Our operating context
Our external operating environment presents us with both risks and opportunities, impacts our ability to generate enterprise value and informs our approach to our stakeholders, as well as our approach to material matters.
The Russia-Ukraine war
Russia's invasion of Ukraine in February this year caused a global inflation, energy, food and supply chain crisis. In addition, many customers were concerned about the use of woodfibre from conflict zones.
The ongoing conflict was exacerbated by Covid-19 lockdowns in China. These developments exerted renewed pressure on global supply chains and energy prices, resulting in further broad-based inflation. Y-o-y variable manufacturing and delivery costs rose by 35% and fixed costs were 4% higher y-o-y due to escalating personnel and maintenance costs.
Several European countries have scaled back on their climate goals in the short term by reverting to coal. For example, Germany is still committed to phasing out coal-fired power plants by 2030. We intended to decommission the coal boiler at Stockstadt Mill by September 2022 but have had to delay this. However, the situation is temporary and we remain committed to a sustainable, low-carbon future – as envisaged by the Paris Agreement and the European Green Deal.
Despite spiralling energy, raw materials and transportation costs, there was strong global demand for paper, particularly packaging, which remained resilient during the Covid-19 pandemic. Strong demand created an equally strong pricing momentum, which we leveraged by increasing pricing of our products. Other risk mitigation strategies included temporarily reducing capacity at Carmignano Mill in Italy, due to the continuing, sharp escalation of energy costs.
The FSC and PEFC (including SFI) withdrew their certifications for Russia and Belarus, excluding wood originating from Russia and Belarus, from their certification systems. We supported stance of both certification bodies and immediately halted our wood procurement from the region. In FY2021, of total woodfibre sourced, less than 0.1% was sourced from Russia.
Rising levels of cyber crime
Digital transformation, the ongoing evolution of malware and the transition to working from home have meant that today, data is at greater risk for a breach. Cyber crime is escalating, causing immense, sometimes invisible damage to businesses and societies. Earlier this year, Sappi was the victim of a cyber attack when a hacker accessed a subset of our internal systems. Our global team identified the anomalous behaviour on one of our file servers and immediately initiated containment protocols.
Due to the rapid response from our teams and existing controls, there was no downtime experienced in any of our operations. In addition, there were no financial losses nor impact to any business systems. Limited, non-business critical information was exfiltrated. There was no access to core business systems nor to any live customer or partner data. The incident affirmed that our recent emphasis on cyber crime risk mitigation is highly justified, as our ability to both detect and contain the infiltration enabled us to avoid a potentially material business interruption.
All files exfiltrated were reviewed and the following proactive measures were applied:
- Limited non-essential and regional internet traffic
- Partnered with multiple industry-leading incident response and forensic partners to capitalise on diverse experience and skill depth
- Ensured all regulatory processes were adhered to through our internal and external legal counsel
- Deployed advanced security detection and response technology at a global scale
- Initiated mandatory training on cyber security for all our employees.
Extreme weather events
The world saw significant weather events in 2022, including record-breaking heat in Europe, wildfires in the US and Algeria, extreme heat and flooding in Pakistan, the melting of Greenland's huge ice sheet, as well as drought in Africa and China.
In South Africa, floods in KwaZulu-Natal province damaged roads, warehouses, railway lines and homes and resulted in the loss of 24,000 tons of production and 32,000 tons of damaged inventory at our Durban port warehouse.
We halted production at our three mills in the KwaZulu-Natal province, Saiccor, Stanger, and Tugela, to ensure the safety of our employees. The mills operated on a skeleton crew as a precautionary measure until it was safe to return to work. Fortunately, there was no material damage to our assets, and we were covered by insurance for property and inventory losses. We provided support to affected communities (described in Our key relationships of this report).
While we expect extreme weather events to continue, our global decarbonisation plans and response to the impact of climate change on woodfibre should help to maintain and enhance enterprise value going forward.
Governments around the world are focusing on mitigating Scope 1, 2 and 3 carbon
emissions through various programmes ranging from carbon trading and taxes
– already in place in some regions in which we operate (South Africa and Europe)
– to actual mandates eliminating the use of coal, for example.
SEU: The EU Green Deal is aimed at making Europe the first climate neutral continent by 2050. The first step is to reduce emissions by at least 55% by 2030, compared to 1990 levels. The EU Green Deal continues to proceed through the European policy process. We are engaging with policy development processes to support outcomes that are ambitious but also feasible to implement.
