Evolve

Evolution in the natural world is a slow process. But in the hyperconnected world in which we live and work, it’s
fast – and becoming faster all the time. As an example, twenty years ago, very few people had ever heard of the ‘Internet of Things’. Ten years ago, the term ‘Industry 4.0’ had not yet been coined. At the start of 2020, few people had paid attention to terms such as coronavirus, social distancing, lockdowns or infection waves. Yet today, these terms are part of our everyday vocabulary, showing just how fast the world around us is changing.

In response to our rapidly changing landscape, five years ago, we embarked on a strategy of intentional evolution, which involved diversifying our product portfolio in higher margin segments. By 2020, despite market challenges, we had essentially met and in many ways, exceeded this ambition.

Evolution is based on a series of events, processes and responses. Around the world, people are responding to natural resources constraints by seeking responsible alternatives to non-renewables and solutions that are truly sustainable from seed to final product.

We are responding to these needs by building on our success in intentional evolution to accelerate an enhanced journey of evolution aligned with our Thrive25 strategy. We are doing so from a foundation based on a coalition of diverse perspectives and expertise; as well as a history of seeking out and investing in breakthroughs that enable lasting outcomes for our partners and a lighter footprint on the world. We are building on these to ensure that every solution we create supports our goal of making everyday products more sustainable and that we accelerate meaningful change.

Reimagine

Stars form when celestial clouds collapse, feeding a rotating disc of gas and dust into a dense, hot central core. Amongst other things, pulsating stars give off carbon, a key ingredient for life as we know it. From chaos, something beautiful – and essential – is created.

We can view this as a metaphor for the coronavirus pandemic that infected and affected people regardless of nationality, class or wealth, leaving intense disruption in its wake. However, it also ushered in a global drive to reimagine our way of being on the planet. A new agenda for change is emerging, gaining traction and raising questions that will not go away.

Questions like: How do we reimagine a collective future where changed behaviours will allow us to live more in balance with nature than before? How do we

maintain and even intensify the sense of connection, caring and community that was one of the unexpected, but welcome, impacts of the pandemic? How do we deal with the uncertainty on the horizon when future surges of Covid-19 occur?

At Sappi we are taking bold, decisive action to respond to these challenges by extracting the full potential of trees and woodfibre to develop practical innovations for everyday impact and innovate what we should, not just what we can. We’re also establishing and maintaining proactive dialogue with all our stakeholders as well as working with and supporting local communities.

In doing so, we can not only create a more sustainable future, but also unlock significant long-term value for all our stakeholders.

Resilience

Rocks are the ultimate symbol of resilience. They are fused together over time from solid crystals of different minerals. These natural processes bind them all together, imparting strength and resilience. But even rocks are shaped and reshaped over time by natural forces like water, wind and sun.

They’re a reminder that none of us are impervious to the global forces shaping our world. Forces like climate change, urbanisation, social inequality and of course, the new reality brought about by the coronavirus pandemic and Covid-19.

We’ve proven our resilience to succeed in the ‘new normal’ and we will continue to do so as we work to accelerate our decarbonisation journey, meet the changing needs of rapidly urbanising populations while managing our environmental footprint and promoting a diverse, inclusive workforce.

At Sappi we operate across different geographies, meeting the needs of customers from New Zealand to New Mexico, but our common purpose makes us stronger and more resilient: Sappi exists to build a thriving world by unlocking the power of renewable resources to benefit people, communities, and the planet. This is our inspiration and our call to create a brighter future for the world and for our business.

Emerge

Collectively, the world is drawing a deep breath as we slowly emerge from the coronavirus pandemic and impact of Covid-19.

During the crisis, the safety of our people was our top priority. After which, like many enterprises across the world, our underlying goal was economic survival. To achieve this, we focused on the preservation of liquidity, lowering costs by deferring non-critical capex projects and postponing some annual maintenance shuts. We also took commercial downtime across all segments as required, in order to match supply to demand and prevent the build-up of inventory.

