Lizards are estimated to have been around for 240 million years. Little wonder, given that they make use of a variety of antipredator adaptations, including venom, camouflage, reflex bleeding and the ability to sacrifice and regrow their tails. What’s more, as with other reptiles, the skin of lizards is covered in overlapping scales made of keratin, providing protection from the environment and reducing water loss through evaporation. This characteristic enables them to thrive in some of the driest deserts on earth.
Vigour, strength and adaptability have ensured lizards’ ability to thrive over the course of time.
So, too, at Sappi, our commitment to growing our business and maintaining a healthy balance sheet, has sustained us for almost 90 years. We are vigorous in our commitment to deliver on our Thrive strategy, including by reducing exposure to graphic paper markets while investing for growth in our target markets and capitalising on our leadership position in pulp supply to the lyocell market.
Very little in nature is static – everything is constantly changing and evolving. One miraculous example of this is the metamorphosis of the egg, the caterpillar (larva) and the chrysalis (pupa) into the adult butterfly. This process embodies fresh ideas, renewal and unexpected outcomes.
The caterpillar’s new form as a butterfly opens new horizons, but also new risks, particularly in the form of climate change. Butterflies are particularly sensitive to environmental changes like climatic shifts. That is because they are strictly adapted to certain environmental conditions and their development depends on certain larval food plants and specific microhabitat structures.
In Sappi’s case, climate change presents both risks and opportunities. We are addressing short- and long-term physical and transitional climate risks identified through processes outlined by the Task Force on Climate-related Financial Disclosures (TCFD) to build resilience. In addition, we are determined, as a socially responsible business, to play our part in ensuring a just transition in South Africa as the country faces the reality of reducing its dependence on coal.
We are also determined to accelerate our science-based decarbonisation trajectory which we see as an opportunity to future-proof our business. So too, are the opportunities presented by evolving customer needs and legislation – notably growing demand for sustainable packaging, based on low-carbon impact, together with demand for more sustainable textile fibres.
We cannot achieve our vision of a thriving world without an evolving response to climate change. By collaborating with a broad range of stakeholders we are working to achieve energy security and climate resilience and transform our vision into reality.
Beauty and confidence. Pride and upright posture. These attributes have meant that many cultures over the ages have associated peacocks with royalty and power.
This image is appropriate to Sappi because we too, can stand tall with pride when we consider our past achievements and drive to create not just enterprise value, but value for our people and for communities.
We have achieved enterprise value through our ability to be nimble and optimise profitability in ever-changing markets, reshaping our products and processes to create value and growth for our own business and our customers. We continue to offer our customers a broad range of solutions based on the power of renewable resources that enable them to achieve their sustainability goals and contribute to the low-carbon, circular economy. In doing so, we have continued to focus on treading more lightly on the Planet.
Creating value for our people and communities is underpinned by the structures and programmes we have established which facilitate open, authentic communication, by our ongoing investment in training, development and transformative community programmes, as well as by our collaborative partnerships focused on workable solutions to industry challenges.
Our commitment to delivering sustainable value to our stakeholders is based on our focus on living our values at all times: At Sappi we do business safely with integrity and courage, making smart decisions which we execute with speed.
Hermit crabs are shapeshifters, moulting as they grow, continually shedding their exoskeletons and growing new ones. As their exoskeletons are fragile, they need shells for protection. Rather than produce their own shell, as they grow, they use shells abandoned by other marine creatures. This process is not a one-off, but continues throughout their lifespan, depending on water temperature, habitat and species.
Many species will enhance their chances of survival by encouraging anemones to attach to their shell, as the latter’s stinging tentacles may deter predators. The crabs even transfer the anemones from shell to shell when they move house.
We can draw parallels with Sappi, fortified as we are by our iterative Thrive strategy and by our agility in responding to changes in our operating context to emerge stronger and better positioned for growth. This process is underpinned by ongoing engagement with our stakeholders, whose input helps us shape our response to our environment as we collaborate to build a thriving world.
Bubbles are things of fragility, wonder – and balance. That’s because the inward surface tension forces of the water film are exactly balanced by the outward-pushing pressure of the air inside.
