Stora Enso Oyj

Financial Report 2020

Contents

This publication consists of both audited and unaudited contents. The audited parts include the consolidated financial statements, the parent company financial statements, and the notes to the financial statements. The unaudited parts - Stora Enso in 2020, and  the Report of the Board of Directors, Stora Enso in capital markets, and Stora Enso as a taxpayer - are marked with a symbol on the top of the page. The contents of Stora Enso as a taxpayer have been assured by an independent third-party assurance provider with a level of Limited Assurance. The official audited financial statements in Finnish and an unofficial Swedish translation can be found on the company website storaenso.com/download-centre

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Stora Enso in 2020

Why to invest in Stora Enso

Part of the bioeconomy, Stora Enso is a leading global provider of renewable solutions in packaging, biomaterials, wooden construction and paper. Our fiber-based materials are renewable, recyclable and fossil free. Our solutions offer low-carbon alternatives to products based on finite resources and solve global sustainability challenges. We believe that everything that is made from fossil-based materials today can be made from a tree tomorrow. This is also the foundation of our entire innovation agenda.

Stora Enso has three strategic focus areas for growth: 1) Packaging Materials and Solutions driven by high demand for plastic free and eco-friendly circular packaging, 2) Building Solutions driven by a growing wooden buildings market, and 3) Biomaterials innovations where we focus on carbon for energy storage, bio-binders and carbon fibres, and target strong growth in new applications and markets. Substantial forest assets, sawmills in the Wood Products division and our pulp mills are the foundation for our value creation and support these three key focus areas. Paper is the cash flow generator to fund our growth. Stora Enso’s financial targets support the Group’s focus on growth and value creation.

Stora Enso shares are listed on Nasdaq Helsinki Oy (STEAV, STERV) and Nasdaq Stockholm AB (STE A, STE R). In addition, the shares are traded in the USA as ADRs (SEOAY).

Key figures

In 2020, Stora Enso revised its long-term financial targets. There are new Group level targets for growth (to grow >5% per annum excluding Paper), and return on capital employed (the target of >13% remains, but now it is excluding the Forest division). Also, the dividend policy was updated to distribute 50% of EPS excluding fair valuation over the cycle. Other Group-level targets remain unchanged.

Unaudited                                                 3

Report of the Board of Directors

The report of the Board of Directors is unaudited.

Stora Enso introduction

Stora Enso had 24 455 employees on average during 2020. Our sales in 2020 were EUR 8.6 billion, with an operational EBIT of EUR 650 million. Stora Enso shares are listed on Nasdaq Helsinki Oy (STEAV, STERV) and Nasdaq Stockholm AB (STE A, STE R).

Markets and deliveries

The global demand for cartonboard remained largely stable over the year. The pandemic presented challenges for a certain number of our end use segments but boosted demand in essential goods such as pharma and food. Demand in the Asian region was stronger than the more mature European and North American markets.

Global containerboard demand increased slightly despite the decline in industrial production caused by the pandemic. The shift in spending from services to goods and strong e-commerce growth compensated the losses in manufacturing. Containerboard consumption was stable in Europe, while it increased in the Americas and China but declined in other parts of Asia.

European corrugated packaging  demand in our main markets saw a slight decrease (2%) due to the pandemic. The strong decline in industrial production in the first half of the year was partly offset by strong traction in e-commerce, food and retail sales. There was a fast recovery in the manufacturing sector in second half of the year.

Global demand for chemical market pulp demand rose by 2.6% during 2020. Softwood pulp deliveries decreased by -3.4% while hardwood pulp deliveries increased by 8.5% compared to 2019. Global market pulp demand increased in Asia, especially in China, and North America while it reduced in Europe. The global chemical market pulp capacity increased by 0.9% in 2020, the softwood capacity decreased by -1.1% while hardwood capacity saw a 1.8% increase. The overall shipment-capacity balance stood at 89%, 2 percent points down from 2019.

By the end of 2020, global pulp inventories came close to a balanced level after being elevated since 2018. During 2020, global pulp markets experienced low pulp prices, generally high inventories and a sharp demand decline from the Printing & Writing segment due to lockdowns and recession caused by the pandemic. Increased demand from tissue and packaging grades supported market pulp demand.

The global sawnwood consumption level declined during 2020 from the 2019 level by some -2% according to market estimates. Due to Covid-19 suppliers cut production especially in the second quarter. In Europe, the market decline was estimated at -2.8% and in North America -3.1%. Low inventory levels led to positive price development in the latter part of the year. Building activity and DIY markets  kept the demand at a high level in most countries during 2020 regardless of lockdowns. In the US, restricted supply led to heavy price increases in the second half of 2020. In Australia, the demand was relatively stable during the year and the market in balance meaning price fluctuations were modest. The Japanese housing market contracted -10% in 2020, but reduced supplies from Europe and North America led to product shortages and an improved market balance by the year end.

The year 2020 was difficult for paper markets. Paper demand was hit hard by the pandemic in addition to continuing structural demand erosion. European paper demand was -18% weaker in 2020 compared to the previous year. As a result of an unforeseen decline in demand in European paper markets, the supply and demand balance turned unfavourable for paper producers. This resulted in declining paper prices. In North America, the demand declined by -22% and in Asia by -13% compared to 2019. Global paper consumption was -17% lower in 2020 than in 2019. However, the variation between paper grades was wide. The decline in the global demand for uncoated was -14%, whereas the demand for standard newsprint and coated mechanical declined by -25%.

Production and external deliveries

4

Unaudited

Estimated consumption of board, pulp, sawn softwood, and paper in 2020 

1 European focus markets (Baltics, FI, PL, RU, SE)

Source: Afry Smart, ICCA, RISI, Numera, Euro-Graph, PPPC, EPIS, Hawkings Wright, Stora Enso, UNECE

The Group’s external consumer board deliveries totalled 2 742 000 tonnes, which was 69 000 tonnes, or -2.4% lower compared to a year ago. This was due to lower volumes in Europe. External containerboard deliveries increased by 27 000 tonnes, or 2.9%, from 943 000 tonnes to 970 000 tonnes, mainly due to higher recycled containerboard deliveries. External corrugated board deliveries in Europe decreased slightly to 902 million m2. Market pulp deliveries increased by 81 000 tonnes, or 3.4%, to record high 2 443 000 tonnes, mainly due to higher market pulp deliveries in the Packaging Materials division. External wood product deliveries decreased by 226 000 m3 or -4.6% to 4 692 000 m3, negatively impacted by the closure and divestment of Kitee and Pfarrkirchen sawmills in Finland and Germany. External paper deliveries totalled 3 106 000 tonnes, down 1 024 000 tonnes, or -24.8%, from 2019, due to lower deliveries in all paper grades and disposal and closures of Dawang Mill in China, and paper production at Oulu Mill in Finland.

Operational key figures, items affecting comparability and other non-IFRS measures

The list of Stora Enso’s non-IFRS measures and the calculation of our key figures are presented at the end of the Report of the Board of Directors. See also the chapter Non-IFRS measures at the end of this report.

Financial results – Group

Sales, at EUR 8 553 (10 055) million, were 14.9% lower than a year earlier. Deliveries reduced in all divisions and the largest drop was in paper volumes. Sales prices were lower in all divisions, with the biggest negative price impacts coming from pulp and paper. The impact of the foreign exchange rate movements on sales was EUR 19 million positive. Structural changes reduced sales by EUR 226 million, the biggest ones being the Oulu Mill conversion in Finland, the divestment of the Dawang paper mill in China in October 2019, the closure of the paper machine 6 at Imatra Mills in Finland in December 2019, the divestment of the Pfarrkirchen Mill in Austria in during the first quarter of 2020, and the closure of the Kitee sawmill in Finland during the second quarter of 2020. Sales excluding the paper business decreased by 8.7%.

Operational EBIT, at EUR 650 (1 003) million, decreased by 35.2% or EUR 353 million and represents a margin of 7.6% (10.0%). Operational EBIT decreased due to lower sales prices and lower volumes in all divisions. The biggest negative impact came from the lower paper volumes and prices and the significantly lower pulp prices.

Sales and Operational EBIT

      EUR million                                                                                    %

Variable costs were EUR 340 million lower, mainly fiber costs including wood, pulp and recycled paper. Fixed costs decreased EUR 117 million due to Covid-19 and profit protection programme actions. The net foreign exchange impact increased operational EBIT by EUR 123 million. The operational result from equity accounted investments was EUR 16 million lower, mainly due to the Bergvik Skog transaction in 2019.

The IFRS operating profit includes a positive net effect of EUR 469 (positive 493) million from IAS 41 forest valuation from subsidiaries and joint operations. The positive impact comes mainly from the increase in fair valuation in Stora Enso owned forests in

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Sweden. There is also a negative net effect of EUR 52 (positive 32) million from Stora Enso’s share of net financial items, taxes and IAS 41 forest valuations of equity accounted investments.

Tangible and intangible asset impairments amounted to EUR 57 (78) million and impairment reversals amounted to EUR 0 (21) million.

The Group recorded items affecting comparability (IAC) with a negative impact of EUR 90 (negative 192) million on its IFRS operating profit and a positive impact of EUR 19 (positive 13) million on income taxes. The IACs relate mainly to asset restructurings in Biomaterials division, the Oulu Mill conversion in Finland and the Hylte Mill restructuring in Sweden.

The IFRS operating profit was EUR 922 (1 305) million.

Segment share of operational EBIT, IAC, fair valuations and non-operational items and operating profit/loss

Operational EBIT comprises the operating profit excluding items affecting comparability (IAC) and fair valuations from the segments and Stora Enso’s share of the operating profit of equity accounted investments (EAI), also excluding items affecting comparability and fair valuations.

IAC =Items affecting comparability are exceptional transactions that are not related to recurring business operations. The most common IAC are capital gains and losses, impairments or impairment reversals, disposal gains and losses relating to Group companies, provisions for planned restructurings, environmental provisions, changes in depreciation due to restructuring and penalties. Items affecting comparability are normally disclosed individually if they exceed one cent per share.

Fair valuations and non-operational items include CO2 emission rights, non-operational fair valuation changes of biological assets, adjustments for differences between fair value and acquisition cost of forest assets upon disposal and the Group’s share of income tax and net financial items of EAI. From 1 January 2020 onwards, the changes in the fair valuation of biological assets are categorized in non-operational and operational fair value changes. Non-operational fair value changes of biological assets reflect changes made to valuation assumptions and parameters, usually during the annual valuation process. Operational fair value changes of biological assets are included in Operational EBITDA and contain all other fair value changes, mainly due to inflation and differences in actual harvesting levels compared to the harvesting plan. The previous periods have been restated.

