BSN medical GmbH

BSN medical GmbH

Hamburg

Befreiender Konzernabschluss zum Geschäftsjahr vom 01.01.2022 bis zum 31.12.2022

Essity Aktiebolag (publ)

Stockholm/Schweden

Our business areas

Essity is active in an attractive hygiene and health market with leading market positions and strong brands in the company's three business areas: Health & Medical, Consumer Goods and Professional Hygiene. Within the respective business areas' customer and sales channels, we are broadening our solutions for improved well-being for customers and consumers and investing in long-term, rising value creation.

Health & Medical

16% of net sales 2022

Consumer Goods

61% of net sales 2022

Professional Hygiene

23% of net sales 2022

Health & Medical

Comprehensive health and medical solutions along the continuum of care

KEY FIGURES

25,239 Net sales, SEKm

9.6% Sales growth¹⁾

7.3% Organic sales growth²⁾

11.5% Adjusted EBITA margin³⁾

8.6% Adjusted return on capital employed³⁾

The Health & Medical business area comprises the categories Incontinence Products Health Care and Medical Solutions that are sold to family caregivers, professional caregivers, patients and consumers via pharmacies, medical device stores, hospitals, distributors, care institutions and e-commerce.

¹⁾ Including organic sales growth and acquisitions.
²⁾ Excluding exchange rate effects, acquisitions and divestments.
³⁾ Excluding items affecting comparability.

Incontinence Products Health Care

In Incontinence Products Health Care, with the globally leading brand TENA, Essity offers a broad range of incontinence products that also includes skincare products, wet wipes, wash gloves and digital solutions with sensor technology, with sales in the healthcare sector.

With the TENA brand, Essity is the global market leader in Incontinence Products Health Care. Essity is also the market leader in Europe and Latin America. Essity is the third largest player in North America and the fourth in Asia.

Medical Solutions

In the Medical Solutions category, Essity offers products and services in wound care, compression therapy and orthopedics. Essity is the world's fourth largest player and the market leader in Europe in Medical Solutions in the product categories in which the company is active.

Wound care

In acute wound care, plasters and bandages for minor wound care are offered primarily under the Leukoplast brand. In advanced wound care, bandages and digital services for more severe wounds, such as chronic wounds, post-operative wounds and pressure sores, are offered under the Cutimed and Sorbact brands. Essity is the fifth largest global player in wound care, a leading player in Europe and the second largest player globally in acute wound care.

Compression therapy

In compression therapy, compression garments are offered such as stockings and arm sleeves that can be used for medical and chronic conditions, during exercise or for longer trips to prevent swelling caused by the accumulation of fluid in the body. With the globally leading brand JOBST, Essity is the largest player in the world in compression therapy, holding the number one position in North American and the number two position in Europe.

Orthopedics

Within orthopedics, solutions are offered for skeletal, muscular and joint injuries including casts, splints, athletic tape and leg and knee braces. Essity sells orthopedic products under the Delta-Cast and Actimove brands and is the third largest player globally.

Earnings 2022

Net sales increased 16.4% to SEK 25,239m (21,685). Sales growth, including organic sales growth and acquisitions, amounted to 9.6%. Organic sales growth amounted to 7.3%, of which volume accounted for 2.5% and price/ mix for 4.8%. The organic sales growth amounted to 5.5% in mature markets. In emerging markets, which accounted for 20% of net sales, organic sales growth was 14.5%. Exchange rate effects increased net sales by 7.3%. Acquisitions increased net sales by 2.3%. Divestments reduced net sales by 0.5%.

For Incontinence Products Health Care, with Essity's globally leading TENA brand, organic sales growth amounted to 7.1% due to higher volumes and higher prices. In Medical Solutions, organic sales growth amounted to 7.6% as a result of higher volumes and higher prices. Sales growth was high in Wound Care and Orthopedics.

The adjusted gross margin decreased 5.4 percentage points to 36.9% (42.3). Higher costs for raw materials, energy and distribution had a negative impact on the margin. The margin was positively impacted by higher volumes and higher prices. The adjusted EBITA margin decreased 6.1 percentage points to 11.5% (17.6). Sales costs, including marketing costs, were higher and increased as a share of net sales. Adjusted EBITA decreased 24% (32% excluding currency translation effects, acquisitions and divestments) to SEK 2,903m (3,821).

The operating cash surplus amounted to SEK 3,789m (4,629).

Key figures

¹⁾ Including organic sales growth and acquisitions.
²⁾ Excluding exchange rate effects, acquisitions and divestments.
³⁾ Excluding items affecting comparability.