The verb ‘emerge’ is derived from the classical Latin ēmergere, meaning ‘to rise out or up’. We are proud

to say that we are rising from the impact of Covid-19 with strong growth in sales and profitability for the packaging and speciality papers segment, quickly recovering dissolving pulp market and steady month-on-month improvement for graphic papers.

As OneSappi we are steely in our determination to emerge from survival mode back onto a growth curve. A curve based on our strategy of diversifying our product portfolio into higher margin and growing segments – a strategy fully justified during the events of the past year.

Doing so is challenging, but we believe we can realise our vision of a thriving world by collaborating with all our stakeholders to create solutions for our collective needs and emerge stronger than ever before.

Momentum

Linear momentum is defined as the product of a system’s mass multiplied by its velocity. The greater an object’s mass or the greater its velocity, the greater its momentum. In other words, momentum is about both magnitude and direction.

It can be difficult to maintain momentum in times of profound change or crisis, but it’s important to do so. That’s because action creates movement which in turn can create unanticipated opportunities.

Recognising this, at Sappi we responded to the coronavirus pandemic and Covid-19 in order to keep our forward momentum. We swiftly implemented a comprehensive Covid-19 action plan that ensured the health and safety of our employees and enabled us to operate in a safe, uninterrupted manner where demand permitted. Working closely with our

customers and suppliers we systematically increased activity and output in response to improved market demand. Our support for local communities helped mitigate the impact of the pandemic and the ensuing socio-economic consequences on them.

Looking ahead, we are confident that we can accelerate our momentum to navigate forward: We have the mass in the form of wide-ranging expertise, extensive infrastructure, strong foundation of research and development, together with our range of sustainable solutions produced from renewable woodfibre. And we have the velocity in the form of our ambitious but achievable Thrive25 strategy, which allows us to take advantage of the changing dynamics between the environment, consumers and the products they require. Above all, our passionate, committed people provide the impetus to power us forward.

Risk management

We have an established culture of managing key risks to our business. We believe effective risk management will safeguard the continuity of our operations, and contribute to the achievement of our strategic objectives. Therefore, we ensure that our risk management processes are aligned and compatible with Sappi’s strategy, taking into account recommendations as set out in the following standards and frameworks: ISO 31000 risk management - principles and guidelines.



Over the years, we have implemented several processes, resources and structures to ensure our risks are managed adequately and efficiently. Among these, we have entrenched safety programmes, internal audit reviews, insurance, information technology (IT) security, compliance and governance processes throughout the group, along with quality management and a range of line management interventions.

Group board of directors

    Assumes overall responsibility for risk governance

Group Audit and Risk Committee

    Mandated to assist the board in carrying out its risk management responsibilities at group level

Line management in each region, business unit and operation

    Responsible for implementing regional risk management processes

Group Internal Audit

    Provides independent assurance on the risk management process

Risk appetite and tolerance

Sappi has a board-approved framework for risk appetite and tolerance. Risk appetite is the total quantum that Sappi wishes to be exposed to on the basis of risk/return trade-offs for one or more desired and expected outcomes. This is the quantum of risk that the board believes will provide an adequate margin of safety within the group’s risk capacity while enabling the achievement of strategic objectives. Risk tolerance is the amount of uncertainty Sappi is prepared to accept. This is the maximum level of loss or reduced earnings that can be absorbed without compromising key objectives, e.g. return on investment.

 

Click on the numbers to view the top 10 risks

Top 10 risks

Residual risk ranking
Safety   Project implementation and execution
Cyclical macro-economic context and competitive industry   Uncertain and evolving regulatory landscape
Evolving technologies and consumer preferences   Employee relations
Liquidity   Climate change
Sustainability expectations   Cyber security

For an analysis of the principal financial risks we are exposed to, refer to note 32 to the Group Annual Financial Statements on www.sappi.com/annual-reports

Our 2020 Risk Management Report provides a detailed discussion of the group’s risk factors, and can be accessed on www.sappi.com/annual-reports

Safety

  (2019: 1)
Root cause   Mitigating actions

Due to the nature of our manufacturing facilities and forestry operations, our employees and contractors operate in an inherently dangerous environment. We continue to prioritise their health and safety to ensure the continuity of our business.

