted by COVID-19, and competition tightened. In H2 2020, demand remained modest but started to improve in Q4 2020.

Source: UPM

Other operations

1) 2020 items affecting comparability relate to restructuring charges. 2019 items affecting comparability of EUR 2 million relate to restructuring charges and EUR 2 million to capital loss on sale of Voikkaa mill site in Finland.

2020 compared with 2019

Comparable EBIT for other operations decreased. The change in the fair value of forest assets net of wood harvested was EUR -17 million (38 million). The increase in the fair value of forest assets was EUR 63 million (15 million). The cost of wood harvested from UPM forests was EUR 81 million (9 million).

Board of Directors and the Group Executive Team

At the Annual General Meeting held on 31 March 2020, the number of members of the Board of Directors was confirmed as 10, and Berndt Brunow, Henrik Ehrnrooth, Piia-Noora Kauppi, Marjan Oudeman, Ari Puheloinen, Veli-Matti Reinikkala, Kim Wahl and Björn Wahlroos were re-elected to the Board. Emma FitzGerald and Martin à Porta were elected as new directors to the Board. Suzanne Thoma and Jussi Pesonen stepped down from the Board. The directors’ term of office will end upon the closure of the next AGM.

Björn Wahlroos was re-elected as Chair, and Berndt Brunow as Deputy Chair of the Board of Directors of UPM-Kymmene Corporation at the Board of Directors’ constitutive meeting that took place following the Annual General Meeting.

In addition, the Board of Directors elected the chairs and other members to the Board committees from among its members. Piia-Noora Kauppi was re-elected to chair the Audit Committee, and Emma FitzGerald, Marjan Oudeman and Kim Wahl were elected as other committee members. Veli-Matti Reinikkala was re-elected to chair the Remuneration Committee, and Henrik Ehrnrooth and Martin à Porta were elected as other committee members. Björn Wahlroos was re-elected to chair the Nomination and Governance Committee, and Berndt Brunow and Ari Puheloinen were re-elected as other committee members.

Shares held by the Board of Directors and the Group Executive Team

At the end of the year, the members of the Board of Directors owned a total of 716,348 (1,162,920) UPM-Kymmene Corporation shares. These represent 0.13% (0.22%) of the shares and 0.13% (0.22%) of the voting rights. At the end of the year, President and CEO Jussi Pesonen owned 504,710 shares. At the end of the year, the other members of the Group Executive Team owned a total of 832,705 shares.

» Refer Note 3.2 Key management personnel, of the consolidated financial statements 2020 for further information on remuneration and shares held by the members of the Board and the President and CEO and remuneration of the members of Group Executive Team.

Litigation

» Refer Note 9.2 Litigation, of the consolidated financial statements 2020 for information on legal proceedings.

Risks

Risk management

UPM regards risk management as a systematic and proactive means to analyse and manage opportunities and threats related to its business operations. This also includes risks that can be avoided through careful planning and evaluation of future projects and business environments.

Risk management is an integral part of UPM’s management system as risk taking is a normal part of business operations. While executing strategies, UPM and its business areas, functions and manufacturing units are exposed to a number of risk and opportunities. Each business area, function and unit is responsible for identifying, measuring and managing of risks related to its own operations, and for reporting on risk exposures, risk management activities and results to its own management team and to the Risk Management function.

The Risk Management Committee, chaired by the CFO, is responsible for recommending risk tolerances and profile to the President and CEO and the Strategy Team. The Strategy Team is responsible for aligning risk management priorities, business and risk management strategies and policies.

The Board of Directors, assisted by the Audit Committee, monitors and assesses the effectiveness of the company’s risk management systems and oversees the assessment and management of risks related to the company’s strategy and operations. The Audit Committee oversees that risk management activities are aligned with the Risk Management Policy, and that risk assessments are used to guide internal audit activities.

UPM seeks to transfer insurable risks through insurance arrangements for any risks that exceed the defined tolerance.

UPM strives to ensure compliance with the UPM Code of Conduct and other corporate policies. To enhance compliance and mitigate risks, UPM performs risk assessments, training and monitoring at regular intervals.

UPM has developed and implemented a comprehensive internal control system that covers business and financial reporting processes. Internal control is aimed at ensuring that the company’s operations are efficient and reliable, and in compliance with statutory requirements, and that the company’s financial reporting is accurate and reliable, and reflects operational results. Internal control pertaining to financial reporting is described in the Corporate Governance Statement available in the corporate website.

The main risk factors that can materially affect the company’s business, financial results and non-financial performance are set out below. They have been classified as strategic risks, operational risks, and financial risks. Risks may also arise from legal proceedings incidental to UPM’s operations.

Strategic risks

Uncertainties in the economic and political operating environment

The main short-term uncertainties in UPM’s earnings relate to sales prices and delivery volumes of its products, as well as to changes in the main input cost items and currency exchange rates, most of which are affected by uncertainty in the global, regional or local economic and political conditions. Political developments are causing uncertainties to the global economy. Such uncertainties also affect UPM’s customers influencing the demand for UPM’s products.

Examples of such developments are the trade tensions between the United States, the EU and China, the nature of the relationship between the EU and the UK after its exit from the EU as well as increased

geopolitical tensions. UPM is also exposed to the impacts of certain governmental protection and trade protection measures that safeguard domestic industries and other changes affecting international trade. Restrictions on import and export and other national interests may affect the availability of necessary raw materials, and changes in the international trade agreements. COVID‑19 related containment measures and the economic downturn or global power struggles continue to cause high uncertainty to global trade, geopolitics or trajectories of economies.

UPM is especially exposed to the economic and political conditions in countries in which UPM has significant production operations and ongoing investment projects, such as Finland, Uruguay and Germany. UPM also has significant production operations in a number of developing markets, such as China and Russia, where the lack of transparency and predictability of the political, economic and legal systems may lead to an increasing uncertainty and risk level when investing in or operating in them.

Cyclical and highly competitive markets

In all markets UPM operates in, the price level is determined by a combination of demand and supply and an imbalance between them could cause the prices of UPM’s products to fluctuate significantly. Imbalances in demand and supply may be caused by factors such as decreases or increases in the end-use demand, changes in customer preferences or a new production capacity entering the market or an old production capacity being closed, all of which may affect both the volume and price level of UPM’s products.

Competitor behaviour may also influence the market price development. UPM may, from time to time, experience price pressures from competitors in its main business areas and geographic market areas as well as particularly large fluctuations in operating margins due to this competitive environment.