Items affecting comparability, fair valuations and non-operational items

Segment share of operative assets, operative liabilities and operating capital

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Key figures

Comparative figures for 2018 and 2019 have been restated

1 See the Board of Directors' proposal for dividend distribution.

2 Earnings per share (EPS) excl. FV, Payout ratio, excluding FV and Price/earnings (R share), excluding FV were added to the list of non-IFRS measures during 2020 replacing the key figures of EPS excl. IAC, Payout ratio, excluding IAC and Price/earnings (R share), excluding IAC. Comparatives are recalculated.

Net financial expenses at EUR 150 (168) million were EUR 18 million lower than a year ago. Net interest expenses, at EUR 132 million, decreased by EUR 15 million, mainly as a result of the lower average interest expense rate on borrowings. Other net financial expenses, at EUR 10 million, were EUR 5 million lower than a year ago. The net foreign exchange impact in respect of cash equivalents, interest-bearing assets and liabilities and related foreign-currency hedges amounted to a loss of EUR 8 (loss of EUR 6) million, mainly due to revaluation of foreign currency net debt in subsidiaries and joint operations located in China, Brazil, Poland and Russia.

The net tax charge totalled EUR 156 (281) million, equivalent to an effective tax rate of 20.1% (24.7%), as described in more detail in Note 9 Income taxes, of the Consolidated Financial Statements.

The loss attributable to non-controlling interests was EUR 9 (24) million, leaving a profit of EUR 626 (880) million attributable to Company shareholders.

Earnings per share excluding fair valuations were EUR 0.45 (0.61). Operational return on capital employed was 5.8% (10.3%).

The Group capital employed was EUR 11 714 million on 31 December 2020, an increase of EUR 1 082, mainly due to the increase of fair valuation of forest assets in Sweden resulting from valuation and accounting principles changes.

Breakdown of Capital Employed change

Financing

Cash flow from operations was EUR 1 344 (1 991) million and cash flow after investing activities was EUR 680 (1 386) million. Working capital decreased by EUR 195 (240) million, inventories decreased by EUR 179 million and short-term receivables by EUR 178 million having a positive impact on working capital. Payments related to the previously announced provisions were EUR 24 million.

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Operative cash flow

Comparative 2019 figures have been restated.

At the end of the year, Group net interest-bearing liabilities were EUR 2921 (3 209) million. The decrease in net interest-bearing liabilities was mainly driven by a solid cash flow from operations after investments and dividend payments. Cash and cash equivalents net of bank overdrafts increased to EUR 1 655 (863) million mainly as a result of the new Green bond financing issued during the year and solid cash flow from operations after investments and dividend payments. The Group increased cash liquidity and available committed credit lines during the year due to the increased uncertainty caused by Covid-19. The net debt/equity ratio at 31 December 2020 decreased to 0.33 (0.43) mainly as a result of the market transaction based forest assets fair valuation change implemented during the fourth quarter. The ratio of net debt to the last 12 months' operational EBITDA increased to 2.3, compared to the ratio of 2.0 at the end of the previous year. The average interest rate on borrowings for the full year 2020 decreased to 3.2% (3.5%) with a run-rate of 3.0% as per the end of the fourth quarter.

In April 2020 Stora Enso successfully issued a SEK 1 700 million green bond under its EMTN (Euro Medium Term Note) programme and Stora Enso’s Green Bond Framework. The bond matures in April 2025. In June 2020, Stora Enso successfully tapped the above mentioned 2025 SEK Green Bond issued in April 2020 with an additional nominal of SEK 1 400 million. The bond consist of fixed and floating tranches and pays a floating coupon of STIBOR +2.20% and a fixed coupon of 2.375%.

 In November 2020 Stora Enso successfully issued a new EUR 500 million green bond under its EMTN programme and Stora Enso's Green Bond framework. The bond matures in December 2030 and pays a fixed coupon of 0.625%.

Stora Enso has a EUR 600 million committed revolving credit facility that was fully undrawn at the year-end. In addition, Stora Enso has undrawn committed bilateral credit facility arrangements with commercial banks up to EUR 250 million. The original tenor of these bilateral arrangements varies from 18 to 24 months and they mature in 2021 and 2022. Stora Enso also has an undrawn committed EUR 150 million loan signed with European Investment Bank during the fourth quarter that can be drawn latest in 2022 for a five-year maturity. Additionally, Stora Enso has access to to statutory pension premium loans in Finland up to  up to EUR 950 (950) million.

Debt/equity ratio

The market transaction based forest assets fair valuation change implemented during the fourth-quarter increased the Group’s other comprehensive income in equity by EUR 1 195 million. Conversely, the fair valuation of cash flow hedges and equity investments fair valued through other comprehensive income in accordance with IFRS 9 decreased equity by EUR 91 (increased by EUR 95) million mainly due to lower fair valuation of the Group’s shareholding in Pohjolan Voima Oy (PVO) partly offset by net fair valuation gains from outstanding cash flow hedge derivatives recorded in other comprehensive income.

At the end of the year, the ratings for Stora Enso’s rated bonds were as follows:

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Financial results – Segments

As of 1 January 2020, Stora Enso merged its containerboard business with the Consumer Board division, creating a new Packaging Materials division. The remaining business in Packaging Solutions, together with the recently created Formed Fiber unit, constitute a more focused Packaging Solutions division. The Group also established a new Forest division as of 1 January. Certain historical figures for Packaging Materials, Packaging Solutions, Forest, Segment Other and the Group have been restated as described in the release from 19 March 2020.

Packaging Materials division

The Packaging Materials division is a global leader in the circular economy with our premium renewable and recyclable packaging materials based on both virgin and recycled fiber. Addressing the needs of today's eco-conscious consumers, we help customers replace fossil-based materials with low-carbon, renewable and recyclable alternatives for their food and drink, pharmaceutical or transport packaging. A wide selection of barrier coatings enables design optimisation for various demanding packaging end-uses.

Comparative 2019 figures have been restated.

Packaging Materials division sales at EUR 3 115 (3 254) million decreased by 4.3% mainly due to lower prices and volumes for containerboards. The closure of paper machine 6 closure at Imatra Mills in Finland in December 2019 impacted consumer board sales.

Operational EBIT at EUR 403 (339) million increased by 18.8%, mainly due to lower variable costs. Lower pulp prices had the biggest positive impact on variable costs. The Oulu Mill conversion costs had a negative impact of EUR 29 million.

Packaging Solutions division

The Packaging Solutions division develops and sells premium fiber-based packaging products and services. Our high-end eco-friendly packaging products are used by leading brands across multiple market sectors, including store retail, e-commerce and industrials. The portfolio includes corrugated and other converting, design services, automation solutions, and scalable innovations such as formed fiber and biocomposites.

Comparative 2019 figures have been restated.

Packaging Solutions division sales were EUR 594 (698) million, down 15% due to lower volumes and sales prices. Foreign exchange had a EUR 20 million negative impact on sales.

Operational EBIT at EUR 34 (46) million decreased 27% mainly due to lower volumes and investments into new businesses like formed fiber and biocomposites. Variable costs were lower mainly due to lower containerboard prices. Fixed costs were lower due to Covid-19 and profit protection programme actions.

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Biomaterials division

The Biomaterials division meets the growing demand for the replacement of products made from fossil-based and hazardous materials with bio-based solutions. We use all fractions of biomass, like lignin and sugars, to develop new solutions. We work to replace fossil-based materials with new applications such as carbon for energy storage, bio-based binders, and bio-based carbon fiber. The division’s offering includes a wide variety of pulp grades to meet the demands of paper, board, tissue, textile and hygiene product producers as well as materials from side streams of our processes, such as tall oil and turpentine from biomass.

Biomaterials division sales were EUR 1 193 (1 464) million, down 19% due to significantly lower pulp sales prices in all grades. Delivery volumes were also lower.

Operational EBIT, at EUR 9 (233) million decreased 96%, due to significantly lower sales prices in all grades and to some extent higher maintenance costs. Operational EBIT was positively impacted by lower variable costs, mainly logistics. Foreign exchange rates had a positive impact on operational EBIT.

Wood Products division

The Wood Products division is the largest sawn wood producer in Europe and a leading provider of sustainable wood-based solutions for the construction industry. Our growing Building Solutions business offers building concepts to support low-carbon construction and eco-friendly designs. We develop digital tools to simplify the designing of building projects with wood. We also offer applications for windows, doors and for packaging industries, and our pellets provide a sustainable heating solution.

Wood Products division sales were EUR 1 386 (1 569) million, down 11.7%, due to structural changes, lower sales prices mainly in classic sawn and lower volumes. Pfarrkirchen mill in Germany was divested in Q1 2020, Uimaharju sawmill in Finland was transferred to Biomaterials division in the beginning of  2020, Kitee sawmill in Finland was closed and production was stopped in Q4 2019, Biocomposites business was transferred to Packaging Solutions division in Q3 2020. Structural changes decreased sales by EUR 80 million.

Operational EBIT at EUR 114 (105) million increased by 9% due to lower raw material and fixed costs.

Forest division

The Forest division creates value with sustainable forest management, competitive wood supply and innovation, which are the foundation for Stora Enso’s renewable offerings. The division manages Stora Enso's forest assets in Sweden and the 41% share of Tornator, the majority of whose forest assets are located in Finland. The division is also responsible for wood sourcing for Stora Enso’s Nordic, Baltic and Russian operations and B2B customers. Stora Enso is one of the biggest private forest owners in the world.

Comparative 2019 figures have been restated.

Forest division sales were EUR 2 046 (2 321) million, down 12% due to lower prices and volumes.

Operational EBIT at EUR 164 (99) million increased by 65% due to improved operational efficiency in Wood supply units including Group’s own forest holdings in Sweden.

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Paper division

Stora Enso is the second largest paper producer in Europe, with an established customer base and a wide product portfolio for print and office use. Customers benefit from Stora Enso's broad selection of paper products made from recycled and virgin fiber, our technical expertise and our sustainability know-how as well as our mill and customer service centre network.

Paper division sales were EUR 1 979 (2 856) million, down 30.7% due to significantly lower volumes resulted from accelerated market demand decrease due to Covid-19. There is overcapacity in the market and sales price decreases had a negative impact to sales as well. Oulu paper mill Covid-19 and conversion impact to sales was negative EUR 281 million.

Operational EBIT at EUR -38 (213) million declined by 118.1% due to lower volumes and prices. Cost savings had a positive EBIT impact. Oulu paper mill Covid-19 and conversion impact was negative EUR 46 million.

Full year cash flow was positive EUR 30 million due to excellent working capital management.

Other

The segment Other includes Stora Enso’s shareholding in the energy company Pohjolan Voima (PVO), and the Group’s shared services and administration.

Sales of the segment Other at EUR 928 (1 076) million reduced from previous year mainly due to lower internal sales of energy and logistics services.

Investments and capital expenditure

Additions to fixed and biological assets including internal costs capitalised in 2020 totalled EUR 687 (656) million. The total amount includes additions in biological assets of EUR 79 (88) million.