Consumer Goods

Personal and home hygiene for all stages of life

KEY FIGURES

94,841 Net sales, SEKm

17.5% Sales growth¹⁾

15.7% Organic sales growth²⁾

7.6% Adjusted EBITA margin³⁾

9.8% Adjusted return on capital employed³⁾

The Consumer Goods business area includes the categories Incontinence Products Retail, Baby Care, Feminine Care and Consumer Tissue, which are sold via the retail trade and e-commerce sales.

¹⁾ Including organic sales growth and acquisitions.
²⁾ Excluding exchange rate effects, acquisitions and divestments.
³⁾ Excluding items affecting comparability.

Incontinence Products Retail

In Incontinence Products Retail, with the globally leading brand TENA, Essity offers a broad range of incontinence products including Lights by TENA for light incontinence and TENA for Men, incontinence products specially designed for men. Essity also sells leakproof apparel under the TENA, TENA for Men, Knix and Modibodi brands. For the Knix and Modibodi brands, the majority of sales are "Direct-to-Consumer". The TENA brand also has its own webshops developed to help our consumers with information about incontinence and the solutions available, and to order and have products delivered.

Essity is the second largest player globally in Incontinence Products Retail and the market leader in Europe and Latin America. In Asia, Essity is the third largest player and the fourth largest in North America.

Baby Care

In Baby Care, Essity offers open baby diapers and pant diapers as well as baby care products such as wet wipes, shampoo, lotion and baby oil. In 2022, Essity launched a climate-smart diaper consisting of a washable cloth diaper and absorbent insert.

Essity is the fifth largest player globally with sales mainly in Europe and South East Asia. In Europe, Essity is the second largest player with the Libero and Lotus brands, as well as retailer brands. Essity's strongest market is the Nordic region, where the Libero brand is the market leader. In South East Asia, Essity is active under the Drypers brand and is the market leader in Malaysia.

Feminine Care

In Feminine Care, Essity offers a broad product portfolio that includes pads, panty liners, tampons, intimate soaps, intimate wipes, leakproof apparel and menstrual cups.

Essity is the fifth largest player globally with several strong regional brands supported by Essity's global brand platform for shared innovation, marketing and consumer insights. In Europe, Essity is the third largest player with brands such as Libresse, Bodyform and Nana. Essity is the market leader in Latin America with the Saba and Nosotras brands. In Australia, Essity is the market leader with Libra, TOM Organic and Modibodi. Libresse is also the brand used for Feminine Care in Asia, where Essity -through its majority ownership in Vinda, is the tenth largest player. Through the acquisition of Knix in 2022, Essity is also represented in Feminine Care in North America with the Knix brand.

Intimate Hygiene includes the categories Feminine Care and Incontinence Products Retail. The fastest growing product segment in Intimate Hygiene is leakproof apparel. Following the acquisitions of Knix and Modibodi in 2022, Essity is the global market leader within leakproof apparel¹⁾ with the goal of being the world's fastest growing company in Intimate Hygiene.

Essity has also launched the Issviva brand, which is aimed at women experiencing menopause. Issviva is an innovative global e-commerce platform that provides knowledge and solutions for women experiencing menopause. Issviva's product range consists of vitamins, minerals, supplements and intimate hygiene products that complement Essity's existing incontinence and feminine care brands.

¹⁾ Estimate based on market data compiled by Essity.

Consumer Tissue

In Consumer Tissue, Essity offers toilet paper, household towels, handkerchiefs, facial tissues, wet wipes and napkins. Essity is the world's third largest supplier of consumer tissue, with a presence primarily in Europe, Asia and Latin America. In Europe, Essity is the market leader with brands such as Lotus, Tempo, Zewa, Cush-elle and Plenty, and under retailer brands. Essity is the market leader in China and Asia through its majority shareholding in Vinda with brands under the same name. In Latin America, Essity is the third largest player with the Regio and Familia brands.

Earnings 2022

Net sales increased 28.1% to SEK 94,841m (74,040). Sales growth, including organic sales growth and acquisitions, amounted to 17.5%. Organic sales growth amounted to 15.7%, of which volume accounted for 0.1% and price/ mix for 15.6%. Organic sales growth amounted to 18.7% in mature markets. In emerging markets, which accounted for 49% of net sales, organic sales growth was 12.6%. Exchange rate effects increased net sales by 10.6%. Acquisitions increased net sales by 1.8%.