The majority of UPM’s revenue comes from sales of graphic and specialty papers, pulp and label materials, and UPM principally competes with several large multinational paper and forest product companies as well as with numerous regional or more specialised competitors.

Changes in consumer behaviour

Demand for UPM’s products may be affected by the introduction of substitute or alternative products. The demand for graphic papers in the mature markets is forecast to continue to decline. This will likely increase the pressure on UPM’s graphic paper deliveries and sales prices as well as the scarcity of recycled fibre. The COVID‑19 pandemic may further amplify the speed of changes adopted by consumers in consuming and communicating information. Changes in demand could also cause overcapacity in some of UPM’s products, affecting the sales prices and deliveries of such products.

Depending on the product area, the shifts in consumer demand may either have a positive or an adverse effect on the consumption of UPM’s products. For example, UPM expects that there will continue to be a growing need for renewable and recyclable solutions, which creates various opportunities for UPM and drive demand growth for most of UPM’s products. At the same time digitalisation and e-commerce have changed consumer behaviour and resulted in decline in demand for graphic papers for various end uses.

Changes in legislation

UPM is exposed to a wide range of laws and regulations globally. The performance of UPM’s businesses, for example the paper, energy, and biofuels businesses, are to a high degree dependent on the regulatory framework for these areas. Changes in regulation, direct and indirect

taxation or subsidies, aid, grants or allowances could have a direct effect on UPM’s performance and its relative competitiveness, and structurally restrict or exacerbate UPM’s ability to compete for raw material.

UPM also operates in industries that are subject to extensive environmental laws and regulations governing, among others, emissions, water quality, energy efficiency, as well as waste handling, recycling and disposal. Environmental laws and regulations have become more stringent and may continue to develop to be even more stringent due to various global, regional and national level regulatory initiatives. As these environmental laws and regulations are amended or as their application or enforcement is changed, additional costs in complying with new and more stringent regulations may be imposed on UPM.

UPM’s operations require UPM to obtain multiple environmental permits and other licences from relevant authorities and comply with their terms and conditions. These permits and licences may be subject to modification, renewal or, subject to certain conditions, revocation by the issuing authorities. UPM monitors regulatory changes in order to better adapt to the effects of such changes.

Shareholdings in Pohjolan Voima Oyj

UPM is a shareholder of Pohjolan Voima Oyj (PVO), which is the majority shareholder of Teollisuuden Voima Oyj (TVO). TVO is in the process of constructing a third nuclear power plant unit, OL3 EPR, at the Olkiluoto site (OL3). When completed, OL3 will supply electricity to its shareholders on a cost-price principle (so called ‘Mankala-principle’) that is widely applied in the Finnish energy industry. Under the Mankala principle, electricity and/or heat is supplied to the shareholders in proportion to their ownership and each shareholder is, pursuant to the specific stipulations of the respective Articles of Association, severally responsible for its respective share of the production costs of the energy company concerned. OL3 is expected to increase UPM’s electricity generation capacity significantly. UPM’s indirect share of OL3 is approximately 31%.

According to TVO OL3 was procured as a fixed price turnkey project from a consortium formed by Areva GmbH, Areva NP SAS and Siemens AG (Supplier). Under the plant contract, the consortium companies have joint and several liability for the contractual obligations.

Originally commercial electricity production at OL3 was scheduled to start in April 2009. However, completion of the project has been delayed. Supplier has updated the schedule for the commissioning of OL3 several times.

In March 2018 TVO announced that it had signed a comprehensive settlement agreement with Supplier and the Areva Group parent company, Areva SA, a company wholly owned by the French state. The settlement agreement concerns the completion of the OL3 project and related disputes and entered into force in late March 2018. According to TVO, pursuant to the settlement agreement, TVO and Supplier jointly withdrew the pending arbitration proceedings under the International Chamber of Commerce (ICC) rules with respect to costs and losses incurred in relation to delays in the construction of the OL3 project.

In July 2018, TVO announced that in June 2018 the ICC tribunal had confirmed the arbitration settlement by a consent award, and the arbitration proceedings had been terminated. The parties also withdrew the pending appeals in the General Court of the European Union.

According to TVO, the settlement agreement stipulates as follows:

•To provide and maintain adequate and competent technical and human resources for the completion of the OL3 project, Areva will source the necessary additional resources from Framatome S.A.S., whose majority owner is EDF.

•The supplier consortium companies undertake that the funds dedicated to the completion of the OL3 project will be adequate and will cover all applicable guarantee periods, including setting up a trust mechanism funded by Areva companies to secure the financing of the costs of completion of the OL3 project.

•The turnkey principle of the OL3 plant contract and the joint and several liability of the supplier consortium companies remain in full force.

•The agreement also noted Supplier’s schedule at the time the agreement was signed, according to which regular electricity production in the unit would have commenced in May 2019.

•The ICC arbitration concerning the costs and losses caused by the delay of the OL3 project is settled by financial compensation of EUR 450 million to be paid to TVO in two instalments by Supplier.

•The parties withdraw all on-going legal actions related to OL3, including the ICC Arbitration and appeals in the General Court of the European Union.

•In the event that the Supplier consortium companies fail to complete the OL3 project by the end of 2019, the Supplier consortium companies will pay a penalty to TVO for such delay, the amount of which will depend on the actual time of completion of the OL3 project and may not exceed EUR 400 million.

In April 2020, TVO announced that it had submitted a permission application to the Finnish Radiation and Nuclear Safety Authority (STUK) for nuclear fuel loading of the OL3 nuclear power plant unit.

In August 2020, TVO announced having received an updated re-baseline schedule on the commissioning of OL3 from Supplier. According to the schedule fuel will be loaded into the reactor in March 2021, OL3 will be connected to the grid in October 2021, and regular electricity production will start in February 2022. Realisation of the OL3 EPR nuclear power plant project and preparing the plant unit for production will be continued. Commissioning tests and maintenance work are needed before fuel loading.

The coronavirus pandemic may have significantly added uncertainty to the progress of the project. According to TVO significant arrangements have been made at the OL3 site preventing the coronavirus infections. Despite of coronavirus restrictions, work has been able to continue under special arrangements.

As announced by TVO, the new management of Areva, the supplier party, is preparing a financial solution to complete the OL3 project until the end of the guarantee period. TVO is also negotiating with Supplier on the terms of completing the OL3 project.

Further, as announced by TVO, TVO has recognised receivables amounted to the accumulated compensation by the end of Q3 2020 agreed in the comprehensive settlement agreement from supplier. The compensation decreases the historical costs of property, plant and equipment in TVO’s balance sheet.