Blowing more air in to make a bigger bubble means more air pressure inside and also means the bubble must get thinner in the process, because there is only so much water to go around. Should one keep blowing more air in, the film eventually won’t have enough reserve water to spread out into a bigger surface, and the ultimate catastrophe occurs: the bubble bursts.
The success of Sappi’s business is also based on balance. This includes continuous capital prioritisation as we look to reduce costs and grow the business while sustaining a healthy balance sheet. It involves reshaping our product portfolio to meet changing market needs and taking advantage of growth opportunities while being mindful of the risks. It means balancing the needs of people and communities with our responsibility to our shareholders.
As we move forward into the future, we know we can rely on the expertise and passion of our people and the ongoing cooperation of our stakeholders to maintain this balance and drive sustainable value creation.
Some mushrooms are bioluminescent, due to luciferins, the same compounds that make fireflies light up at night. This ability is used to attract insects which then spread the mushroom spores elsewhere in the forest, allowing the fungi to reproduce.
But that’s not where connection ends. Beneath every forest and wood lies a complex network of roots and fungi that connects trees and plants to one another. This network – sometimes called the Wood Wide Web – is almost 500 million years old and is vital for most plants on earth. Trees and plants obtain nutrients that the fungi acquire from the soil, such as nitrogen and phosphorus by means of enzymes that the trees do not possess. In return, the fungi receive carbon-rich sugar from the roots of the trees.
This symbiotic relationship enables all connected organisms to thrive.
Similarly, at Sappi our connection with our stakeholders shapes our work to build a thriving world. This connection enables us to meet the changing needs of every employee at Sappi and to offer our partners the renewable innovation they need to be successful. By understanding and connecting with community needs, we drive positive social impact, playing a role beyond making and selling.
Like mushrooms, our business is a living organism – growing, adapting and evolving in a continually shifting context. As we shape our response to this context, we prioritise value creation for all stakeholders.
Our external operating environment presents us with both risks and opportunities, impacts our ability to generate social and enterprise value and informs our approach to our stakeholders, as well as our approach to material matters.
There are deep-rooted problems in South Africa’s state-owned ports and rail companies related to a shortage of freight trains, rail infrastructure and inefficient ports. It is estimated that the negative impact of rail and port’s poor performance equates to 5 – 6% of the country’s GDP, thereby diminishing South Africa’s competitiveness in the global supply chain. Sappi Southern Africa (SSA) exports the majority of the dissolving pulp (DP) produced in the region and relies heavily on the Durban port. The region has also traditionally moved a large proportion of both raw material and finished product by rail.
The unstable rail system was further
compromised following widespread floods in
KwaZulu-Natal in April 2022 – multiple railway line
bridges between Durban and Umkomaas where
our Saiccor Mill is situated became unusable.
These have still not been repaired and according
to authorities, the earliest we can expect the
95-year-old Illovo bridge south of Durban to be operational is at the end of 2025.
On an operational level and in the face of robust demand for our DP, we adjusted to these challenges by increasing road transport routes, working with our logistics partners to contain costs and shipping DP from Ngodwana Mill to the port of Maputo in Mozambique, rather than the port of Durban. In addition, we opened a bonded warehouse for DP in China, with the first shipment taking place in March this year. We are also deploying performance-based standard (PBS) road haul vehicles to mitigate the impact on timber deliveries from the northern part of KwaZulu-Natal.
At a strategic level, at the opening of the Saiccor Mill capacity expansion and environmental enhancement project in September 2022, the Chairman of Sappi Limited raised the issue of port inefficiencies and failing rail infrastructure with South African President Cyril Ramaphosa. In addition, in February this year on the eve of the State of the Nation address, the Sappi Limited CEO called for urgent Government intervention to halt the negative effect of these issues on Sappi’s business operations and the entire value chain.
In August, the national Government established a National Logistics Crisis Committee (NLCC) with a direct reporting line to President Ramaphosa. The committee, which will report to the President every six weeks, has been tasked with overseeing short- and long-term interventions to fix South Africa’s freight logistics system and formulate a logistics road map. Sappi is an active participant in this committee, which is focused on immediate operational improvements in the logistics system as well as longer-term reforms to improve efficiency and competitiveness.