For Incontinence Products Retail, with Essity's globally leading TENA brand, organic sales growth amounted to 10.8%, in Feminine Care to 15.7% and in Baby Care to 1.0%. In Consumer Tissue, organic sales growth amounted to 19.1% and for the Consumer Tissue Private Label Europe division to 35.8%. Prices were higher in all categories. Baby Care was negatively impacted by the discontinuation of the baby diaper business in Latin America.

The adjusted gross margin decreased 4.4 percentage points to 22.6% (27.0). Higher costs for raw materials, energy and distribution had a negative impact on the margin. The margin was positively impacted by higher volumes, higher prices and a better mix. The adjusted EBITA margin decreased 3.1 percentage points to 7.6% (10.7). Sales costs, including marketing costs, were higher but decreased as a share of net sales. Adjusted EBITA decreased 9% (20% excluding currency translation effects, acquisitions and divestments) to SEK 7,211m (7,938).

The operating cash surplus amounted to SEK 11,595m (11,632).

Key figures

¹⁾ Including sales growth and acquisitions.
²⁾ Excluding exchange rate effects, acquisitions and divestments.
³⁾ Excluding items affecting comparability.

In Consumer Goods, 27% of total net sales was related to retailer brands. In Incontinence Products Retail 1%, Baby Care 46%, Feminine Care 6% and Consumer Tissue 32%. The Consumer Tissue Private Label Europe division accounts for 15% of Consumer Tissue.

Professional Hygiene

Hygiene management solutions for a broad set of commercial applications

KEY FIGURES

36,114 Net sales, SEKm

25.0% Sales growth¹⁾

22.9% Organic sales growth²⁾

11.1% Adjusted EBITA margin³⁾

14.5% Adjusted return on capital employed³⁾

¹⁾ Including organic sales growth and acquisitions.
²⁾ Excluding exchange rate effects, acquisitions and divestments.
³⁾ Excluding items affecting comparability.

The Professional Hygiene business area comprises the categories Tissue, Services & Solutions and Wiping & Cleaning as well as Soaps & Sanitizers that are sold to companies and office buildings, universities, healthcare facilities, industries, restaurants, hotels, stadiums and other public venues - direct to the end-customer, e-commerce or via distributors.

With the globally leading Tork brand, Essity is the world's largest supplier of hygiene solutions in professional hygiene. Essity is the market leader in Europe and holds a market share that is nearly three times the size of the second largest player. In North America, Essity is the second largest player with a particularly strong market position in the food service segment, where we estimate that the company supplies approximately every second napkin. Essity is the third largest player in Asia, through its majority ownership in Vinda, and also holds the number three position in Latin America.

Tissue, Services & Solutions

In Tissue, Services & Solutions, Essity offers toilet paper, paper hand towels, napkins, reusable cloths, dispensers, service and maintenance, and digital solutions with sensor technology, such as Tork Vision Cleaning, data-driven cleaning.

Wiping & Cleaning

In Wiping & Cleaning, Essity offers wipers and cloths for keeping surfaces clean and disinfected. In 2022, Essity acquired the US company Legacy Converting, Inc. to expand its range of Wiping & Cleaning solutions and further strengthen its presence in the North American market.

Soaps & Sanitizers

In Soaps & Sanitizers, Essity offers soaps, lotions, sanitizers and dispensers. Good hand hygiene is the most effective way to prevent the spread of disease and infection. Through its Tork brand, Essity works to create awareness of the importance of hand hygiene through information campaigns and education. Our award-winning "Tork Virtual Reality Clean Hands" course is one example of how we provide inspiring training showing the correct hand washing and hand sanitation procedures for our customers in the healthcare sector.

Earnings 2022

Net sales increased 38.1% to SEK 36,114m (26,143). Sales growth, including organic sales growth and acquisitions, amounted to 25.0%. Organic sales growth amounted to 22.9%, of which volume accounted for 5.8% and price/ mix for 17.1%. Organic sales growth amounted to 25.6% in mature markets. In emerging markets, which accounted for 19% of net sales, organic sales growth was 13.2%. Exchange rate effects increased net sales by 13.1%. Acquisitions increased net sales by 2.1%.

The adjusted gross margin decreased 0.2 percentage points to 23.1% (23.3). Higher costs for raw materials, energy and distribution had a negative impact on the margin. The margin was positively impacted by higher prices, a better mix and higher volumes. The adjusted EBITA margin increased 0.7 percentage points to 11.1% (10.4). Sales costs, including marketing costs, were higher but decreased as a share of net sales. Adjusted EBITA increased 48% (33% excluding currency translation effects, acquisitions and divestments) to SEK 3,998m (2,710).