On 16 December 2020 TVO announced that the shareholders of TVO have signed an additional shareholder loan commitment, comprising a total of EUR 400 million new subordinated shareholder loan agreements. According to TVO with the new shareholder loan commitment, TVO prepares to maintain a sufficient liquidity buffer and equity ratio in order to complete the OL3.

As announced by TVO, on 17 December 2020, S&P Global Ratings (S&P) affirmed its long-term corporate credit rating 'BB' on TVO and removed it from CreditWatch Negative, where it had been placed on 4 September 2020, with the outlook being negative. According to S&P, the EUR 400 million shareholder loan recently granted to TVO reduces near-term risk and signals that TVO's owners still support the OL3 project, despite the delays it has suffered.

Further delays to the OL3 project could have an adverse impact on PVO’s business and financial position, the fair value of UPM’s energy shareholdings in PVO and/or the cost of energy sourced from OL3 when completed. It is possible that the cost of energy sourced from OL3 at the time when it starts regular electricity production may be higher than the market price of electricity at that time.

Climate change

UPM is exposed to a variety of risks related to climate change. Strategic risks related to climate change include risks concerning competition, markets, customers, products and regulation. For example, unpredictable regulation and subsidies may distort raw material and final product markets and changing costs of greenhouse gas emissions may influence UPM’s financial performance. UPM believes that forest, wood-based products and low-carbon energy hold significant value creation potential with respect to renewable and recyclable products.

Other risks related to climate change particularly concern UPM’s supply chain as well as the availability and price of major inputs, such as wood and electricity. Climate change may cause exceptional weather events, such as severe storms, floods and draughts, which could, for example, result in unpredictable hydropower availability and wood harvesting conditions. Exceptionally mild winter conditions with a reduced period of frozen soil in the Nordics could affect the harvesting and transport of wood, consequently undermining the stability of raw material supply and potentially increasing the cost of wood. These could also increase the risk of production limitations.

Loss of major customers and industry consolidation

UPM has several major customers, and the largest customer in terms of sales represented approximately 2% of UPM’s sales in 2020, and the ten largest customers represented approximately 14% of such sales. Although UPM is not dependent on any specific customer or group of customers, the loss of its major customers, if not replaced on similar terms, could have a material effect on UPM’s business. Also, as the size of UPM’s customers could increase in connection with industry consolidation, such customers could exert increased bargaining power on all of their suppliers, including UPM. UPM is also exposed to risks related to any deterioration of a major customer group’s financial condition.

Product development, innovation and intellectual property rights

Research and product development are an important part of UPM’s strategy, particularly with regard to new businesses, such as wood-based biofuels, biochemicals and biomedicals. The return on investment of new or enhanced existing products and solutions may not meet targets or improve UPM’s competitiveness.

UPM has a broad patent portfolio that provides value creation potential in the future; however, it also exposes UPM to risks related to the protection and management of intellectual property, including patents and trademarks.

Corporate acquisitions and divestments

UPM’s strategy is to grow businesses with strong long-term fundamentals and sustainable competitive advantage. This may result in acquisitions of new businesses or divestments of existing businesses or parts thereof. Carrying out corporate mergers, acquisitions and divestments involves risks relating to the successful implementation of a divestment and the ability to integrate and manage acquired businesses, systems, culture and personnel successfully. In addition, the cost of an acquisition may prove high and/or the anticipated economies of scale or synergies may not materialise. Hidden liabilities of an acquired company (e.g.,

competition law liabilities) may also constitute a significant risk in relation to potential acquisitions.

UPM may divest operations or assets to focus on strategic areas. Any future divestments may be affected by many factors that are beyond UPM’s control, such as the availability of financing to potential buyers, interest rates and acquirers’ capacity, and divestments may also expose UPM to indemnity claims. Furthermore, divestments may involve additional costs due to historical and unaccounted liabilities. The profitability of corporate acquisitions and divestments may differ from UPM’s expectations.

Operational risks

Fluctuations in the prices of major inputs as well as changes in their availability

The main inputs required in the manufacturing of UPM’s products are wood, fibre, chemicals, energy and water. The prices for many of these major production inputs have been volatile in the recent years and are expected to remain volatile for the foreseeable future, which may have an effect on the general profitability of the industries in which UPM operates. Climate change may contribute to the increase of the price volatility of UPM’s major production inputs. Also, any changes in the current forestry practices and level of harvesting due to negative public opinion towards harvesting could have an effect on the raw material supply and may increase the cost of wood.

Governmental protection and trade protection measures could also have an effect on the price and availability of raw materials as countries may, for example, enact export ban policies to protect forests or to bolster their domestic timber industry, which could have a material effect on the cost and availability of wood as a raw material 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 as well as shifts in the availability and price of wood. 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, 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 world-class pulp mill in Uruguay, which includes other related investments as well (port, Free Trade Zone infra and housing). Particular to this project is its size, complexity with a number of interconnected sub-projects as well as the level of cooperation with permit and other authorities. Additionally, the second largest ongoing project is the construction of a 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. The COVID‑19 pandemic and the required additional health and safety measures have also added a new challenge to large investment projects. UPM’s transformative pulp project in Uruguay and biochemicals project in Germany are proceeding with strict health and safety controls, but despite these efforts, some changes to the detailed timeline of the projects may occur due to containment measures.

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 critical information system services, loss of critical, financial or personal data due to reasons beyond UPM’s 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 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. 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 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.

Labour disruptions

UPM is subject to risk of labour disputes, 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. Any labour disputes in UPM’s business operations or related sectors could have an effect on UPM’s business operations. For example, labour disputes 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, 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 (such as a COVID‑19 infection) 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 fires are estimated to pose the most significant risks for UPM’s business. 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 the 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.

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.

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 the necessary new capabilities required for future growth. UPM is continuously developing its leadership culture, evaluating its recruitment, compensation policies and career development opportunities and taking measures to attract and retain diversely skilled personnel for current and future growth areas.

Financial risks

Financial risks are described in consolidated financial statements 2020.

Non-financial information

Global megatrends represent many long-term opportunities and challenges for UPM towards 2030 and beyond. They are also driving demand for sustainable solutions and responsible business practices.

To steer its responsibility activities, UPM has established a set of responsibility focus areas with targets and key performance indicators. They are reviewed every year based on a materiality analysis (page 71). The focus areas cover economic, social and environmental responsibility. Economic responsibility at UPM covers economic performance, good governance and compliance, as well as responsible sourcing. Social responsibility focuses on respecting human rights, occupational health and safety and UPM’s role as a responsible employer. Environmental responsibility includes sustainable products, the climate and use of forests, as well as water use and waste reduction. Mitigation of and adaptation to climate change is becoming more important all the time, and it is relevant for UPM throughout the whole value chain: land use, sourcing, production and products. Climate-related targets have been established for all of these areas.