 
  • Conduct root cause analyses of all major incidents and fatalities
  • Drive continuous improvement in safety performance
  • Ensure compliance with behaviour-based safety (BBS) principles
  • Host regular training sessions
  • Approach all transgressions of our safety policies with discipline
  • Encourage reporting of near-miss incidents
  • External safety reviews.
   
Thrive25 strategy objectives impacted     3Ps impacted
   
   

Related material issues

  • Ensuring the safety of our employees and contractors
  • Engaging more closely with our employees
  • Supporting sound labour relations

Cyclical macro-economic context and competitive industry

(2019: 2)
Root cause   Mitigating actions

Our business is impacted by cyclical changes in global economic conditions, including fluctuations in exchange rates, supply, industry capacity and output levels, and demand. Global economic turmoil (including that caused by the Covid-19 pandemic) can lead to significant decreases in volume, as well as pressure on our prices in the markets where we operate. We continue to operate in a highly competitive environment. Over the past few years, consolidation in the pulp and paper industry – leading to larger, more focused companies – has become more prevalent.

 
  • Monitor the balance between supply and demand
  • Impair operating assets when needed
  • Implement capacity closures as required
  • Improve efficiencies and reduce costs across the business
  • Enhance customer service, innovation, and efficient manufacturing and logistics
  • Drive performance to set our businesses apart from competitors
  • Increase pulp integration – as an example, through our acquisition of Matane Mill.
 
Thrive25 strategy objectives impacted     3Ps impacted
   
 

Related material issues

  • Containing costs and ensuring appropriate capital allocation
  • Supporting sound labour relations

Evolving technologies and consumer preferences

(2019: 3)
Root cause   Mitigating actions

The advent of new technologies has an unavoidable impact on the way we operate. Similarly, changes in consumer preferences driven by emerging trends in advertising, electronic data transmission and storage, the internet and mobile devices, as well as digital alternatives to traditional paper applications, could materially affect the sustainability of our business.

 
  • Improve profitability by implementing restructuring and other cost-saving projects
  • Enhance productivity
  • Drive growth in our higher-margin packaging and speciality paper businesses
  • Leverage our position in the market to capture growth in the dissolving pulp market.
 
Thrive25 strategy objectives impacted     3Ps impacted
   
 

Related material issues

  • Sourcing responsibly
  • Meeting long-term demand growth for cellulosic-based fibres
  • Increasing the sustainability of our products through circular design and adjacent markets
  • Developing and commercialising innovations in addition to adjacent businesses
  • Sourcing woodfibre responsibly
  • Prioritising renewable and clean energy
  • Helping to mitigate climate change

Liquidity

  (2019: not ranked)
Root cause   Mitigating actions

Our principal sources of liquidity are cash generated from operations and available under our credit facilities, and other debt arrangements. Our ability to generate cash depends mainly on general economic, financial, competitive, market and regulatory factors. Our cash flow from operations may be adversely impacted by a downturn in world-wide economic conditions (including as a result of the effects of the Covid-19 pandemic), which could result in a decline in global demand for our products.

 
  • Cost saving initiatives
  • Re-prioritising various strategic initiatives
  • Commercial downtime taken to match supply to demand
  • Postponement of scheduled annual maintenance shuts.
 
Thrive25 strategy objectives impacted     3Ps impacted
   
 

Related material issues

  • Containing costs and ensuring appropriate capital allocation
  • Meeting long-term demand growth for cellulosic-based fibres

Sustainability expectations

(2019: not ranked)
Root cause   Mitigating actions

The requirements from stakeholders are changing rapidly, challenging Sappi’s ability to keep up to date, exceed or even lead with regard to regulatory, social, product and environmental demands. Sappi’s operational impact and environmental footprint need to support and demonstrate Sappi’s sustainability commitments and actions.

 
  • Product certifications
  • Enhanced health and safety specifications
  • Recyclability
  • Product innovation (including R&D)
  • Move fast to secure benefit from the high-value niche opportunities created by the ‘paper-for-plastics’ movement
  • Build on our strong position and commitment to fibre certification
  • Promote our social and environmental credentials through media – social and otherwise.
 