According to the Organisation for Economic Co-operation and Development (OECD), currently, the world produces 430 million metric tons of plastics each year of which over two-thirds are short-lived products which soon become waste (approximately one-third after single use). The OECD also points out that plastic production is set to triple by 2060 if ‘business as usual’ continues. Increasingly, stakeholders around the world are aware of the unintended consequences of the current linear packaging system and are looking for alternatives.
Against this backdrop, in a historic decision at the fifth UN Environment Assembly in March 2022, all 193 UN Member States decided to end plastic pollution. Negotiations regarding a binding legal agreement by 2024 are underway.
The global move away from plastic-based packaging offers Sappi significant growth opportunities and is in line with our Thrive strategy of creating responsibly sourced and sustainable solutions as viable alternatives to fossil-based products.
We are capitalising on consumer preferences and legislative shifts towards environmentally sustainable packaging solutions in various ways. One of these is our US$418 million investment at Somerset Mill to convert Paper Machine 2 from coated woodfree graphic paper to solid bleached sulphate paperboard (as described here). We continue to expand our range of compostable, recyclable packaging solutions and to bring innovations like bagasse-based compostable thermo-moulded food-grade bowls and plates (see here), to market.
Reports indicate that the planet’s biological diversity is shrinking so rapidly that it threatens to undermine the broader climate agenda and enterprise value creation. In fact, the World Economic Forum indicates that US$44 trillion of economic value generation – over half the world’s total GDP – is moderately or highly dependent on nature and its services and consequently, exposed to risks from nature loss1. In September this year the Taskforce for Nature-related Financial Disclosures (TNFD) published a comprehensive document with recommendations and guidance which builds on the work of the TCFD, the ISSB and the GRI. The document is based on the premise that nature-related risks are a reality today in the cash flows and balance sheets of businesses and in the capital allocation portfolios of financial institutions.
As a company based on the power of renewable natural resources, we recognise that our ability to create and maintain value is linked to our interaction with healthy ecosystems throughout our value chain. At the 15th Conference of the Parties to the UN Convention on Biological Diversity (COP 15), 190 nations agreed on a historic package of measures known as the Kunming-Montreal Global Biodiversity Framework. This is deemed critical to addressing the dangerous loss of biodiversity and restoring natural ecosystems.
Sappi’s work to incorporate the TCFD requirements and our longstanding alignment with GRI indicators has given us a strong foundation for incorporating TNFD recommended disclosures, including the LEAP approach:
Sappi Forests has assessed (and continues to assess) – nature-related risks and opportunities, taking into consideration different scenarios. The TNFD has provided guidance on scenario analysis and we will be using this going forward. In addition, we have a biodiversity target related to important conservation areas (ICAs) in South Africa which incorporates defined assessments.
As the world experiences extreme weather events in every region, governments are intensifying their efforts to mitigate climate change through carbon-related legislation.
SEU: The EU hopes to both exert global influence on combatting climate change and addressing potential carbon leakage concerns through the implementation of a Carbon Border Adjustment Mechanism Regulation (CBAM) under the Fit for 55 package. The CBAM, which came into effect on 01 October 2023, is designed to counter the risk of carbon leakage. This is achieved by imposing a charge on the embedded carbon content of certain imports that is equal to the charge imposed on domestic goods under the European Trading Scheme, with adjustments being made to this charge to take into account any mandatory carbon prices in the exporting country. To ensure that there is no double benefit afforded to EU producers, the CBAM will replace the free Emissions Trading Scheme (ETS) allowances currently granted to EU producers assessed to be at high risk of carbon leakage.
Currently, the CBAM covers aluminium, cement, energy, fertilisers, hydrogen, iron and steel. We are monitoring developments closely to ensure that there are no unintended consequences for developing countries like South Africa which is a significant exporter of citrus – packed in Sappi products – to Europe.
Sappi North America (SNA): In the USA, the Inflation Reduction Act (IRA) offers generous tax credits, rebates and subsidies to producers of green technology – provided manufacturing takes place on North American soil.
SNA continues to look for opportunities to apply for both federal funding under the IRA and local funding within our operating states. We received a US$1 million grant from the Maine Technology Institute’s Forestry Recovery Initiative (FRI) in December 2022 to improve productivity and reduce energy at Somerset Mill. The grant funds are being used to improve pulp yield in at the mill, specifically through a new chip treatment process that will improve productivity, lower energy consumption and reduce the use of pulping chemicals.