UPM’s Biofore strategy guides the company in achieving its responsibility targets for 2030 and in contributing to the Sustainable Development Goals (SDG) of the 2030 Agenda for Sustainable Development published by the UN.

In March 2020, UPM became one of the first companies to link the pricing mechanism of a syndicated revolving credit facility (RCF) of EUR 750 million to both biodiversity and climate targets. In November 2020, UPM issued its first green bond of EUR 750 million under the EMTN (Euro Medium Term Note) programme. In connection with the programme, a UPM Green Finance Framework was prepared which was rated with the highest-grade by CICERO (Center for International Climate Research).

Based on international frameworks and commitments

UPM respects international human rights agreements and agreements concerning labour rights, including the UN Declaration of Human Rights, the ILO Declaration on Fundamental Principles and Rights at Work, and the OECD Guidelines for Multinational Enterprises.

Since 2003, UPM is a signatory of the UN Global Compact initiative, whose ten universal principles are derived from international agreements in the areas of human rights, labour standards, the environment and anti-corruption. And since 2016, UPM has the LEAD participant status for its commitment to the UN Global Compact. In 2020, UPM was one of only 41 global companies to receive this recognition, and the only representative of the forest industry and Finland.

Regarding climate change UPM committed to the Science Based Targets (SBT) initiative in 2017 and received validation of its tightened CO2 targets in 2020. To further strengthen its climate approach, UPM committed to the UN's Business Ambition for the 1.5°C pledge.

UPM follows the Finnish Corporate Governance Code issued by the Securities Market Association and complies with all of its recommendations.

UPM Code of Conduct and other corporate policies

UPM’s decision making, management and operations are guided by UPM values and the UPM Code of Conduct. Legal compliance and responsible practices are the foundation of all of UPM’s businesses and create long-term value for both UPM and its stakeholders. The UPM Code of Conduct emphasises UPM’s commitment to business integrity and responsible business operations, manifesting the company’s guiding principles.

The UPM Code of Conduct is complemented by more detailed policies approved by the Board of Directors and rules or statements approved by the Group Executive Team, business areas or global functions. These policies, rules and statements cover such topics as treasury, taxes, disclosures, insider matters, anti-corruption, competition law, confidentiality, contract management, human resources, the environment, forestry, information security and data protection, and safety. In 2020, the UPM Responsibility Statement, defining responsibility-related principles and commitments relevant to all UPM operations, was issued

UPM requires its suppliers, third party intermediaries and joint venture partners to apply the same principles as in the UPM Code of Conduct and to fulfil criteria concerning social and environmental responsibility. These requirements are defined in the UPM Supplier and Third Party Code, latest updates effective as of beginning of 2020.

The UPM Code of Conduct was last updated during 2019, followed by extensive communication and training efforts to enhance our employees' awareness and understanding of its contents.

Roles of the group management and functions in leading non-financial matters

The Board of Directors, with the assistance of the Audit Committee, is responsible for monitoring compliance with applicable legal and regulatory requirements and with the UPM Code of Conduct and other corporate policies. In addition, the Audit Committee oversees procedures for treatment of complaints and concerns received by the company, anonymous or otherwise. As part of the committee’s compliance review, the committee is provided with a quarterly report by the company’s Chief Compliance Officer, and a report of submissions under the company’s Report Misconduct channel by the Head of Internal Audit.

In line with its main duties and responsibilities, the Board reviewed and approved updated strategic plans during its strategy session in May 2020. The main focus areas of the UPM Biofore strategy continue to be performance, growth, innovation, responsibility and portfolio development. This strategy is enhanced by the brand promise: Beyond Fossils (read more on pages 26-27). An essential part of the Board’s annual strategy work is to review and assess strategic and operational risks and opportunities (see UPM Governance Statement 2020). These risks and opportunities and their impact on operations and strategy are described on pages 36-37.

The Group Executive Team, headed by the President and CEO, is in charge of the management of corporate responsibility, determining courses of action and guiding development work. In practice, corporate responsibility efforts take place in businesses and functions, and in the Group’s Responsibility team, which co-ordinates the projects carried out by businesses and functions.

UPM Legal Function and its Compliance team manage legal compliance programmes and arrange related training at regular intervals for specific target groups, which have been defined based on risk assessments. UPM Sourcing organisations follow clearly defined selection and follow-up processes when evaluating suppliers. Reliable long-term deliveries, product and service quality, financial sustainability of suppliers, social and environmental responsibility and product safety are the key factors when selecting and evaluating suppliers.

While executing strategies, UPM and its business areas, functions and production units are exposed to a number of financial and non-financial risks and opportunities. Each business area, function and unit is responsible for identifying, measuring and managing risks related to its own operations, and for reporting on risk exposures, risk management activities and results to its own management team and to the Risk Management Function.

Management of non-financial matters

UPM’s responsibility thinking starts with anticipating, mitigating and managing risks, and extends to creating a competitive advantage and long-term value.

UPM continually strives to reduce its risk exposure and improve its performance by using tools such as certified management systems. Since 2018, all our production sites have a certified ISO 14001 environmental management system. Almost all our production sites and wood-sourcing operations implemented integrated management systems for environmental protection, quality management and occupational health and safety in accordance with ISO 14001, ISO 9001 and ISO 45001 standards. All European pulp and paper mills, as well as the UPM Fray Bentos pulp mill in Uruguay and the UPM Changshu paper mill in China, also adhere to the EU’s Eco-Management and Audit Scheme (EMAS). Many of the sites also have energy management systems certified under ISO 50001 or the Finnish ETJ+ system, and food safety management systems certified under ISO 22000, if relevant.

Should stakeholders have any concerns or suspect misconduct, they are encouraged to contact UPM or to use the UPM Report Misconduct channel which was renewed in 2020. The new service is available on the corporate website for both the company’s employees and external stakeholders. Operated by an independent external service provider, the service is accessible in over 40 languages, 24/7. In 2020, 23 (31) cases were reported either through the UPM Report Misconduct channel or directly to internal audit. One case related to discrimination. Five cases led to disciplinary action including warnings and terminations of employment.

Reporting framework used

UPM uses the GRI Standards reporting guidelines published by the Global Reporting Initiative to measure and report on corporate responsibility at group level. UPM’s corporate responsibility reporting has been compiled in accordance with the GRI Standards: Core option.