During the second quarter of 2020, the formed fiber production line commissioning was completed at Hylte Mill. The brand PureFiber™ by Stora Enso was launched and production started. The EUR 22 million investment at Skoghall Mill in Sweden in an expansion of the existing water treatment plant was taken in operation in April.

During the third quarter of 2020, the investment of EUR 25 million in the steam turbine in Maxau Mill, Germany was taken in operation. The investment improves the cost-competitiveness of the mill and reduces CO2 emissions.

In August 2020, Stora Enso announced investment in building a pilot facility for producing a lightweight, fiber-based foam material, for protective packaging and cushioning. The pilot plant is built at Stora Enso’s Fors Mill in Sweden. It is estimated that the plant will be ready in the fourth quarter of 2021. Decisions about commercialisation will follow, after evaluating the results of the pilot-scale production.

In September 2020, Stora Enso announced an investment of approximately EUR 79 million in a new production line for cross laminated timber (CLT) at its Ždírec sawmill in the Czech Republic. The investment will further enhance Stora Enso’s position as a global provider of high-quality engineered wooden elements and as a market leader in CLT. Production is scheduled to begin during the third quarter of 2022. The estimated annual production capacity will be approximately 120 000 m³ after ramp-up. Also in September, Stora Enso announced an investment in dispersion barrier technology at its Forshaga site in Sweden as a step in its innovation agenda. The investment of approximately EUR 10 million enables the development and production of paperboard with barrier properties that are easier to handle in a recycling process, have a lower carbon footprint and can be compostable in industrial facilities. The new equipment is expected to come into use during the second quarter of 2021.

In November 2020, Stora Enso commenced a feasibility study and environmental permit application process on enhancing and expanding the pulp- and board-making capabilities at its Skoghall Mill in Sweden. The feasibility study evaluates a possible upgrade and expansion of existing integrated pulp capacity from 370 000 tonnes to 780 000 tonnes annually and a possible increase of 120 000 tonnes in board capacity. After the investment, the mill would be integrated close to 100%, with an additional 220 000 tonnes of softwood market pulp. If the investment is approved following the feasibility study and environmental permit application process, the capital expenditure for the upgrade and expansion is estimated to be approximately EUR 800–850 million. The feasibility study is expected to be completed by the end of 2021. Production would start earliest during the fourth quarter of 2023.

In December 2020, Stora Enso announced an investment of EUR 14 million to build a granulation and packing plant for lignin. According to Stora Enso’s strategy, lignin is one of the key innovation areas for delivering growth on new applications, such as energy storage, binders and carbon fiber. The granulation plant will be located at Stora Enso’s Sunila Mill in Finland. Also in December, Stora Enso announced an investment in centralising and modernising the wood handling capacity at its Imatra Mills in Finland. The investment of EUR 80 million will enhance Stora Enso’s production capabilities for premium packaging board. The investment is planned to start in Q1 2021 and to be completed in Q3 2022.

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The other main projects ongoing at the end of 2020 were the EUR 350 million conversion of the Oulu paper mill into kraftliner production in Finland and the EUR 10 million pilot facility at Sunila Mill in Finland for producing bio-based carbon materials from lignin.

Innovation, research and development

Stora Enso’s expenditure on innovation, research and development in 2020 was EUR 146 (141) million, which was equivalent to 1.7% (1.4%) of sales.

Stora Enso is recognised as the renewable materials company. We believe that everything made with fossil-based materials today can be made from a tree tomorrow. Work for replacing fossil-based products with new bio-based applications continues.

Scale-up of DuraSenseTM by Stora Enso biocomposites production at Hylte Mill, and PureFiberTM by Stora Enso formed fiber products, both in the Packaging Solutions division, lignin for phenol replacement at Sunila Mill, LineoTM by Stora Enso in the Biomaterials division and ECO TAGTM, as well as the New Retail Solution in Intelligent Packaging all continued in 2020. The speed of commercialisation varies but gradually more real customer applications are brought into use.

The Packaging Materials division continued to develop the generation 1 micro-fibrillated cellulose (MFC) films at Imatra Mills. Some adjustments will still be required to the paper machine 7 at Imatra Mills to enable Proof of Concept #2. The first trial orders were shipped during the year. The generation 2 dewatering development continues with collaboration partners. 

The formed fiber project, the implementation of which started in February 2019, has developed very quickly and smoothly. The installation of the first two presses, related pulp handling and infrastructure were commissioned and products qualified with customers. Following the good success an expansion investment was launched in the autumn adding more capacity to the operations at Hylte Mill and establishing a first plant in China for the food service customers.

The Group focuses on the development of sustainable packaging applications to replace plastics, bio-based barriers solutions for packaging and biomaterial innovations around the lignin platform. Additionally, focus on digitalisation has increased with focus areas Robotic Process Automation (RPA), machine learning, smart operations, transparent supply chain, digital customer experience, and Intelligent Packaging.

Strong consumer demand to replace fossil-based plastics has positively impacted the attractiveness of new fiber-based solutions to our customers. These applications include materials for new packaging board grades, especially those aiming to replace single-use plastics and plastic packaging. For long-term success, Stora Enso collaborates with academia and research institutes; for fast results, we work together with startups. During the year, the cooperation with the Combient Foundry Venture Client Program has expanded. A first cycle was run in China in spring 2020 and in the autumn the first materials cycle was launched targeting innovative food packaging and new wood products. Stora Enso was once again recognised as the most start-up friendly corporation in Finland in 2020, as also in 2018.

To trigger innovation processes, we are more active in searching for collaborations with, customers, suppliers, institutes and academia. We have a high activity in ideation by our own employees. WeNovate, our group-wide tool for collecting and evaluating ideas from the divisions and functions, has supported the internal innovation culture development. In 2020, we ran 19 campaigns and had 16 open idea channels operating. In total almost 508 ideas were collected, compared to 1 200 in 2019. The most suitable ideas enter a state-gate based innovation process.

Stora Enso has established funds to be used in an agile manner for capital expenditure in novel projects, which have potential business cases. The Innovation Fund is an allocation for new pilot scale opportunities and new business models. The Digitalisation Fund is an allocation for piloting new digital tools and models. Applications for these resources are approved in the company’s Investment Working Group. We have allocated an agility reserve to cover operational expenses related to cross-divisional projects in 2020.

Stora Enso defines innovation as the process of translating ideas into new value. Research and development work is a basic element in the process. The company employed about to 400 people in the following R&D centres:

•Research Centre and Pulp Competence Centre in Imatra (Finland)

•Research Centre and Pulp Competence Centre in Karlstad (Sweden)

•The Innovation Centre for biomaterials in Sickla, Stockholm (Sweden)

•The Innovation Centre for packaging in Helsinki (Finland)

•Biocomposite Competence Centre in Hylte (Sweden)

•Intelligent Packaging Centre in Tampere (Finland)

•Virdia demonstration plant in Louisiana and Research Centre in Virginia (United States)

Supporting Stora Enso’s innovation strategy, we have several co-operation projects with research organisations and academic institutions. The aim is to build a clearer understanding of how our needs and the universities’ capabilities can meet, first and foremost in the research sphere surrounding Stora Enso research priorities and the long-term scientific challenges for R&D in the divisions. The second target is to widen the contact network. Thirdly, we aim to identify topics where we have special interest regarding the universities’ bachelor, master and PhD programmes, also for recruiting talents to mills and research/innovation centres.

Our collaboration partners include Aalto University in Finland, Chalmers University of Technology and the Royal Institute of Technology in Sweden, VTT Technical Research Centre of Finland, SweTree Technologies, Swedish University of Agricultural Science, Treesearch and Wallenberg Wood Science Center. Stora Enso is a member of national, European and trade associations focused on the bioeconomy and forest agendas including Confederation of European Paper Industries (CEPI), Forest Technology Platform (FTP), and the Swedish and Finnish Forest Industry Federations. Stora Enso is also a member in the EU’s Biobased Industries Consortium (BIC) and the Bio-Based Industries Initiative Joint Undertaking, a partnership within the EU Horizon 2020 research programme.

Intellectual property (IP) is an increasingly important tool to support Stora Enso’s transformation. In this context, IP rights relate to areas such as patents, utility models, designs, trademarks, domain names, know-how and trade secrets. IP landscape as well as FTO (Freedom to Operate) investigations are of equally high importance. During 2020, Stora Enso continued to strengthen its patent portfolio, with priority founding patent applications filed. Over 440 patents were granted worldwide during the year. The Group Intellectual Property (IP) has the responsibility for handling IP matters. The Group IP strategy has been approved by the CEO supported by the Group IP Steering Team.

Non-financial information

Requirements of non-financial information reporting according to the Finnish Accounting Act are reported below. The scope of the reporting includes those non-financial topics that relate to the Group’s key risks.

Risks and policy principles related to these topics are additionally described on pages 15–22, including Stora Enso’s reporting according to Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

Business model

Replacing the use of fossil-based resources with renewable raw materials is the foundation for a sustainable bioeconomy. Stora Enso’s products contribute to a low-carbon circular economy, in which materials are reused and recycled, while waste is minimised, to maximise environmental, social, and financial added value. As a leading renewable materials company with access to carbon-neutral biomass, Stora Enso is in a unique position to combat climate change. Stora Enso’s business model description is in the beginning of the Report of Board of Directors and value creation model is presented in Strategy 2020 on page 12.

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Stora Enso acknowledges the importance of the United Nations Sustainable Development Goals as part of a commonly agreed global ambition to end poverty, protect the planet and improve the lives and prospects of everyone, everywhere. Read more on pages 10–11 in Sustainability 2020.

Sustainability

Sustainability is a key element of Stora Enso’s corporate governance, promoted by the Board of Directors, the CEO, and the Group Leadership Team (GLT). The CEO carries the ultimate responsibility for the successful implementation of the sustainability strategy. Work on sustainability is led by the Executive Vice President, Sustainability, who reports directly to the CEO. The Board of Directors’ Sustainability and Ethics Committee oversees the implementation of Stora Enso’s Sustainability Strategy and Ethics and Compliance Strategy. The Committee met four times in 2020.

Stora Enso’s Sustainability Policy describes our overall approach and governance model. At the same time, our Code of Conduct and other policies, guidelines, and statements on specific sustainability topics all further elaborate our approach, while also guiding our employees in their everyday work. These documents are available at storaenso.com/sustainability.

More information on Stora Enso’s approach to sustainability is published in Sustainability 2020.

Covid-19 pandemic

The global pandemic has underscored the importance of our work on the social agenda. During the year, we promoted the health and safety of our employees and others working in our premises through various measures. We took early action by imposing a global travel ban from early February. We also prohibited all physical meetings, strongly advising personnel to work remotely whenever feasible, restricting access to mill sites, and quarantined any affected employees. These practices were in place throughout most of the year. Our employees were advised to follow the rules and recommendations of national and local authorities both at work and in their private lives. We continue to closely monitor the Covid-19 situation. Read more on our adaption to the global pandemic and work on social agenda on pages 18–31 and 60–63  in Sustainability 2020.