Thrive25 strategy objectives impacted     3Ps impacted
   
 

Related material issues

  • Sourcing responsibly
  • Increasing the sustainability of our products through circular design and adjacent markets
  • Developing and commercialising innovations in addition to adjacent businesses
  • Sourcing woodfibre responsibly
  • Prioritising renewable and clean energy
  • Helping to mitigate climate change
  • Focusing on water stewardship
  • Accelerating circular business models
  • Safeguarding and restoring biodiversity

Project implementation and execution

(2019: 6)
Root cause   Mitigating actions

To deliver against our strategy, we invest in several capital expenditure projects across the group. The success of these projects depends on several factors, including time to completion, delivery of expected outcomes and remaining within the parameters of the approved budget. Should our projects not track against expectations – it could impact our reputation and, ultimately, our market share.

 
  • Select and appoint contractors dedicated to quality and safety
  • Evaluate and address any shortcomings between contractor and supplier interfaces
  • Ensure the adequate availability of skilled human resources
  • Consider various contracting philosophies specific to the regions in which we operate
  • Leverage modern tools, including technology, to improve project management functions across project phases
  • Cultivate relationships with main suppliers
  • Source cross-functional global teams and additional internal experts, where applicable, to provide detailed oversight and review
  • Track relevant risk metrics across project phases to ensure successful execution
  • Provide operational and maintenance training.
 
Thrive25 strategy objectives impacted     3Ps impacted
   
 

Related material issues

  • Containing costs and ensuring appropriate capital allocation
  • Meeting long-term demand growth for cellulosic-based fibres

Uncertain and evolving regulatory landscape

(2019: 7)
Root cause   Mitigating actions

Our business is subject to various regulatory requirements across the regions where we operate, including requirements relating to environmental stewardship, health and safety. Significant changes to applicable laws and regulations – along with instabilities in political, financial and social spheres – could impact our competitiveness and profitability.

 
  • Remain up to date on changes to applicable legislation
  • Ensure compliance with all relevant laws and legislation
  • Report regularly on compliance to the Group Audit and Risk Committee
  • Reduce the impact of our operations on the environment, as guided by relevant and recognised programmes
  • Invest in initiatives aimed at reducing our air emissions, wastewater discharges and waste generation
  • Monitor potential changes in pollution control laws, including greenhouse gas (GHG) emission requirements, and take action accordingly
  • Cooperate across regions to apply best practices in sustainability.
 
Thrive25 strategy objectives impacted     3Ps impacted
   
 

Related material issues

  • Maintaining ethical behaviour and compliance

Employee relations

(2019: 9)
Root cause   Mitigating actions

The majority of our employees are represented by labour unions and are subject to collective bargaining agreements. These agreements are negotiated and renewed periodically, and any corresponding wage increases or work stoppages could impact our business. The risk of workforce reductions, closures or restructuring remains a reality given the current economic climate.

 
  • Interact and engage with union representatives and organised labour regularly
  • Build constructive work relationships.
 
Thrive25 strategy objectives impacted     3Ps impacted
   
 

Related material issues

  • Ensuring the safety of our employees and contractors
  • Engaging more closely with our employees
  • Supporting sound labour relations
  • Attracting, developing and retaining key skills

Climate change

(2019: emerging risk)
Root cause   Mitigating actions

Climate change will have an unavoidable effect on our business in the form of transitional, reputational and physical impacts. The latter include the frequency and intensity of forest disturbances such as wildfires and extreme storms. This, in turn, could reduce forest productivity and change the distribution of tree species. The impact of climate change on the availability of raw materials, including the wood supply we need for our operations, may adversely impact our business.

Regarding transitional risk, governments around the world are focusing on carbon trading and taxes – already in place in some regions in which we operate (South Africa and Europe) – as a response to climate change and such taxes could impact profitability to an increasing extent in future.