Committed to anti-corruption

The UPM Code of Conduct underlines the company’s zero tolerance attitude towards corruption and bribery in any form. UPM Anti-Corruption Rules explain prohibited conduct and expected ethical behaviour in further detail.

UPM performs anti-corruption risk assessment on a regular basis. The annual risk-assessment process includes a top-down risk discussion with the management of each business area. All UPM group entities are also assessed on the basis of country risk and complexity of operations. UPM operates globally and has significant manufacturing operations in several emerging market countries. Such operations require a number of permits and other licenses from the relevant authorities. Some of the countries where UPM operates 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.

Due diligence of suppliers and third parties with whom UPM does business is an essential part of UPM’s anti-corruption compliance programme. UPM requires that due diligence is performed before entering into or renewing any contract with a third party that meets specified criteria. UPM requires anti-bribery contract terms to be included in agreements with such third parties outlining the third party’s commitment to compliance with applicable anti-bribery laws and UPM’s right to audit the third party to verify compliance with these terms. The company also has corresponding due diligence procedures for joint ventures, including mergers and acquisitions.

In 2020, UPM updated its anti-corruption e-learning platform. The anti-corruption training covers all white-collar employees. In 2020, the company also launched an e-learning platform to support the implementation of the updated Supplier and Third Party Code. The company organized tailored anti-corruption training workshops for selected target groups across the company and performed risk-based compliance reviews in selected jurisdictions and operations.

Respect for human rights

UPM is committed to respecting human rights. UPM has assessed all its operations and activity and has identified the potential human rights issues and impacts. When considering both the severity and likelihood of these potential issues and impacts, UPM considers the salient human rights issues in the company’s sphere of influence to be environmental pollution, occupational health and safety (OHS), working conditions, protection of children, and forced labour.

In 2020, UPM reviewed quarterly its human rights risks as part of UPM compliance process and took into use a continuous process for assessing salient human rights issues on a business area level. Grievance mechanisms were strengthened by renewing UPM’s Report Misconduct channel.

Responsible sourcing

UPM requires its suppliers, third-party intermediaries and joint venture partners to apply the same principles as in the UPM Code of Conduct including commitment to anti-corruption, environmental and social responsibility, safe products, human rights and occupational health and safety practices.

Transparent supplier requirements are the basis for responsible sourcing. These supplier requirements are defined in the UPM Supplier and Third Party Code (available on the corporate website). A number of additional requirements are in place for the sourcing of wood, chemicals, pulp and packaging materials, as well as for safety and logistics. All contractors working on site go through UPM’s safety requirements and a web-based safety induction training.

UPM identifies its supply chains with a high risk of potential negative environmental and social impacts. These responsibility-related risks are determined by the country of origin, sourced material or service, and complexity of supply chain. Based on the risk identification, selected suppliers’ activities are evaluated in more detail through EcoVadis and other assessments, supplier audits and joint development plans.

In 2020, UPM focused on training its sourcing employees on renewed supplier requirements and promoting decent work in supply chain. UPM also assessed working conditions in its logistics chain by interviewing truck drivers in Central-Europe.

UPM continued its cooperation with Together for Sustainability (TfS), a chemical industry initiative that promotes and improves sustainability practices within the supply chains and its participation to UN Global Compact Action Platform on Decent Work in Global Supply Chains. In 2020, UPM conducted some 290 EcoVadis assessments and 117 supplier audits.

Social and employee-related matters

UPM’s responsibility focus areas in social and employee-related matters are: learning and development, responsible leadership, diversity and inclusion as well as working conditions.

UPM is committed to active employee participation and consultation, organised in accordance with international and national rules and regulations. UPM aims to empower and engage employees at all levels through responsible leadership. UPM encourages its employees to pursue professional growth, expects development and supports them in learning skills and developing them further.

UPM respects the privacy of employees and promotes equal opportunities and objectivity in employment and career development. All UPM employees are treated as individuals regardless of gender, age, ethnic origin, nationality, etc.

UPM promotes employees' health and wellbeing. Safety is an essential part of UPM’s activities and business management system. Equal safety requirements are applied to all employees, visitors and contractors working at UPM’s premises.

In its People Strategy, UPM focused on leadership and creating safe, inclusive & diverse working environment, as well as aiming higher in performance and ensuring growth of our people. In 2020, UPM continued the enabling performance approach by strengthening feedback culture, agile goal setting and frequent manager-employee discussions. Development programs to support skills of asking and giving feedback, high quality conversations and coaching have been continued. To further develop inclusive leadership and culture, UPM continued the dialogue on diversity and inclusion with management teams.

The proactive safety of employees and contractors has remained an important focus area in 2020. Safety and wellbeing of our employees during global pandemic has been the key priority.

Product stewardship

Majority of UPM’s products are made from renewable raw materials and are recyclable. Product stewardship covers the entire lifecycle of all UPM products from the development phase to the end-use and beyond.

Ecodesign and product safety measures ensure that impacts on products and the environment are considered and minimised. In 2020, UPM renewed its sustainable product design concept. One step was the updating of the ecodesign questionnaire to cover the UN Sustainable Development Goals.

UPM provides product declarations to provide customers with easy access to information concerning the responsibility of products' environmental and product safety aspects or the wood origin. In 2020, the collaboration with paper and chemical companies resulted in a new harmonized and transparent way to gather and assess chemical information.

Most of UPM products are certified with widely recognised ecolabels, such as the EU ecolabel and national ecolabels for graphic paper or ISCC and RSB certification for biofuels, biocomposites and labels.

All of UPM pulp mills, the European sites of UPM Raflatac and UPM Specialty Papers' production lines have implemented ISO 22000 food management systems and the respective products are designed and produced to meet food packaging requirements.

Environment

UPM’s responsibility focus areas in environmental matters are forests and biodiversity, water use, waste and climate. UPM uses raw materials, water, energy and other resources in a responsible manner and continuously improves its energy, resource and cost efficiency.

UPM is committed to sustainable forestry, and the company uses third-party-verified FSC™ and PEFC chain of custody certification to ensure that the wood it procures is legally sourced from sustainably managed forests. All UPM owned forests are certified, or in the process of certification if acquired recently.

In 2020, UPM continued to implement its work aimed at positive impact on biodiversity in company forests in Finland. This biodiversity programme is implemented through biodiversity guidelines for operational forestry work, forest protection and cooperation with stakeholders. Biodiversity indicators and monitoring methods have been developed further in 2020.