Environmental matters

Forests, plantations, and land use

Key policy: Wood and fiber sourcing, and land management policy

Progress on responsible forestry is followed with a key performance indicator (KPI) measuring the proportion of land in wood production and harvesting owned and managed by Stora Enso that is covered by forest certification schemes. Our target is to maintain the high level of 96%. In 2020, coverage amounted to 98% (98% in 2019). At year-end Stora Enso owned or managed lands with a total area of 2.34 million hectares.

In 2020, the total amount of wood (including roundwood and wood chips) delivered to our mills was 35.0 million m3 (solid under bark) (36.3 million m3 in 2019). The proportion of third-party certified wood in the Group's total wood supply was 78% (75%).

Carbon dioxide

Key policy: Energy and carbon policy

Stora Enso’s science-based target (KPI) is to reduce greenhouse gas emissions from our operations by 31% per tonne of pulp, paper and board produced by 2030 compared with the 2010 base-year. In 2020, our CO2e emissions per saleable tonne of board, pulp, and paper were 26% lower than the 2010 benchmark level (26%1 lower in 2019). The performance remained stable despite the Group’s lower production in 2020 compared to 2019.  During 2020, our performance was positively affected by the less fossil-intensive electricity purchased for our mills in Finland as well as energy efficiency improvements and further reductions of fossil fuel use at several mills.

1 Recalculated due to additional data or organisational scope changes after previous report.

Water use

Key policy: Stora Enso’s Environmental Guidelines

The objective of the Group’s KPIs on total water withdrawal and process water discharges is to drive a downward trend from our 2016 baselines of 57 m3 and 27 m3 per saleable tonne of product, respectively. In 2020, our total water withdrawal was 65 m3 per saleable tonne (61 m3 in 2019) and our process water discharges amounted to 31 m3 per saleable tonne (29 m3 in 2019). The normalised performance as per tonne was partly affected by lower production levels. The water needed at our board, pulp and paper mills is not in direct relation to production volumes, and especially waste-water treatment at our mills require a regular flow of water to function properly.

Social and employee matters

Employees and wider workforce

Key policies: Minimum HR requirements, Health and Safety policy

On 31 December 2020, there were 23 189 (25 141) employees in the Group. The average number of employees in 2020 was 24 455, which 1 640 less  than the average number in 2019. The numbers include 50% of the employees at Veracel in Brazil and Montes del Plata in Uruguay.

Personnel expenses totalled EUR 1 270 (1 331) million or 14.8% of sales. Wages and salaries were EUR 966 (1 004) million, pension costs EUR 152 (166) million and other employer costs amounted to EUR 151 (157) million.

At the end of 2020, the Group's top four countries in respect to the number of employees were Finland, Sweden, China, and Poland. 24% (26%) of employees were women.

Personnel turnover in 2020 was 12.7% (16.3%, restated). Illness-related absenteeism amounted to 3.6% (3.4%, restated) of total theoretical working hours.

In 2020, our Total Recordable Incident (TRI) rate decreased to 6.1 (7.0). The milestone for 2020 was 4.7. Tragically, during the year, two fatalities occurred at our Guangxi forestry operations in China, both involving contractor employees. We have investigated the incidents and their root causes together with the contractor and local authorities. The learnings from these tragic events will be acted upon at Stora Enso to prevent such accidents from recurring.

Stora Enso’s KPI for leadership, the Leadership Index, measures employee perceptions of their managers. The index is calculated based on our annual employee survey. Our target is to achieve an index of 85/100 by 2022. In 2020, the Leadership Index improved to 84 (83).

Remuneration to the Board of Directors and key management is described in Note 7 of the Consolidated financial statements.

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Suppliers

Key policy: Supplier Code of Conduct (SCoC)

Stora Enso’s key performance indicator (KPI) for responsible sourcing measures the proportion of our total supplier spend covered by our SCoC, including all categories and regions. By the end of 2020, 96% of Stora Enso’s total spend on materials, goods, and services was duly covered (96% at the end of 2019), which exceeds our target to maintain the high level of 95%.

Community

Key policies: Human Rights Policy, Guidelines for Social Responsibility

Guangxi, China

Stora Enso leases 81 000 hectares of land in Guangxi province China, of which 53 600 hectares is leased from state-owned forest farms. The remaining 27 400 hectares, or 34% of the total area, is social land leased from village collectives, individual households, and local forest farms.

Parts of the land leased by Stora Enso have been occupied for up to ten years for the purpose of growing crops and trees on a small scale. In some cases, the occupiers are claiming rights to the land based historical land ownership documents that have been superseded by state ownership in successive land reform processes.

At the end of the year, 5 350 hectares of productive land leased by Stora Enso was occupied, including 4 870 hectares of state-owned land and 480 hectares of social land. Approximately 4 000 people were growing crops and trees on the occupied land. In 2020, the Guangxi government’s recent efforts to recover occupied land in the province reached areas where Stora Enso leases land from state-owned forest farms. Stora Enso is carefully monitoring the land recovery process and, for example, reserves the right to stop the proceedings at any point. We have also trained our local staff to identify causes for concern, to promote our grievance channel, and to engage with the occupiers to ensure that they are informed and do not feel threatened.

Bahia, Brazil

In Bahia, Brazil, work continued on a Sustainable Settlement Initiative launched in 2012 to provide farming land and educational support for local families in the landless people’s social movements. In 2018, Veracel signed a new agreement with the social landless movements to complement the earlier agreed Sustainable Settlement Initiative.

Since 2012, Veracel has voluntarily approved the transfer of approximately 20 000 hectares of land to benefit landless people. By the end of 2020, 215 hectares or 0.3% of productive land owned by Veracel remained occupied by movements not involved in the agreements. Veracel will continue to seek repossessions of the remaining occupied areas through legal processes.

At the end of 2020, the total land area owned by Veracel was 213 000 hectares, of which 82 000 hectares are planted with eucalyptus for pulp production.

Respect for human rights

Key policy: Human Rights policy

Stora Enso’s commitment to respect human rights covers all our operations, including our employees, contractors, suppliers, and neighbouring communities. In addition to our commitment to the UN Guiding Principles on Business and Human Rights, Stora Enso’s annual Slavery and Human Trafficking Statement is available at storaenso.com/sustainability. Human rights are integrated into our Sustainability Agenda, which is aligned with the ten principles of the UN Global Compact.

While we respect and consider all human rights important, our highest priority human rights remain the primary focus of our work: 

•Health and safety

•Fair labour (fair employment conditions, forced labour, freedom of association, non-discrimination and non-harassment)

•Land and natural resource rights acquisition and management

•Grievance mechanisms

•Children’s rights (relevant to the forest sector).

We continued to develop our human rights due diligence programme in 2020. By the end of the year, we had finalised 22 out of 24 actions addressing development areas that were identified in 2019.

Anti-corruption and bribery matters

Key policies: Business practice policy, the Stora Enso Code (Code of Conduct)

As to Business Ethics, in 2020, a total of 86 reports received through Stora Enso’s various grievance channels were identified as potential non-compliance cases (57 in 2019). A total of 76 investigations of potential non-compliance cases were completed in 2020 (40 in 2019), also including open cases from previous years. Proven cases leading to disciplinary action, legal action and/or process improvements were identified in 28 (26) of the investigations. Based on our assessments, 10 of the proven cases can be considered to relate to corruption and/or fraud (9 in 2019). All these cases resulted in employee dismissal or disciplinary process. Two of the cases resulted in the termination of business relationships.

The company’s code of conduct index monitors and evaluates employees’ perceptions of Stora Enso’s work on topics covered by the Stora Enso Code and it is based on the annual employee survey results. In 2020, the index increased to 86 in 2020 (84 in 2019). Our objective is to maintain the positive trend by increasing our efforts in communications and training during 2021.

Environmental investments and liabilities

In 2020 Stora Enso’s environmental investments amounted to EUR 91 (54) million. These investments were mainly to improve the quality of air and water, to enhance resource efficiency and energy self-sufficiency, and to minimise the risk of accidental spills.

Stora Enso’s environmental costs in 2020 excluding interest and including depreciation totalled EUR 195 (172) million. These costs include taxes, fees, refunds, permit-related costs, and repair and maintenance costs, as well as waste water treatment chemicals and certain other materials.

Provisions for environmental remediation amounted to EUR 91 (97) million at 31 December 2020, details of which are in Note 22, Other Provisions, of the Consolidated financial statements. There are currently no active or pending legal claims concerning environmental issues that could have a material adverse effect on Stora Enso’s financial position. Payments related to environmental remediation measures amounted to EUR 18 (12) million.

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Risks and risk management

Our approach to risk management

Risk is an integral element of business and corporate governance, and it is characterised by both threats and opportunities, which may have an impact on future performance and the financial results of Stora Enso, as well as on its ability to meet certain social and environmental objectives. Stora Enso is committed to ensuring that systematic, holistic and proactive management of risks and opportunities is among its organisational core capabilities, and that a culture is fostered where both are carefully considered in all business decisions. Through consistent application of dynamic risk analysis and scenario planning, we enhance opportunities and manage risk in order to reduce threats which may prevent us from reaching our business goals.

Risk governance

Stora Enso defines risk as the effect of uncertainty on our ability to meet organisational values, objectives and goals. The Group Risk and Internal Control Policy, which is approved by the Board of Directors, sets out the overall approach to governance and the management of risks in accordance with the COSO (Committee of Sponsoring Organizations) framework and in line with the ISO 31000 standard. The Board retains the ultimate responsibility for the overall risk management process and for determining predominantly through Group policies the appropriate and acceptable level of risk.

The Board has established a Financial and Audit Committee to provide support to the Board in monitoring the adequacy of the risk management process within Stora Enso, and specifically regarding the management and reporting of financial risks. This oversight scope includes also monitoring of the cybersecurity risk. The Sustainability and Ethics Committee is responsible for overseeing the company’s sustainability and ethical business conduct, its strive to be a responsible corporate citizen, and its contribution to sustainable development.

The head of Enterprise Risk Management, reporting to the CFO, is responsible for the design, development and monitoring of the top-down implementation of the Group risk management framework. Each division and Group function head, together with their respective management teams, are responsible for process execution and cascading the framework and guidelines further down in the organisation. The Internal Audit unit evaluates the effectiveness and efficiency of the Stora Enso risk management process.

During 2020, the dedicated Group level coordination team continued its’ work related to the implementation of the TCFD (Task Force on Climate-related Financial Disclosures) recommendations. Also, collaboration between different risk and assurance functions was strengthened with more systematic cross-functional cooperation.