SNA: In the US, the IRA which was signed into law August 2022, promotes the reduction of carbon emissions by roughly 40% by 2030. SNA is currently assessing the implications of the IRA, particularly opportunities for funding that might support our SBTi-related plans for decarbonisation in the form of tax breaks and other financial benefits. In December 2020, the Canadian federal government released A Healthy Environment and a Healthy Economy (Climate Plan), a climate plan to exceed Canada's 2030 emission reduction targets and achieve net zero GHG emissions by 2050. The federal government has also released an updated nationally determined contribution plan to match its commitments in the Climate Plan. The province of Quebec, in which our Matane Mill is situated, has its own emissions reduction commitment. While we monitor emerging regulation here, we do not see it as a significant risk, given that Matane Mill uses nearly 100% renewable energy and that electricity in the province is mainly derived from hydropower. However, we also monitor emerging regulation related to Scope 3 emissions.
SSA: Developments in this region are discussed in Risk management of this report.
Levels of social disaffection in South Africa are high, fuelled by high unemployment rates of 34% for the general population and over 60% for youth. The situation is exacerbated by slow economic recovery from Covid-19, decaying infrastructure, high levels of crime and corruption, as well as escalating food and fuel prices. Globally, the country has one of the highest social inequality rates with almost half of all South Africans now relying on some financial support from the government. What this means is that living conditions are poor and social mobility is limited. Against this backdrop, Sappi is faced with increased militancy from unemployed youth and business forums. We are also expected to play a bigger role than just business given communities' high expectations for us to facilitate and resolve social ills.
We recognise that we need to ensure the stability of our operations within the context described above. Accordingly, we adopt an approach beyond 'business as usual' in order to maintain our licence to operate and thrive. We do so by investing in the rural economy by generating employment, creating shared value and leveraging our ICFs. Initiated in 2018, ICFs aim to build trust, gain advocacy and achieve shared value.
Sappi participants include management, HR, communication, procurement, engineering and project teams. Community participants range from traditional leaders and councillors to local business and environmental groups and the Abashintshi (young community members, meaning 'changers' in isiZulu). Integral to this structure is forestry managers' participation in social impact programmes (speaking at schools, integrated fire awareness and training) and participating in social engagements (sports days etc.). The ICF focuses on three key areas: community skills development, ABCD and corporate social investment, as well as ESD.
Our community engagement structure
Our engagement approach is both short and long term. In the short term we focus on disaster relief efforts, donations – often in the form of paper, sports and recreation, as well as access to potable water and road and infrastructure support. In the longer term we focus on systemic change and helping to build social capital. This incorporates support throughout the education value chain – from support for ECD, to the Sappi Skills Centres at Ngodwana and Saiccor mills, which are focused on technical training. It also extends to environmental projects such as our partnership with WWF-SA (described in Our key material issues) that both mitigate harm and create environmental benefit. Self-empowering ABCD projects like the Abashintshi help to drive community self-reliance. So too, do our collaborations with other organisations aimed at shared value which include:
- Offering non-monetary developmental support for SMEs through a memorandum of understanding with the Small Enterprise Development Agency (SEDA)
- Funding the membership of 10 of our incumbent SMEs for the Durban Chamber of Commerce and Industry which offers training, development support, networking and market expansion opportunities to these SMEs
- Establishing memoranda of understanding with Ithala Bank and the Industrial Development Corporation for the provision of funding to SMEs within our value chain
- Contributing ZAR694,000 to the National Business Initiative for the establishment of a business hub in Mandeni aimed at developing technical skills among identified SMEs and job-creation opportunities for local youth – the other funders are the German and Swiss governments
- Partnering with a major South African logistics company to run a five-year incubation programme for the delivery of finished product between Saiccor Mill and our Durban warehouse.
Through shared value, our overarching aim, is to move our communities towards a sustainable future independent of Sappi.
Earth's wildlife populations have plunged by an average of 69% in just under 50 years, according to the WWF and Zoological Society of London's Living Planet Report1, as humans continue to clear forests, consume beyond the limits of the planet and pollute on an industrial scale. The report highlights that land use change is still the most important driver of biodiversity loss across the planet.
As our business depends on healthy ecosystem function, we have a particular interest in participating in initiatives to arrest biodiversity loss. We do so in the following ways:
- High levels of certification to independently verified system
- Membership of the Circular Bioeconomy Alliance aims to accelerate the transition to a circular bio-economy that is climate neutral, inclusive and prospers in harmony with nature
- Business for Nature's #MakeitMandatory campaign, which calls on all large businesses and financial institutions to assess and disclose their impacts and dependencies on biodiversity
- Communicating our support for COP15
- Utilise third-party forest certification systems to advance responsible forest management, identify and manage risk, continuously improve Sappi's operations and those of our suppliers
- Implement detailed procedures and systems to trace and document the origin of wood and the species used in our products
- Conduct annual supply-chain risk assessments coupled with rigorous supplier qualification processes.
See our Woodfibre Procurement Policy at https://www.sappi.com/groupwoodprocurementpolicy
See other initiatives and programmes are described in Our key material issues of this report.