All of UPM’s largest production plants are located in areas where there is sufficient water available. The water used by UPM plants comes from rivers, lakes or groundwater resources. UPM uses water responsibly in terms of the company’s water consumption and effluent quality. If the price of raw water were to increase by EUR 0.01 per cubic metre, it would mean additional water costs of approximately EUR 4 million annually. In 2020, wastewater volume increased by 2% per tonne of paper and decreased by 4% per tonne of pulp.

Circular economy thinking is at the core of our operations. We have developed innovative ways to reduce and recover waste and to use side streams. For example, tall oil is used for UPM BioVerno renewable diesel and naphtha and ash is utilized in soil stabilisaton, cement industry or as raw material for paper filler production. Regulatory changes can have an impact on the options for waste or residue use, thus causing higher costs for alternative solutions. In 2020, 89 (89)% of UPM’s process waste was recovered or recycled.

In 2020, UPM’s environmental investments totalled EUR 6 million (17 million). The largest investments were the modernization of UPM Chudovo plywood mill’s wastewater treatment plant and a system to collect rainwater from the wood yards and direct it to the wastewater treatment plant at UPM Kaukas. UPM’s environmental costs, which were mainly attributable to effluent treatment and waste management, totalled EUR 110 million (123 million), including depreciation.

The company-wide Clean Run programme, launched in 2012, aims to improve UPM’s environmental performance by bringing environmental issues to the forefront of everyday work. All sites systematically follow up any deviations, proactively report observations and near misses, carry out walks and discussions, and compile detailed risk assessments. Despite the global pandemic, approximately 1,700 (1,900) environmental walks were organised and 2,700 (2,900) preventive environmental observations and near misses were reported in 2020.

There has been a significant decrease in the number of environmental non-conformances since UPM’s internal Clean Run programme was launched in 2012. No major environmental incidents occurred at UPM production plants in 2020. However, a total of 17 (19) temporary deviations from permit limits or limits set by UPM occurred over the course of the year. The deviations were minor contraventions of air emission and water-related limits (7 and 10, respectively). All deviations were immediately reported to the authorities and, where relevant, to local stakeholders. Appropriate measures were taken to normalise the situation and prevent similar occurrences.

Climate

The management of climate change related issues is integrated to management of other non-financial issues and is reported to the Board depending on the context and matter. For example: 1) risks are reported to the Board by CFO, 2) related compliance and regulatory issues are briefed quarterly to Audit Committee (Board) by Compliance Officer, 3) annual progress on 2030 responsibility targets is reported by EVP Stakeholder Relations or 4) if there are specific climate-related topics, then responsible topic owner briefs the Board. Additionally, major climate-related issues such as scenario analyses, commitments and UPM’s overall approach of acting through forests, emission reductions in production and supply chain and through climate-positive products are reported directly to UPM management bodies led by CEO.

UPM's position and resilience in different climate scenarios (IPCC RCP 2.6, RCP 4.5, RCP 8.5, IEA B2DS, IEA NPS and IEA CPS) have been evaluated for the businesses and functions from both physical and transitional angles, involving expertise from scientific community. Generally, in low- and medium-emission scenarios the transition impacts play a bigger role and UPM is well positioned as its business portfolio allows for flexibility regarding recognised risks and opportunities. In the high-emission scenario physical impacts dominate with severe consequences not only to UPM but the ecosystems and societies over the globe.

UPM's main target related to climate change is reducing fossil CO2 emissions (scope 1 and 2) by 65% from 2015 level by 2030. This target was validated by Science-Based Target initiative to be aligned with the 1.5°C pathway according to Paris agreement. In 2020, fossil CO2 emissions (scope 1 and 2) summed up to 5.4 million tonnes, which is a decrease of 6% compared to 2019.

Further targets related to climate change are reducing fossil CO2 emissions from supply chain (Scope 3) by 30% from 2018 level by 2030, climate-positive land use and developing climate-positive product portfolio. Concerning land use, forestry and product portfolio, UPM has engaged with scientific partners in order to gain credible data and approaches.

UPM favours the use of renewable and other carbon-neutral energy sources. Biomass-based fuels make up 72% (70%) of fuels used by UPM worldwide. If UPM needed to buy certificates to cover its whole direct fossil CO2 emissions, and if the price of CO2 certificates were to rise by EUR 5 per tonne, it would mean additional costs of approximately EUR 14 million annually.

UPM climate related disclosures according to TCFD (Task Force on Climate-related Financial Disclosures)
are presented in UPM annual report as follows:

Material non-financial topics and key performance indicators

Material risks and their management is described on pages 129–133 of the Report of Board of Directors and in the Annual Report on pages 36–37. Information on the company’s risk management system is available on the corporate website in the governance section and in the Corporate Governance Statement 2020, which is also available as a separate report on the corporate website upm.com/governance. More information about performance related non-financial topics is available in the general section of the Annual Report and on the UPM website upm.com.

Research and development

Innovating for the future

Innovation and R&D programmes are essential in the development of new products and technologies. Research and development funding is primarily being used on studying new technologies and developing businesses and processes. A global network of research centres provides support for UPM’s activities in R&D, both in new and existing businesses.

In 2020, UPM spent EUR 189 (121) million on research and development, making up 18.8% (6.6%) of UPM’s operating cash flow. In addition to direct R&D expenditure of EUR 41 (53) million, the figure includes negative operating cash flow and capital expenditure in

developing businesses, transformative business prospects and digitalisation projects.

Accelerating the development and scale-up of new molecular businesses

Molecular bioproducts form one of UPM’s three strategic focus areas for growth. The biorefinery investment in Leuna, Germany, will enable a switch from fossil raw materials to wood-based sustainable alternatives in various consumer-driven end-uses such as textiles, plastics, PET bottles, packaging and pharma or cosmetics products.

We have also successfully entered the biofuels business and built a profitable and sustainable business platform. Development is currently ongoing, with the aim of expanding the biofuels business with new types of technology concepts and biomass-based raw materials.

Our new state-of-the-art R&D Biofore Base in Lappeenranta, Finland, combines research, piloting and analytics, and unites our technologies, globally accumulated experience and expertise in the new and existing businesses. Strategic research further accelerates the commercialisation of bio-based solutions into viable industrial processes in a cost-efficient way. In 2020, special focus was placed on new value chains in our growth businesses: biochemicals, biofuels and specialty packaging.

Innovating climate-positive products

Our products offer solutions to mitigating climate change as they systematically replace fossil raw materials with bio-based renewable alternatives. Carbon bound from the atmosphere remains in our products over their lifetime, even if they’re recycled several times.