Risk management process

Risk management is embedded in all decision-making processes, with holistic risk assessments conducted also as part of all significant investment decisions. In connection with the annual strategy process, business divisions and group service and support functions conduct a holistic baseline risk assessment, linked to their key objectives. Specific guidance regarding the risk management process is outlined in the enterprise risk management instructions.

Business entities and functions identify the sources of risk events including changes in circumstances and their causes and potential consequences. Stora Enso’s risk model outlines the overall risk universe which is used to support holistic risk identification and risk consolidation, while also providing taxonomy as well as consistency in risk terminology.

Risk analysis involves developing an understanding of the risk to provide an input for risk evaluation. The purpose of risk evaluation is to determine the risk priorities and to support decision making to determine which risks require treatment/actions. Risks are assessed in terms of their impact and likelihood of occurrence, often based on specific risk scenarios. The effectiveness of existing risk reduction is factored in to define the residual risk level. Pre-defined impact scales consider financial, safety and reputational impacts, on both a quantitative and qualitative basis.

Risk treatment involves selecting one or more risk management option, such as avoidance, reduction, sharing or retention. Additional risk mitigation actions are determined for risks which exceed the perceived risk tolerance incorporating the assignment of responsibility, schedule and timetable of the risk response actions.

Following the annual baseline assessment, prioritised and emerging risks, as well as the corresponding risk mitigation and business continuity plans related to those risks, are reviewed in divisional business review meetings on a semi-annual basis.

Despite the measures taken to manage risks and mitigate the impact of risks, and while some of the risks remain beyond the direct control of the management, there can be no absolute assurance that risks, if they occur, will not have a materially adverse effect on Stora Enso’s business, financial condition, operating profit or ability to meet financial obligations.

Risk management process

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Main risk factors

Key risks in 2020

Symbols 

S = Strategic

O = Operational

C = Compliance

F = Financial market and reporting

ST = Short-term (next 12 months)

MT= Medium-term (1-5 years)

LT = Long-term (up to 25-30 years)

Strategic risks

Macroeconomy, geopolitics, and currency rates

Stora Enso operates in more than 30 countries and is affected by the global economy. Changes in broad economic conditions, sharp market corrections, increasing volatility in foreign exchange rates and chronic fiscal imbalances could have negative and material impact on the Group’s profit, cash flows and financial position. A prolonged global recession may materially and adversely affect Stora Enso’s performance and financial condition. A recession may also materially affect the Group’s customers, suppliers and other parties with whom it does business. Exchange rate fluctuations may have a material impact on the reported results through transaction and translation risk impact.

A significant and sustained economic downturn or economic shock, such as the one triggered by Covid-19 during 2020, may involve materially adverse impact on the Group’s operational performance and financial condition. While the global economic outlook has brightened towards the end of 2020, our baseline assumptions show a weaker rebound in 2021 than anticipated earlier. Recent positive vaccine news have shifted the balance of risks substantially and opened the door to a more rapid relaxation of restrictions. However, further downside risks, including rising risk aversion among households, businesses and investors, fragility of systemic resilience, and subdued growth over the medium term are still notable. Consequently, the overall macroeconomic risk is considered to have increased on relative basis, compared to the conditions at end of 2019.

Stora Enso is exposed to several financial market risks that the Group is responsible for managing under policies approved by the Board of Directors. The objective is to achieve cost-effective funding in Group companies and manage financial risks using financial instruments to reduce earnings volatility. The main exposures for the Group besides currency risk are interest rate risk, funding risk, commodity price risk and credit risk.

Financial risks are discussed in detail in Note 24, Financial risk management, of the Consolidated financial statements.

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Policy principles and mitigation measures

The Group has a diversified portfolio of businesses which mitigates exposure to any one country or product segment. We monitor the external environment continuously and our planning assumptions and dynamic scenario modelling take account of important near- to medium-term and long-term drivers and risks related to key macro-economic factors. We closely monitor the Board-approved risk appetite compliance for specific financial metrics and actively manage cash flow and liquidity. We hedge 50% of the highly probable 12-month net foreign exchange flows in main currency pairs. Currency translation risk is reduced by funding assets, whenever economically possible, in the same currency as the asset. The divisions regularly monitor their order flows and other leading indicators, where available, so that they may respond quickly to deterioration in trading conditions. In the event of a significant deterioration in general economic condition and in main leading economic indicators, the Group identifies and implements cost reduction measures to offset the impact on margins from deterioration in sales.

Related opportunities

•A diverse business portfolio and geographical presence, competitive strength and resilient balance sheet reduce the Group’s risk exposures

•Strategic opportunities in changing currency and macroeconomic environment. 

Global warming - physical impacts

Physical risks related to climate change are assessed based on stress scenario on long-term (25-30 years) basis. Changes in precipitation patterns, periods of drought, typhoons and severe frost periods in the subtropics could cause damage to operations and tree plantations. Increases in average temperatures could lead to changes in the tree species composition of forests. Drought periods together with high temperatures increase the risk of forest fires and insect outbreaks, potentially affecting forests and regional wood prices. Milder winters will impact harvesting and transport of wood in northern regions and the related costs. Water stress to our production units is not seen as a material risk given geographical location. The increase in risk level vs 2019 is driven by the lack of political decisions and multilateral coordination to mitigate the climate change, increasing the probability of physical impacts. See also “Competition and market demand”, “Regulatory changes” and “Sourcing”.

Policy principles and mitigation measures

Physical risks are to great extent subject to risk transfer and thereby within the cover of our property and business interruption insurance programs. With regards to forest and plantation assets, making roughly 35% of the Group's balance sheet, Stora Enso benefits from strong strategic resilience through geographical diversification within the asset portfolio. Moreover, risks related to insect damages such as bark beetle infestation in Nordic forest assets is limited by better inherent endurance of Nordic forest compared for instance to Central-European forests. Diligent plantation planning is ensured to avoid frost sensitive areas and non-controversial tree breeding and R&D programmes are applied to increase tolerance of extreme temperatures. Stora Enso maintains a diversity of forest types and structures and enforces diversification in wood sourcing. Wood harvesting in soft soils involves the implementation of best practices guidelines.

Related opportunities

Nordic forests in Finland and Sweden benefit from increased heat summation and longer growing seasons, leading to acceleration in forest growth with direct positive impact on the value of own forest asset and indirect impact related to market wood availability and cost.

Competition and market demand

Continued competition and supply and demand imbalances in the raw material, energy and products market, driven by megatrends such as eco-awareness and climate change, may have an impact on profitability. The paper, pulp, packaging and wood products industries are mature, capital intensive and highly competitive. Stora Enso’s principal competitors include a number of large international forest products companies and numerous regional and more specialised competitors. Customer demand for products is influenced by the general economic conditions and inventory levels and affects product price levels. Product prices, which tend to be cyclical in this industry, are affected by capacity utilisation, which decreases in times of economic slowdowns. Changes in prices differ between products and geographic regions.

The following table shows the operating profit sensitivity to a +/- 10% change in either price or volume for different segments based on figures for 2020.

Operating profit: Impact of changes +/- 10%, EUR million

Furthermore, as a global warming-related risk, extreme weather events may disrupt the operations of our customers, and consequently result in increased volatility on product demand. 

Policy principles and mitigation measures

The ability to respond to changes in product demand and consumer preferences and to develop new products on a competitive and economic basis calls for innovation, continuous capacity management and structural development. The risks related to factors such as demand, price, competition and customers are regularly monitored by each division and unit as a routine part of business management. These risks are also continuously monitored and evaluated on a Group level to gain a perspective of the Group’s total asset portfolio and overall long-term profitability potential.

Related opportunities

Stora Enso, as one of the biggest private forest owners in the world, benefits from a strategic renewable resource base. Our expertise in wood and wood based renewable materials is focused on responding to changing customer and consumer preferences, driven by the climate change. Products based on renewable materials with a low carbon footprint help customers and society at large to reduce CO2 emissions by providing an alternative to solutions based on fossil fuels or other non-renewable materials.

Operational risks

Personal safety – employees and wider workforce

Failure to maintain high levels of safety management can result in harm to the Group’s employees and contractors, and also to communities near our operations and the environment. Impacts in addition to physical injury, health effects and environmental damage could include liability to employees or third parties, impairment of the Group’s reputation, or inability to attract and retain skilled employees. Government authorities could additionally enforce the closure of our operations on a temporary basis.

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Personnel safety and security can never be compromised and thus Stora Enso must be aware of potential safety risks and provide adequate guidelines to people for managing risks related to, for example, travelling, working and living in countries with security or crime concerns. Focusing on the security of key personnel is also important from a business continuity perspective.

Policy principles and mitigation measures

Stora Enso’s goal is to provide an accident-free workplace. Encouraging a company-wide safety culture means that everyone is responsible for making every workday healthy and safe - from our top management and throughout the company. Safety management at Stora Enso is based on international standards such as OHSAS 18001 and ISO 45001, but our processes go beyond these requirements.

Stora Enso’s approach to safety extends to contractors, suppliers, and on-site visitors. We encourage everyone to give feedback and provide ideas on how to further improve safety. Additionally, we promote safety among our contractors and suppliers through a dedicated e-learning - Safety Trail. We also emphasise the importance of safety by asking suppliers for information on their safety performance in our tendering process.

Stora Enso’s Health and Safety Policy defines the objectives for our safety management as well as our governance model on how we manage health and safety topics in practice and how we integrate them into annual planning and reporting.

Other key documents applied in our people and safety management include our:

•Stora Enso Code - our code of conduct

•Supplier Code of Conduct

•Minimum Human Resources Requirements - Labour Conditions

•Global Framework Agreement

•Diversity Policy

For more information please see Sustainability 2020: Employees and wider workforce.

Related opportunities

•Leading health and safety performance strengthens the brand as an employer.

•Improved engagement, efficiency and productivity.

Information technology, security, and digitalisation

The Group is dependent on IT systems for both internal and external communications and for the day-to-day management of its operations. The Group’s information systems, personnel and facilities are subject to cyber security risk. Other operational  IT related risks relate to the potential unavailability of IT services due to human error in operations, damaged hardware in data rooms and data centres, network connection issues and the failure of suppliers to follow service level agreements.

Accidental disclosure of confidential information due to a failure to follow information handling guidelines or due to an accident or criminal act may result in financial damage, penalties, disrupted or delayed launch of new lines of business or ventures, loss of customer and market confidence, loss of research secrets and other business critical information. Further risks involve the loss of backup media and violation of data privacy regulations.

The digital transformation of businesses continues to alter the ways in which organisations operate. Digital capabilities penetrate all aspects of business and operating models, reshaping how companies and functions generate value. Therefore, digitalisation also involves potentially disruptive forces. Moreover, customers, regulators and other stakeholders expect companies to understand what data they have or could have, what risks it poses, and to have plans to manage it well.

Business process erosion, failure to take advantage of the upside that technology offers or inability to harvest related synergies could significantly impair Stora Enso’s competitiveness in the market place.