SSA: To date, we have been governed by the Carbon Tax Act which came into effect on 01 June 2019. The first phase from 01 June 2019 to 31 December 2022 applied to activities that directly emit greenhouse gas (GHG) emissions. The tax includes various allowances in the first phase, including a 100% allowance for forestry. We engaged with the Department of Forestry, Fisheries and Environment (DFFE) to recognise carbon sequestration and the department has validated our carbon sequestration calculation. Government then extended the first phase of South Africa’s carbon tax by three years to 31 December 2025 to support businesses in their clean transition endeavours. SSA’s carbon tax liability for the 2022 calendar year was zero. (Carbon tax works in calendar years, so we only submit data for CY2023 in March 2024.)
We are now monitoring the Climate Change Bill, ambitious legislation which the National Assembly voted to pass shortly after year-end. The adopted version of the Bill will now go to the National Council of Provinces (NCOP) for consideration. Recognising that human-induced climate change represents an urgent threat to human societies and the planet, the Bill seeks to enable an effective climate change response and to ensure a just transition to a low-carbon and climate-resilient society.
South Africa has one of the highest rates of social inequality globally, with unemployment and poverty levels exacerbated by Covid-19, the escalating cost of living and the global economic downturn. SSA supports local communities in 60 of the country’s 278 municipalities. These comprise primary (within a 30km radius of Sappi operations) and secondary communities (within a 50km radius of Sappi’s operations), many of whom have expectations of Sappi to resolve social demands. While the risk of community unrest and potential disruptive impact on our operations has stabilised, as the country prepares for 2024 national elections, political activities can be expected to intensify. This could have potentially negative consequences for some of our operations.
We maintain close relationships with communities through our Integrated Community Forums (ICFs) which incorporate a range of stakeholders from both Sappi and local communities. The ICFs’ overarching focus is on building social capital and strengthening community relationships. This is achieved through skills development, enterprise and social development, as well as social responsibility programmes, in line with SSA’s overall social impact strategy. In addition, Community Management Committees at each mill identify shared value opportunities which help identify and support local entrepreneurs, as well as promote the sourcing of goods and services from local suppliers where possible. Community Service Officers also play a key role in strengthening community relationships, as do extension officers who work with Sappi Khulisa farmers.
Our focused Enterprise Supplier Development (ESD) department aligns with this approach by working to incorporate small and medium enterprises (SMEs) into the mainstream economy. In FY2023, SSA spent just over ZAR316 million with SMEs, exceeding our annual target by ZAR160 million. In the process, 587 jobs were sustained. Over and above this amount, through collaboration with our established contractors, a total of ZAR27 million was spent with SMEs through a sub-contracting arrangement and a further ZAR712,000 was invested in SME training and development interventions. Our most significant ESD initiative through which we strengthen participation in the forestry value chain is Sappi Khulisa (described here).
In recent years, artificial intelligence (AI) has been advancing at an exponential pace, with artificially intelligent machines able to sift through and interpret massive amounts of data from various sources to carry out a wide range of tasks. AI is part of our daily lives as consumers, often providing services and support without us realising it. AI is also being used by organisations to undertake repetitive tasks, to analyse and summarise large quantities of data, identify trends and patterns which are used to improve production, planning, auditing and other functions. Generative AI (GenAI) is one small part of the overall AI landscape, but it has become publicly prominent with the launch of ChatGPT from Microsoft and OpenAI and Bard from Google.
We have adopted AI as part of our digital strategy, where multiple use cases exist using machine learning and computer vision. Sappi is also leveraging the benefit from AI solutions embedded in the solutions we use across our business functions.
Some of our staff have tested these GenAI tools and have asked to be allowed to explore how using GenAI could benefit their work. Our preference is to enable and allow the use of GenAI rather than to ban it as some other companies have done. Accordingly, we have published guidelines for the use of AI including GenAI within Sappi to protect our confidential information. We are also working on a comprehensive enterprise AI strategy which will ensure that both risk and opportunities are appropriately addressed as GenAI capabilities are deployed.