We are committed to a climate-positive product portfolio. Many of our products are already proven to be climate positive. In 2020, we initiated a study on climate-related substitution and the carbon storage effects of our products with two research institutes, the German IFEU (Institut für Energie- und Umweltforschung) and the Finnish Environment Institute (SYKE). In the future, we aim to scientifically verify the climate impacts of all our products.

One example of our research related to climate change mitigation is renewable hydrogen. Potential commercial applications using various technologies are evaluated with the aim to lower CO2 emissions. We also became a member of the European Clean Hydrogen Alliance.

Focus on sustainability and circular economy solutions

Our R&D activities are guided by our aim to meet our 2030 responsibility targets and integrate contribution to the UN Sustainable Development Goals (SDGs) into product development. In 2020, we renewed our sustainable product design concept. One step was the updating of our ecodesign questionnaire to cover SDGs. We carried out a pilot case in the development of sustainable lignin products. In 2021, the work will continue with sustainable packaging and other business areas. Special focus on sustainable product development will be put on circularity.

We are also examining new ways to utilise sustainable fibre-based materials that are being developed for growing end-uses, such as textiles, nonwovens, hygiene products and flexible packaging. New solutions are developed in collaboration with our businesses, technology partners and customers by using revised ecodesign approach as part of sustainable product development concept. We see the residues and side streams as valuable raw materials and thus real business opportunities.

Solid patent portfolio creates value

The significance of the patents, trademarks and intellectual property rights protecting our innovations is even more pronounced in our new businesses, supporting the journey from innovation to business. We have 2,713 patents and patent applications, and 1,360 trademarks globally.

A solid patent portfolio boosts our competitive edge. Licensing of innovations and technologies provides an excellent basis for value creation with customers and technology partners.

More value from digital opportunities

We aim to significantly increase the speed and quality of decision-making, culture of data utilisation and innovation by leveraging high-quality, compliant and modern common data services. Much of what we focus on relates to building the data foundation, including common

platforms, digital customer experience, digital supply chain and intelligent operations.

After having created a rich portfolio of digital projects and initiatives, we created a solid operating model that facilitates data-driven decision making in 2020. As part of the model, data governance management forms an important decision-making body for overseeing the strategic focus areas, data principles and related initiatives. Also in 2020, we created the Data Management Office (DMO) and started to work on UPM’s Digi and Data strategy to achieve more impact and business value from the digital and data-driven opportunities.

Extensive partner network

Our close-knit global partner network is comprised of customers, universities, research organisations, suppliers and start-up companies. Collaboration speeds up the development and launch of new solutions, particularly for new businesses.

The partnership with the European Joint Undertaking on Bio-Based Industries (BBI) focuses on bio-based products and strengthening their competitiveness in Europe. As a shareholder in the Finnish company CLIC Innovation Ltd, we aim for breakthrough solutions in the bioeconomy, circular economy and cleantech, as well as in smart energy systems. We are also a member of FinnCERES Ecosystem to collaborate on research into lignocellulose-based materials.

In 2020, UPM Specialty Papers collaborated with 4evergreen Alliance, a initiative by CEPI (the Confederation of European Paper Industries) to further accelerate the fibre-based packaging in the circular economy. UPM Raflatac joined a new global industry-wide consortium CELAB (Creating the Circular Economy for Labelling) to boost liner recycling in the labelling industry. UPM Biofuels joined the BIKE project promoting sustainable biomass value chains for biofuels in Europe.

The new era of biochemicals

In January, UPM made the decision to invest EUR 550 million in a biochemical refinery in Leuna, Germany. The investment will open completely new markets for us, with large growth potential for the future.

The new-to-the-world biorefinery will produce a range of 100% wood-based biochemicals, which will enable a switch from fossil raw materials to sustainable alternatives in various consumer-driven end-uses such as textiles, plastics, PET bottles, packaging and variety of rubber applications.

The total annual capacity of the biorefinery will be 220,000 tonnes. The main products will be bio-monoethylene glycol (BioMEG) and lignin-based renewable functional fillers. The biorefinery will also produce bio-monopropylene glycol (BioMPG) and industrial sugars.

In 2020, detailed engineering, procurement and permitting processes of the project were proceeding at full speed. The construction activities for the biorefinery began in October with the official groundbreaking ceremony. The biorefinery is scheduled to start production by the end of 2022.

UPM’s biochemicals respond to customers’ increasing needs for renewable alternatives. Strong demand-led growth is expected globally as biochemicals are intended mainly to replace chemicals made from fossil raw materials.

The products can be used to replace oil, gas or coal-based materials. Customers don’t need to make changes in their existing value chains as UPM’s biochemicals perform consistently in existing production processes and recycling infrastructure. Moreover, they will significantly reduce the CO2 footprint of the end-use products.

The renewable biochemicals have a huge number of potential industrial and consumer applications. Our go-to market strategy focuses

on building the right partnerships in the value chain with the sustainability conscious companies.

A combination of sustainable wood supply, a unique technology concept and the proximity to customers will ensure the competitiveness of our operations. InfraLeuna GmbH, a company at the heart of European chemical industry, offers very competitive conditions for constructing the biorefinery with its existing permitting processes, logistics arrangements and infrastructure for various services and utilities. The safety and sustainability of the value chain are based on our high standards. Raw materials and key services for the biorefinery will be sourced from a region that enables local value creation and enhances sustainability. Once the biorefinery is fully running and has been optimised, it is expected to achieve the ROCE target of 14%.

In 2020, we joined the Renewable Carbon Initiative (RCI), which promotes the goal of making chemicals more sustainable, more climate-friendly and part of the circular economy in the future. Our investment was awarded as “The Bio Act of the Year 2020” by the World BioEconomy Forum. This recognition substantiates the fact that bioproducts boosting the circular economy are truly seen as fundamental in the fight against climate change.

First clinical product to hospitals

UPM Biomedicals develops and supplies innovative and sustainable wood-based biomedical products for a variety of uses. The main ingredient of our products is high-quality nanocellulose, extracted from birch.

In the long term, we are aiming for personalised medicine, where treatments are developed from patient’s own cells. These cells can be used in  manufacturing and in treatments. The key enabling factor is the fact that our gels are animal-free and therefore also do not introduce animal DNA to the patients. Meanwhile, we sell our products to two application areas: clinical and life science.

In the clinical field, FibDex® wound dressing took the significant step of being introduced to market, when a medical device distributor Steripolar Oy started to sell the product to Finnish healthcare professionals and hospitals.