Policy principles and mitigation measures

The management of risks is actively pursued in the Information Risk Management System and best practice change management and project methodologies are applied. A number of security controls have been implemented to strengthen the protection of confidential information and to facilitate compliance with international regulations. Specific measures include a thorough RfP process in supplier selection for business-critical services, supplier audits, annual controls and audit, data centres located in low-risk areas, backup connections for critical services, disaster recovery plans, targeted scanning and investigation activities, encryption of communication, information and devices, remote management of security on devices and information security awareness training.

Stora Enso has an extensive digitalisation programme with the aim to develop a competitive advantage by making full use of the opportunities to drive revenue growth and internal efficiency. Moreover, Stora Enso has established a programme with external partners to search for technological development initiatives with a clear business purpose. With experimental and fast prototyping, these projects will help to identify and further develop initiatives that will speed up Stora Enso’s digital agenda by exploring new technologies and capabilities.

Related opportunities

•Efficient operations, performance optimisation, innovative product offerings, and new customer services through digitisation and sophisticated IT systems.

•New technologies offer significant potential for higher level of process optimisation and automatisation, generating new business and enhanced value propositions for customers and consumers.

Sourcing

Violation of Supplier Code of Conduct could result in contractual, financial and reputational damages and loss of sales, if Stora Enso were to be blacklisted by customers. Similarly, poor occupational safety performance of subcontractors can be a risk to our reputation. Increasing input costs or availability of materials, goods and services may adversely affect Stora Enso’s profitability. Securing access to reliable low-cost supplies and proactively managing costs and productivity are of key importance. Reliance on outside suppliers for natural gas, oil and coal, and nearly half of the electricity consumed, leaves the Group susceptible to changes in energy market prices and disturbances in the supply chain. As a global warming-related physical risk, potential acute availability shocks or chronic shortage of water may in the long term impact the Group’s operations through our supply chains. There is also an increased risk for disturbances in the supply chain due to cyber incidents, pandemic related lockdown measures, political instability and other drivers related to global trade.

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The following table shows Stora Enso’s major cost items.

Composition of costs in 2020

In many areas Stora Enso is dependent on suppliers and their ability to deliver a product or a service at the right time and of the right quality. The most important products are fiber, chemicals and energy, and machinery and equipment in capital investment projects. Increased demand for carbon neutral primary and secondary biomass fuels may increase energy costs. Drought periods and changing precipitation patterns may affect hydropower generation and electricity prices for units in Europe. Sea level rise will in long term impact the accessibility to ports and salt water intrusion may cause disruption in inbound and outbound supply chain operations. The most important services are transport and various outsourced business support services. For some of these inputs, the limited number of suppliers is a risk.

Policy principles and mitigation measures

Input cost volatility is closely monitored on the business unit, divisional and Group level. The Group applies consistent long-term energy risk management. The price and supply risks are mitigated through increased own generation, shareholding in competitive power assets such as PVO/TVO, physical long-term contracts and financial derivatives. The Group hedges price risks in raw material and end-product markets and supports the development of financial hedging markets. The Group uses a wide range of suppliers and monitors them to avoid situations that might jeopardise continued production, business transactions or development projects.

Suppliers and subcontractors must also comply with Stora Enso’s sustainability requirements as they are part of Stora Enso’s value chain, and their weak sustainability performance could harm Stora Enso and its reputation. Stora Enso’s sustainability requirements for suppliers and audit schemes cover its raw materials, and other goods and services procured. Suppliers are assessed for risks related to their environmental, social and business practices through self-assessment questionnaires and supplier audits. Findings from such assessments are continuously followed up and progressive blacklisting procedures are applied as necessary.

Related opportunities

•Add value and bring innovation to our business globally by building strong and measurable relationships with the best suppliers.

•Enforce harmonised sourcing processes to increase capabilities, increase tender quality to reduce cost, and develop sustainable suppliers to reduce risk.

People and capabilities

Recruiting, retaining and developing a competent workforce and managing key talent throughout Stora Enso’s global organisation are crucial to success. Competition for personnel is intense and the Group may not be successful in attracting or retaining qualified personnel. A significant portion of Stora Enso employees are members of labour unions and there is a risk that the Group may face labour market disruptions especially in times of restructuring and redundancies due to divestments and mill closures or during labour market negotiations.

Moreover, in Finland, the Forest Industry Association has imposed fundamental changes to central agreements and hence Stora Enso will move into a collective bargaining model gradually from 2022. This change and the implementation of adopted process involves increased uncertainty related to labour relations. The loss of key employees, the Group’s inability to attract new or adequately trained employees, or a delay in hiring key personnel could seriously harm the Group’s business and impede the Group and its business divisions from reaching their strategic objectives. Labour market disruptions and strikes could have adverse material effects on the business, financial conditions and profitability.

Policy principles and mitigation measures

Stora Enso manages the risks and loss of key talents through a combination of different actions. Some of the activities aim at providing a better overview of the workforce of the whole Group, making the Stora Enso employer brand better known both internally and externally, globalising some of the remuneration practices and intensifying the efforts to identify and develop talents. Finally, the Group actively focuses on talent and management assessments, including succession planning for key positions. The majority of employees are represented by labour unions under several collective agreements in different countries where Stora Enso operates, thus relations with unions are of high importance to manage labour disruption risks.

Related opportunities

•Skilled and dedicated employees are essential for success.

•Engaged high performing people enable the implementation of transformation strategy and commercial success.

Physical assets

The physical assets that comprise the installed capacity of the production facilities have inherent risks or the potential for failure, and also involve risks for off-specification operation that could result in poor product quality, unplanned production downtime and lower output or increased production costs. In addition to the inherent risks of material process failure, the management must also consider the relative importance, e.g. criticality, of each asset on the plant’s ability to meet delivery commitments and the business plan. In some instances, the risks are the result of inherent design deficiencies, failures in mode of operation or operating practices. In Stora Enso the significant asset risks lie predominantly in integrated (but also non-integrated) pulp and related energy production. The risks related to physical assets have slightly increased compared to end of 2019, driven by some delays in maintenance debt reduction, partly because of COVID-19 restrictions.  

Policy principles and mitigation measures

Protecting production assets and business results is a high priority for Stora Enso to achieve the target of avoiding any unplanned production stoppages. This is achieved through structured methods of identifying, measuring and controlling different types of process risk and exposure. Divisional risk specialists manage this process together with insurance companies and other loss prevention specialists. Each year a number of technical risk inspections are carried out at production units. Risk improvement programmes and cost-benefit analyses of

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proposed investments are managed via internal reporting and risk assessment tools. Internal and external property loss prevention guidelines, fire loss control assessments, key machinery risk assessments and specific loss prevention programmes are also utilised. Planned stoppages for maintenance and other work are important to keep machinery in good order. Preventive maintenance programmes and spare part criticality analyses are utilized to secure the high availability and efficiency of key machinery.

Related opportunities

•Optimised maintenance and well controlled loss prevention programmes.

•Potential for competitive advantage through improved productivity and overall efficiency.

Product safety and compliance

Some of our products are used for package liquids and food consumer products, so any defects could affect health or packaging functions and result in costly product recalls. Wood products are incorporated into buildings, and this may involve product liability resulting from failures in structural design, product selection or installation. Failure to ensure product safety could result in product recalls involving significant costs including compensation for indirect costs of customers, and reputational damage.

Policy principles and mitigation measures

The mills producing food and drink contact products have established certified hygiene management systems based on risk and hazard analysis. To ensure the safety of its products, Stora Enso actively participates in CEPI (Confederation of European Paper Industry) working groups on chemical and product safety. In addition, all Stora Enso mills have certified ISO quality management systems. Furthermore, contractual liability limitation and insurance protection are used to limit the risk exposure to Stora Enso.

Related opportunities

•Differentiation and value creation through superior product quality and the highest level of product conformity.

Forest and land use

Wood is our most important raw material. Failure to meet stakeholder expectations or to ensure the chain of custody and economically, socially and environmentally sustainable forest and land management practices throughout our wood procurement and plantation operations could also result in significant reputational and financial loss to Stora Enso. Unpredicted changes in forest certification schemes could limit the availability of certified raw materials. Furthermore, global challenges such as population growth, global warming, increasing demand for agricultural land and bioenergy, and the widening gap between the supply and demand for wood, all require us to use natural resources even more efficiently. See also "Global warming - physical impacts", "Regulatory changes", and "Communities and human rights".

Policy principles and mitigation measures

Our Policy for Wood and Fiber Sourcing, and Land Management, robust traceability systems and our active promotion of forest certification all help to ensure that no wood or fibre from unacceptable sources enters our supply chain. In addition, when sourcing logging residues and other forest biomass for energy use, we follow the specific guidelines developed for the harvesting of forest energy, which include strict environmental considerations.

Related opportunities

As trees absorb carbon dioxide (CO2) from the atmosphere and – together with wood-based products – act as carbon sinks, wood from sustainably managed forests represents a carbon neutral, renewable alternative to many non-renewable materials. If forests and plantations are managed sustainably, new generations of trees will replace those that are logged, sequestering more CO2 from the atmosphere. Well-managed forests can make entire ecosystems more resilient to negative impacts, and benefit from positive ones.

Mergers, acquisitions, and divestments

Failure to achieve the expected benefits from any acquisition or value from assets or businesses sold can have serious financial impacts. The Group could find itself liable for past acts or omissions of the acquired business, without any adequate right of redress. Failure to achieve expected values from the sales of assets or deliveries beyond the expected receipt of funds may also impact the Group's financial position. In connection with an acquisition, past practices with targets related to e.g. pollution, competition law compliance or corruption could result in additional costs for Stora Enso and cause reputational damage. Divestments may involve additional costs due to historical and unaccounted liabilities. Business restructuring may also involve reputational impacts.

Policy principles and mitigation measures

Rigorous M&A guidelines, including due diligence procedures are applied to the evaluation and execution of all acquisitions that require the approval of the Board of Directors. Structured governance and policies such as the policy for responsible right-sizing, are followed when making restructuring decisions.

Related opportunities

A strong balance sheet and cash flow enable value enhancing M&A, when the timing and opportunity are right.

Compliance risks

Regulatory changes

The Group’s businesses may be affected by political or regulatory developments in any of the countries and jurisdictions in which the Group operates, including changes to fiscal, tax, environmental or other regulatory regimes. Potential impacts include higher costs and capital expenditure to meet new environmental requirements, expropriation of assets, imposition of royalties or other taxes targeted at our industry, and requirements for local ownership or beneficiation.

The EU Green Deal and its climate targets for 2030 and 2050 have resulted in proliferation of future legislation which will impact Stora Enso. The policy initiatives from European commission will include policies and legislation on areas such as EU Forest Strategy, EU ETS, Carbon Border Adjustment mechanism, Sustainable products initiative, Packaging and Packaging waste revision as well as EU taxonomy.