 
  • Source pulp and woodfibre from a variety of sources and regions
  • Invest in fire, pests and disease prevention protocols in South Africa, as well as site species matching to withstand abnormal weather events and reduce our water footprint in this region
  • Formulate a climate change strategy under the auspices of our Task Force on Climate-Related Financial Disclosure (TCFD) work
  • Sappi Southern Africa has engaged National Treasury to motivate taking into account carbon sequestration by companies that own their own forests when
    calculating carbon tax. Sappi’s process starts with the planting of trees and our supply chain is carbon positive
  • Group-wide decarbonisation initiatives are in place.
 
Thrive25 strategy objectives impacted     3Ps impacted
   
 

Related material issues

  • Increasing the sustainability of our products through circular design and adjacent markets
  • Developing and commercialising innovations in addition to adjacent businesses
  • Sourcing woodfibre responsibly
  • Prioritising renewable and clean energy
  • Helping to mitigate climate change
  • Focusing on water stewardship
  • Accelerating circular business models
  • Safeguarding and restoring biodiversity

Cyber security

(2019: emerging risk)
Root cause   Mitigating actions

During the normal course of our business we make use of our digital platforms to access and transact on confidential customer, employee, financial and commercial information, through our transactional and production systems. We also store, access and share our trade and proprietary information in our databases. These could be vulnerable/ susceptible to cyber-attacks.

 
  • Mitigate against cyber-attacks and information security breaches through our multi-layered information technology security programme
  • Adhere to relevant data protection laws in the jurisdictions where we operate
  • Provide relevant cyber security training to all our employees
  • Identify the employees susceptible to social engineering and phishing attacks.
 
Thrive25 strategy objectives impacted     3Ps impacted
   

Emerging risks and opportunities

While we ensure that our risk management processes are aligned with our strategy, we also take into account that our risks are liable to change. We continue to observe trends and developments within the macro-environment, and are monitoring the following risks as they become topical.

Automation and data exchange in manufacturing technologies (Industry 4.0)

Root cause   Mitigating actions

At Sappi, we recognise the opportunities presented by smart systems and automation, digitisation, data analytics and machine learning. Similarly, we can leverage these systems to optimise our production and maintenance processes, logistics and supply chains, together with enhanced innovation and speed to market. Failing to invest in and pursue Industry 4.0 opportunities, or keeping pace with ongoing developments, could negatively impact the sustainability of our business.

 
  • Leverage our strong foundation of continuous technology improvement and intentional evolution to enhance our competitive advantage
  • Maximise the use of data analytics
  • Enhance efficiency and productivity of our processes
  • Track information on quality, raw materials and environmental stewardship
  • Enhance workforce training and development
  • Utilise intelligent solutions through satellite imaging and drones in our forestry operations.

Incidents of social unrest

Root cause   Mitigating actions

Social unrest in South Africa continues to escalate – the result of a disaffected population protesting about lack of service delivery and job opportunities. This has been exacerbated by the outbreak of Covid-19, leading to the country’s unemployment rate reaching 30.8%. Should South Africa’s broader issues not be resolved, the impact on our business could be disruptive.

 
  • Engage with relevant stakeholders through integrated community forums
  • Our Enterprise and Supplier Development (ESD) department is helping to promote entrepreneurship through a focused capacity building programme focused on small, medium and micro enterprises (SMMEs)
  • We continue to promote entrepreneurship and drive social impact through our Sappi Khulisa programme. Currently, the programme involves over 3,644 growers and approximately 103 SMMEs.

Land restitution

Root cause   Mitigating actions

Generally, Sappi supports the land claim initiatives in South Africa, and we continue to engage with relevant parties in several land claims. Of concern to us is the slow pace of implementation and the length of time taken to conclude claims. The forestry industry continues to be a key driver of growth in the country’s rural areas – if government could unlock this potential growth driver by ensuring a faster process, the attendant benefit would flow directly to the rural communities. However, should this issue not be resolved, it could heighten social tensions and social unrest which, in turn, could negatively impact our operations.

 
  • Enter into supply agreements with land reform beneficiaries, which range from pure supply agreements to comprehensive forestry enterprise development agreements
  • Provide technical and business training
  • Offer administrative support
  • Continue to buy timber from beneficiaries.