Based on clinical investigation results, FibDex was granted the CE mark in 2019, allowing the marketing and sale of the wound dressing in the EU. Work towards registration with the US Food and Drug Administration (FDA) is ongoing.

In life science, our main products are GrowDex®, a range of hydrogels for 3D cell culturing and GrowDase®, an enzyme to release the cells from the gel. The main application is in pharma. The nanocellulose ensures excellent compatibility even with the most demanding cells, such as stem cells and patient-derived cells. In addition to the existing GrowDex product family on the market, we launched GrowInk™, new biocompatible ready-to-use hydrogels for 3D bioprinting of cells in 2020.

We work with global partners to develop new biomedical products and applications. In 2020, we joined in a new cancer immunotherapy focused research and innovation project, Cancer IO. The project will have a significant impact on clinical cancer research, healthcare systems, business and, most importantly, on the lives of cancer patients. The collaboration integrates immuno-oncology (IO) activities with universities, university hospitals, cancer patient organisations and major pharmaceutical companies.

Circular economy is the basis of growth for biocomposites

UPM Biocomposites offers innovative and sustainable composite materials for various uses in outdoor construction and consumer products. Over 50% of the raw material originates from renewable sources. The materials are based on UPM’s own research and development.

UPM ProFi biocomposite utilises the cellulose fibres and plastic polymers generated as manufacturing surplus from self-adhesive label material production and from label customers’ label waste. The label waste is collected from UPM Raflatac’s 150 customers and partners from several European countries. Our target is to further increase the use of recycled materials in products. For example, UPM ProFi Piazza decking contains 75% recycled materials, which also includes post-consumer recycled plastics.

In 2020, our focus was on developing internal efficiency and digitalisation, as well as data-based forecasting models. The launch of UPM ProFi Piazza was a commercial success. We also joined the EU Circular Plastics Alliance to boost the use of recycled plastics in consumer goods and, in our case, in UPM ProFi products.

UPM Formi composite material, made from wood-based fibres and polymers, is suitable for different types of industrial and consumer products such as furniture and home appliances. The material has a 30–60% lower carbon footprint than fossil-based materials. It complies with the requirements set by the EU for reinforced plastics in relation to the circular economy.

The new UPM Formi EcoAce product range is based almost entirely on renewable resources. It contains certified wood or cellulose fibres as well as bioplastics made of wood-based feedstock from UPM Biofuels’ production. Production is ISCC Plus certified, which guarantees that the product meets environmental and social standards along the supply chain. In collaboration with customers, we launched two new UPM Formi EcoAce products, Akvila’s reusable cutlery and the MySoda sparkling water maker in 2020.

Development of the UPM Formi 3D biocomposite continued in 2020. The focus was on developing technology around large-scale industrial 3D printing.

R&D’s role in different businesses

Information on shares

Shares

UPM has one class of shares. Each share entitles the holder to one vote at the General Meeting of UPM.

On 31 December 2020, the total number of UPM shares was 533,735,699. Through the issuance authorisation described below, the number of shares may increase to a maximum of 558,735,699. On 31 December 2020, UPM held 411,653 treasury shares, representing approximately 0.08% of the total number of UPM shares and voting rights. There are no specific terms related to the shares.

In 2020, UPM shares worth a total of EUR 9,921million (9,695 million) were traded on the NASDAQ Helsinki stock exchange. This is estimated to represent more than 50% of all trading volume in UPM shares. The highest listing was EUR 31.50 in January and the lowest was EUR 20.31 in March.

Authorisations held by the Board of Directors

The Annual General Meeting held on 31 March 2020 authorized the Board of Directors to decide on the repurchase of a maximum of 50,000,000 of the Company’s own shares. The authorization will be valid for 18 months from the date of the AGM resolution.

The Annual General Meeting held on 31 March 2020 authorized the Board of Directors to decide on the issuance of new shares, the transfer of treasury shares and the issuance of special rights entitling to shares in proportion to the shareholders’ existing holdings in the Company, or in a directed share issue, deviating from the shareholder’s pre-emptive subscription right. The Board of Directors may also decide on a share issue without payment to the Company itself. The aggregate maximum number of new shares that may be issued and treasury shares that may be transferred is 25,000,000, including the number of shares that can be received on the basis of special rights. The authorization will be valid for 18 months from the date of the AGM resolution.

Aside from the above, the Board of Directors has no current authorisation to issue shares, convertible bonds or share options.

Changes in number of shares

Major shareholders at 31 December 2020

Shareholders by category at 31 December, %

Share distribution at 31 December 2020 

Under the provisions of the Securities Markets Act, changes in holdings must be disclosed when the holding reaches, exceeds or falls below 5, 10, 15, 20, 25, 30, 50 or 66.7 (2/3) per cent of the voting rights or the number of shares of the company. The stock exchange releases on notifications of changes in holdings pursuant to Chapter 9, Section 5 of the Securities Market Act are available in UPM website upm.com/investors.

Adjusted share related indicators

1) 2020 proposal

2) Trading on the Nasdaq Helsinki Main Market. Treasury shares bought by the company are included in shares traded.

The definitions of adjusted share related indicators are described below

Board of Directors´ proposal for the distribution of profit

The Board of Directors proposes to the Annual General Meeting of UPM-Kymmene Corporation to be held on 30 March 2021 that a dividend of EUR 1.30 per share be paid based on the balance sheet to be adopted for the financial year ending 31 December 2020 and that the remaining portion of the distributable funds be retained in the Company’s unrestricted shareholders’ equity.

The dividend will be paid to a shareholder who is registered in the Company’s shareholders’ register held by Euroclear Finland Ltd on the dividend record date of 1 April 2021. The Board of Directors proposes that the dividend be paid on 12 April 2021.

On the date of the dividend proposal, 28 January 2021, the Company’s registered number of shares is 533,735,699. The aforementioned number of shares includes 411,653 treasury shares which are not entitled to dividend. As a result, the proposed dividend would total EUR 693.3 million.

On 31 December 2020, the distributable funds of the parent company were EUR 3,523,705,577.69 including EUR 248,543,044.65 profit for the period. No material changes have taken place in respect of the Company's financial position after the balance sheet date. In the opinion of the Board Of Directors, the proposed distribution of profits does not risk the solvency of the Company.

Signatures of the annual accounts and the report of the Board of Directors for the year 2020

Helsinki, 28 January 2021

Financial Statements 2020

Consolidated financial statements, IFRS

Consolidated income statement

Consolidated statement of comprehensive income

The notes are integral part of these consolidated financial statements.

Consolidated balance sheet

The notes are integral part of these consolidated financial statements.

Consolidated statement of changes in equity