In particular, the EU energy and carbon policies may impact the availability and price of wood fiber. Concerning the EU Emissions Trading Scheme (ETS) 4th trading period, carbon leakage will remain, but the allocation of free allowances is expected to decline. A stress scenario over the next ten years and with a carbon allowance price at 50 EUR/t, assuming the current proposal for the 4th ETS trading period, implies an annual financial impact below Group materiality threshold, even when factoring in increased costs from purchased electricity.

Increased demand for carbon neutral primary and secondary biomass fuels may increase energy costs. General opinion and political consensus to limit wood harvesting, arising from the view to further increase forests’ function as carbon sinks while ignoring the net-positive climate impact of forest products, could limit the availability of wood, increase costs and reduce investment opportunities. Additionally, political instability may result in civil unrest, nullification of existing agreements, harvesting permits or land leases.

Regulation as part of the EU’s Action Plan on sustainable finance brings new climate related obligations on both investors and corporates, in particular through the EU Taxonomy on sustainable activities and integration of ESG risks in investment processes. There is uncertainty as to how Stora Enso’s share will be classified as an investment object in light of this emerging regulation, but good management of financial

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climate and other sustainability related risks and opportunities, as well as disclosure thereof, will improve the likelihood of a favourable perception by the capital markets and thus the cost of capital.

Stora Enso has been granted various investment subsidies and has given certain investment commitments in different countries e.g. Finland, China and Sweden. If committed planning conditions are not met, local officials may pursue administrative measures to reclaim some of the formerly granted investment subsidies or to impose penalties on Stora Enso, and the outcome of such a process could result in a negative financial impact on Stora Enso.

The risks related to regulatory changes have increased during 2020 driven by more protectionist policies amongst key economies and due to potential downside impacts related to key transition risks, such as the EU Green Deal programme.

Policy principles and mitigation measures

•Active monitoring of regulatory and political developments in the countries where the Group operates

•Participation in policy development mainly through industry associations and other partnership programmes

Related opportunities

•Regulatory changes involve market growth potential for sustainable products. Resource efficiency, the low-carbon circular economy and renewability are increasingly important sources of competitive advantage.

Ethics and compliance

Stora Enso operates in a highly regulated business area and is thereby exposed to risks related to breach of applicable laws and regulations (e.g. capital markets regulation, company and tax laws, customs regulation and safety regulation) and breaches of group policies such as the Stora Enso Code, Supplier Code of Conduct and Business Practice Policy regarding fraud, anti-trust, corruption, conflict of interests and other misconduct. Stora Enso may face high compliance and remediation costs under environmental laws and regulations. See also Information systems, security, and digitalisation. Potential impacts include prosecution, fines, penalties, and contractual, financial and reputational damage.

Policy principles and mitigation measures

Stora Enso’s Ethics and Compliance Programme, including policy setting, value promotion, training and knowledge sharing and grievance mechanisms are kept continuously up to date and developed. Other compliance mechanisms include Stora Enso Group’s internal control system and Internal Audit assurance, the Supplier Code of Conduct in supplier contracts, supplier risk assessments, supplier trainings, supplier audits and black-listing procedures. In response to capital markets regulations, Stora Enso’s Disclosure Policy emphasises the importance of transparency, credibility, responsibility, proactivity and interaction.

Environmental risks are minimised through environmental management systems and environmental due diligence for acquisitions and divestments, and indemnification agreements where effective and appropriate remediation projects are required. Special remediation projects related to discontinued activities and mill closures are executed based on risk assessments.

Related opportunities

•Focusing on wider ethical topics rather than mere compliance with regulations will lead to successful business, foster accountability and enhance corporate reputation.

Strategic investments

Stora Enso’s business strategy is to transform itself from a traditional paper and board producer to a customer-focused renewable materials growth company. The success of this transformation depends on the Group’s ability to understand the needs of the customer and find the best way to serve them with the right offering and with the right production asset portfolio. Failure to complete strategic projects in accordance with the agreed schedule, budget or specifications can have serious impacts on our financial performance. Significant, unforeseen changes in costs or an inability to sell the envisaged volumes or achieve planned price levels may prevent us from achieving our business goals. The lower risk level compared to last year is due to lower committed strategic capital expenditure and the good progress in the Oulu Mill conversion project. Hence the risk associated with the implementation is lower.

Policy principles and mitigation measures

Risks are mitigated through profound and detailed pre-feasibility and feasibility studies which are prepared for each large investment. The Group's investment guidelines stipulate the process, governance, risk assessment, management and monitoring procedures for strategic projects, including climate related risk factors. The guidelines also require the calculation of potential cost and income for CO2 emissions as part of the investment proposal.

Environmental and Social Impact Assessments (ESIAs) are conducted for all new projects that could cause significant adverse effects in local communities. Post completion audits are carried out for all significant investments.

Related opportunities

Replacing fossil-based materials by innovating and developing new products and services based on wood and other renewable materials.

Communities and human rights

Social risks may harm existing operations and the execution of investments, especially in growth markets. Failure to successfully manage relationships with local communities and non-governmental organisations (NGOs) could disrupt our operations and adversely affect the Group’s reputation. The Group operates in certain countries, where land and resource ownership rights remain unclear and where related disputes may arise.

In order to transform to a renewable materials company, business restructuring may be required which in some cases can lead to site closures and hence have a significant impact on local communities.

Potential impacts include reputational impacts and negative media coverage, harm to communities and rights holders, disruption of operations, and loss of the licence to operate.

Policy principles and mitigation measures

Stora Enso strives to identify and minimise risks related to social issues in good time, in order to guide decision-making in its investment processes, restructuring planning as well as in its ongoing operations. Tools such as sustainability risk assessment, human rights due diligence and Environmental and Social Impact Assessments (ESIA) help ensure that no unsustainable projects are initiated, and all related risks and opportunities are fully understood in all operations. These tools also enable project plans and operating practices to be adapted to suit local circumstances. Furthermore, dialogue with NGOs is a part of the Group’s stakeholder engagement. More information on community engagement is presented in Stora Enso’s Sustainability Report.

Related opportunities

•Ensuring that the communities around our operations thrive economically, socially, and environmentally is crucial for the success and sustainability of Stora Enso.

•Clear business benefits to Stora Enso through a strong focus on social responsibility, as customers, business partners, investors and potential employees become more and more attracted to socially responsible companies.

For more information, please see Sustainability 2020: Human rights.

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Climate-related financial disclosures (TCFD)

The Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) recommends a framework for disclosing climate-related risks and opportunities that goes beyond current practices. In the online index table, we list our disclosures with reference to TCFD recommendations, and refer to those locations where these issues are addressed in our annual reporting. The location references are complemented in the index with additional information, as necessary. 

Scenario analysis in 2020

The TCFD recommendations encourage companies to use scenario analysis to help ensure that their strategies are resilient to climate change in a range of possible future states. Leading practice shows that this is best approached by breaking down the full scope of scenario analysis into a set of smaller scopes considering asset type and geography, and to apply prioritisation in conducting the full scenario analysis.

Stora Enso is one of the largest private forest owners in the world with forest assets valued at more than EUR 7 billion (land and biological assets, including Stora Enso's share of Tornator) in 2020, including the biological assets of EUR 6.4 billion in Sweden and Finland. Furthermore, 65% of Stora Enso’s wood was sourced from Finland, Sweden, Norway and Northwestern part of Russia. Effects of climate change such as milder winters have already shown to have material impact on the harvesting and transport of wood in northern regions and related costs. To support our annual Enterprise Risk Assessment (ERM), in 2020 Stora Enso developed a scenario analysis with the qualitative assessment of the physical climate impacts on the Nordic forests and our business until 2050. This work was based on the Business-As-Usual scenario by the International Panel for Climate Change (RCP 8.5 scenario) that would deliver a temperature increase of 4–5 degrees. The climate change attributes considered are pests, diseases, droughts, wildfires, floods, periods of frost, water scarcity, changes to precipitation patterns, sea level rise and changing temperatures.

The results show that whilst under the right circumstances a higher temperature increases the growth rate of the forest and hence positively affects wood availability and forest valuation, the other attributes assessed primarily decrease wood availability and increase wood prices. In 2021, we will continue analysing our strategic resilience using different climate-scenarios as part of our annual risk assessment. We will advance the work on physical impacts as well as assess the business impact from a global transition required to limit the temperature increase in line with the Paris agreement.

For more information about our disclosures with reference to the TCFD recommendations and the locations where these issues are addressed in our annual reporting, see the TCFD index table on our website.

Opportunities from substituting non-renewable materials

In 2020, Stora Enso worked with the Swedish University of Agricultural Sciences (SLU) to further develop the scientific methodologies for calculating climate impact for forest product companies, including the contribution achieved from substituting fossil based and other non-renewable materials – for example plastics or concrete. According to the SLU report Stora Enso is estimated to have a positive impact on the climate equivalent to a reduction of 11.5 million tonnes of CO2e from the atmosphere (2019 data). Throughout 2020, Stora Enso also worked with the World Business Council for Sustainable Development on the publication of a new report on the circular bioeconomy, titled "The business opportunity contributing to a sustainable world” to help articulate the business case for low-carbon and circular products from the circular bioeconomy.

Corporate governance in Stora Enso

Stora Enso complies with the Finnish Corporate Governance Code issued by the Securities Market Association (the “Code”). The Code is available at cgfinland.fi. Stora Enso also complies with the Swedish Corporate Governance Code (“Swedish Code”), with the exception of the deviations listed in Appendix 1 of the Corporate Governance Report. The deviations are due to differences between the Swedish and Finnish legislation, governance code rules and practices, and in these cases Stora Enso follows the practice in its domicile. The Swedish Code is issued by the Swedish Corporate Governance Board and is available at corporategovernanceboard.se. 

Legal proceedings

Contingent liabilities  

Stora Enso has undertaken significant restructuring actions in recent years which have included the divestment of companies, sale of assets and mill closures. These transactions include a risk of possible environmental or other obligations the existence of which would be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. 

Stora Enso is party to legal proceedings that arise in the ordinary course of business and which primarily involve claims arising out of commercial law. The management does not consider that liabilities related to such proceedings before insurance recoveries, if any, are likely to be material to the Group’s financial condition or results of operations. 

Legal proceedings in Latin America  

Veracel 

On 11 July 2008, Stora Enso announced that a federal judge in Brazil had issued a decision claiming that the permits issued by the State of Bahia for the operations of Stora Enso’s joint operations company Veracel were not valid. The judge also ordered Veracel to take certain actions, including reforestation with native trees on part of Veracel’s plantations and a possible fine of, at the time of the decision, BRL 20 (EUR 3) million. Veracel disputes the decision and has filed an appeal against it. Veracel operates in full compliance with all Brazilian laws and has obtained all the necessary environmental and operating licences for its industrial and forestry activities from the relevant authorities. In November 2008, a Federal Court suspended the effects of the decision. No provisions have been recorded in Veracel’s or Stora Enso’s accounts for the reforestation or the possible fine.

Changes in organisational structure

Stora Enso established a new Forest division and started reporting it separately at the beginning of 2020. The new division

includes the Group's Swedish forest assets and its 41% share of the equity accounted investment Tornator with the majority of its forest assets located in Finland. The Forest division also includes wood supply operations in Finland, Sweden, Russia and the Baltic countries.

Stora Enso merged its containerboard business previously under the Packaging Solutions division with the Consumer Board division, creating a new Packaging Materials division. The remaining business in Packaging Solutions together with the formed fiber and biocomposite businesses unit, constitutes a more focused Packaging Solutions division. The change was effective as of 1 January 2020.

Changes in Group management

Jari Suominen was appointed EVP, Head of Forest division as of 1 January 2020. He remained a member of the Group Leadership Team.

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David Ekberg was appointed as EVP, Head of Packaging Solutions division and member of the Group Leadership Team as of 1 April 2020.

Lars Völkel was appointed EVP, Head of Wood Products division, and member of the Group Leadership Team as of 1 July 2020.

Katariina Kravi was appointed EVP, Head of Human Resources, and member of the Group Leadership Team as of 1 September 2020. The previous Head of HR, Malin Bendz, left her position at Stora Enso in January 2020.

Annette Stube was appointed EVP, Head of Sustainability, and member of the Group Leadership Team as of 1 September 2020. She succeeded Noel Morrin, who retired at the end of 2020.

Tobias Bäärnman, Chief Strategy and Innovation Officer, and Teemu Salmi, CIO and Head of IT & Digitalisation, were appointed as members of the Group Leadership Team as of 1 November 2020. 

Share capital

Stora Enso Oyj’s shares are divided into A and R shares. The A and R shares entitle holders to the same dividend but different voting rights. Each A share and each ten R shares carry one vote at a shareholders’ meeting. However, each shareholder has at least one vote.

During 2020, a total of 2 419 A shares converted into R shares were recorded in the Finnish Trade Register. On 31 December 2020, Stora Enso had 176 254 415 A shares and 612 365 572 R shares in issue. The company did not hold its own shares. The total number of Stora Enso shares in issue was 788 619 987 and the total number votes at least 237 490 972.

Board of Directors is authorised to decide on the repurchase and on the issuance of Stora Enso R shares. The amount of shares to be issued or repurchased shall not exceed a total of 2 000 000 R shares, corresponding to approximately 0.25% of all shares and 0.33% of all R shares.

Major shareholders as of 31 December 2020 

Share distribution as at 31 December 2020 

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Ownership distribution as at 31 December 2020

Outlook

Stora Enso resumes an annual outlook even though the uncertainties due to the ongoing pandemic in the global economy are expected to remain in 2021. Provided that the vaccination programmes progress as planned and the  virus is contained, there are expectations of economic recovery. Until then, demand for our products remains mixed.

Operational EBIT in 2021 is expected to be higher than the 2020 operational EBIT.

Stora Enso will conclude its EUR 400 million profit protection programme by the end of 2021. The expected fixed and variable cost savings for the year are approximately EUR 80 million. The Group will continue to focus on customer service and cash flow generation in 2021.

Short-term risks and uncertainties

The global outlook has brightened. While we expect a weaker rebound in 2021 than anticipated in the end of Q3/2020, recent vaccine progress has shifted the balance of risks substantially and opened the door to a more rapid relaxation of restrictions. The global output is constrained by social distancing in the near term, before large-scale and permanent reductions in restrictions might begin around mid-2021. Nevertheless, and despite a strong initial recovery, high unemployment, stagnant investments, business insolvencies and surging corporate and sovereign debt, as well as dramatic market corrections triggered by unconventional monetary policy measures may limit the revival in 2021. In addition, Stora Enso continues to face uncertainty in the short and medium term. However, compared with previous recessions, both the industry in general and Stora Enso in particular with its diversified business portfolio and relatively strong balance sheet, are considered more resilient to economic shock and morbid business conditions.

Stora Enso maintains a Covid-19 risk assessment process to determine the potential near- and medium-term implications of the direct and indirect impacts on Stora Enso’s business operations. The process builds on several alternative scenarios, involving the identification and planning of business contingency and cash preservation measures to limit the potential impacts across Stora Enso’s business divisions and to ensure sufficient liquidity in all conditions. The contemplated worst-case scenarios, which assume faltering vaccine progress and delayed W-shaped recovery, would not, in Stora Enso's view, lead to circumstances that would compromise Stora Enso’s ability to continue as a going concern.

The trend towards nationalist anti-globalist policies may grow following the Covid-19 pandemic, with border checks on goods and people becoming more stringent and national interests being promoted. There is also a risk that even open economies, such as those in Western Europe and Asian business hubs, enact policies in direct opposition to globalisation. The tail risk related to the UK’s exit from the EU, subsequent to the trade deal between the two, is mainly limited to near-term congestion in logistics, while the UK market demand is not expected to suffer notable impacts.

Sensitivity analysis

Energy sensitivity analysis: the direct effect of a 10% increase in electricity and fossil fuel market prices would have a negative impact of approximately EUR 11 million on operational EBIT for the next 12 months. 

Wood sensitivity analysis: the direct effect of a 10% increase in wood prices would have a negative impact of approximately EUR 177 million on operational EBIT for the next 12 months. 

Pulp sensitivity analysis: the direct effect of a 10% increase in pulp market prices would have a positive impact of approximately EUR 105 million on operational EBIT for the next 12 months. 

Chemical and filler sensitivity analysis: the direct effect of a 10% increase in chemical and filler prices would have a negative impact of approximately EUR 32 million on operational EBIT for the next 12 months. 

A decrease of energy, wood, pulp or chemical and filler prices would have the opposite impact. 

Foreign exchange rates transaction risk sensitivity analysis for the next twelve months: the direct effect on operational EBIT of a 10% strengthening in the value of the US dollar, Swedish krona and British pound would be approximately positive EUR 133 million, negative EUR 20 million and positive EUR 22 million annual impact, respectively. Weakening of the currencies would have the opposite impact. These numbers are before the effect of hedges and assuming no changes occur other than a single currency exchange rate movement in an exposure currency. 

The Group's consolidated income statement on operational EBIT level is exposed to a foreign-currency translation risk worth approximately EUR 120 million cost exposure in Brazilian real (BRL) and approximately EUR 28 million income exposure in Chinese Renminbi (CNY). These exposures are arising from the foreign subsidiaries and joint-operations located in Brazil and China, respectively. For these exposures a 10% strengthening in the value of a foreign currency would have a negative EUR 12 million and a positive EUR 3 million impact on operational EBIT, respectively.

Events after the balance sheet date

On the 20 January 2021, the Court of Justice of the European Union has given a preliminary ruling (Lexel AB -case, C-484/19) which might have an impact on Stora Enso’s pending disputes concerning the deduction of interest expenses in Sweden.

Proposal for the distribution of dividend

The Board of Directors proposes to the AGM that a dividend of EUR 0.30 per share be distributed on the basis of the balance sheet adopted for the year 2020. The Board of Directors has assessed the Company’s financial situation and liquidity before making the proposal. There have been no material changes in the parent company’s financial position since 31 December 2020, the liquidity of the parent company remains good and the proposed dividend does not risk the solvency of the company. Stora Enso's policy is to distribute 50% of earnings per share (EPS) excluding fair valuation over the cycle. In 2020, EPS excluding fair valuation was EUR 0.45.

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The Parent Company distributable shareholders’ equity on 31 December 2020 amounted to EUR 1 582 387 493.42, including the profit for the period of EUR 505 709 365.15. The Board of Directors proposes to the Annual General Meeting of the Company that the distributable funds be used as follows:

A dividend of EUR 0.30 per share from the distributable shareholders’ equity to be distributed on 788 619 987 shares, not to exceed EUR 236 585 996.10, which would leave EUR 1 345 801 497.32 in distributable shareholders’ equity.

The dividend would be paid to shareholders who on the record date of the dividend payment, 23 March 2021, are recorded in the shareholders’ register maintained by Euroclear Finland Oy or in the separate register of shareholders maintained by Euroclear Sweden AB for Euroclear Sweden registered shares. Dividends payable to Euroclear Sweden registered shares will be forwarded by Euroclear Sweden AB and paid in Swedish crowns. Dividends payable to ADR holders will be forwarded by Citibank N.A. and paid in US dollars. 

The Board of Directors proposes to the AGM that the dividend be paid on or about 30 March 2021.

Annual General Meeting

Stora Enso Oyj's Annual General Meeting (AGM) will be held on Friday 19 March 2021. The Annual General Meeting 2021 will be held with exceptional procedures based on the temporary legislative act to limit the spread of the Covid-19 pandemic approved by the Finnish Parliament. This means that the shareholders of the Company and their proxy representatives may participate in the meeting and exercise their rights as shareholders only through voting in advance as well as by making counterproposals and presenting questions in advance. More information is available at storaenso.com/agm

Non-IFRS measures

The Group’s key non-IFRS performance metric is operational EBIT, which is used to evaluate the performance of its operating segments and to steer allocation of resources to them.Operational EBIT comprises the operating profit excluding items affecting comparability (IAC) and fair valuations from the segments and Stora Enso’s share of the operating profit of equity accounted investments (EAI), also excluding items affecting comparability and fair valuations. 

Items affecting comparability are exceptional transactions that are not related to recurring business operations. The most common IAC are capital gains and losses, impairments or impairment reversals, disposal gains and losses relating to Group companies, provisions for planned restructurings, environmental provisions, changes in depreciation due to restructuring and penalties. Items affecting comparability are normally disclosed individually if they exceed one cent per share.  

Fair valuations and non-operational items include CO2 emission rights, non-operational fair valuation changes of biological assets, adjustments for differences between fair value and acquisition cost of forest assets upon disposal and the Group’s share of income tax and net financial items of EAI.  From 1 January 2020 onwards, the changes in the fair valuation of biological assets are categorized in non-operational and operational fair value changes. Non-operational fair value changes of biological assets reflect changes made to valuation assumptions and parameters, usually during the annual valuation process. Operational fair value changes of biological assets are included in Operational EBITDA and contain all other fair value changes, mainly due to inflation and differences in actual harvesting levels compared to the harvesting plan. The previous periods have been restated.

Cash flow from operations (non-IFRS) is a Group specific way to present operative cash flow starting from operational EBITDA instead of operating profit.  

Cash flow after investing activities (non-IFRS) is calculated as follows: cash flow from operations (non-IFRS) excluding cash spent on intangible assets, property, plant and equipment, and biological assets and acquisitions of EAIs.  

The full list of the non-IFRS measures is presented at the end of this report.

Calculation of key figures

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26

Consolidated financial statements

Consolidated income statement