The operating cash surplus amounted to SEK 6,386m (4,782).

Key figures

¹⁾ Including organic sales and acquisitions.
²⁾ Excluding exchange rates and divestments.
³⁾ Excluding items affecting comparability.

Operations and structure

Essity reports its operations in the following three business areas as of January 1, 2022: Health & Medical, Consumer Goods and Professional Hygiene. Health & Medical comprises the categories Incontinence Products Health Care and Medical Solutions. The offering includes incontinence products, wound care, compression therapy, orthopedics, skincare products and digital solutions with sensor technology. Consumer Goods includes the categories Incontinence Products Retail, Baby Care, Feminine Care and Consumer Tissue. The offering includes incontinence products, pads, diapers, wet wipes, skin cream, intimate soaps, leakproof apparel, menstrual cups, toilet paper, household towels, handkerchiefs, facial tissues and napkins. Professional Hygiene comprises the categories Tissue, Services & Solutions, Wiping & Cleaning and Soaps & Sanitizers. The offering includes toilet paper, paper hand towels, napkins, hand soap, hand lotion, hand sanitizers, dispensers, and cleaning and wiping products.

Europe is Essity's largest market. The Group also holds strong positions in North America, Latin America and Asia. Expansion takes place through organic growth and acquisitions.

Organization

Essity's organization as of December 31, 2022 is as follows:

Essity markets and sells products primarily in professional hygiene as well as the categories of incontinence products and feminine care in Australasia (Australia, New Zealand and some of the Pacific Islands). The business is being operated as an independent unit under the name Essity AustralAsia.

The financial reporting of these four business units and Essity AustralAsia is presented under the respective business areas in the company's external financial reporting.

In addition to the business units, Essity has established three global units:

Essity has five Group functions:

Essity exerts an influence on the Group company Vinda, a listed Asian hygiene company in which Essity is a majority shareholder, through board representation.

Events during the year

Knix and Modibodi were acquired during the year, two leading companies in leakproof apparel, which is the fastest growing product segment in Intimate Hygiene. Through the acquisitions, Essity is the global market leader within leakproof apparel¹⁾with the goal of being the world's fastest growing company in Intimate Hygiene.

In line with Essity's strategy to grow in wiping and cleaning products in Professional Hygiene, the US company Legacy Converting, Inc. was acquired.

Essity has made significant price increases in all business areas in order to manage high cost inflation.

Essity introduced a new Group organization as of December 31, 2022 entailing that the company has four business units aligned with the company's business areas. These four business units are Consumer Goods Americas, Consumer Goods EMEA, Professional Hygiene and Health & Medical. In parallel, the Global Digital & Business Services unit was established.

As a consequence of the war in Ukraine, work is ongoing to exit the Russian market and Essity's assets in Russia have been impaired by approximately SEK 1.7bn.

¹⁾ Estimate based on market data compiled by Essity.

Acquisitions, investments and divestments

Acquisition of Legacy Converting, Inc. - a company in wiping and cleaning products

On February 2, 2022, Essity announced that the company had acquired Legacy Converting, Inc., a USA-based professional wiping and cleaning company. The company offers products within the categories of sanitizing and disinfecting wet-wipes, napkins, chemical-ready wipes and dry wipes. The purchase price amounted to USD 40m (approximately SEK 370m) with a potential additional earn-out amount of USD 10m (approximately SEK 90m) on a cash and debt-free basis.

Acquisition of Modibodi - a leading leakproof apparel company

On July 7, 2022, Essity announced that the company has acquired the Australian company Modibodi, a leading leakproof apparel company in Australia, New Zealand and the UK. The purchase price amounted to AUD 140m (approximately SEK 1bn) on a cash and debt-free basis. Through the acquisition, Essity is strengthening its position within leakproof apparel, the fastest growing product segment in Intimate Hygiene which includes Feminine Care and Incontinence Products. Modibodi was consolidated in Essity's consolidated financial statements from August 1, 2022. In 2021, the company reported net sales of AUD 56.7m (approximately SEK 365m) and sales growth of 18%. EBITDA amounted to AUD 5.7m (approximately SEK 36m) and EBITA to AUD 5.6m (approximately SEK 36m). The gross margin was high and the EBITA margin amounted to 9.8%.

Essity acquires Knix and becomes worldleader in leakproof apparel

On July 8, 2022, Essity announced that the company had acquired 80% of the Canadian company Knix Wear Inc., a leading provider of leakproof apparel for periods and incontinence. The purchase price amounted to USD 320m (approximately SEK 3.5bn) on a cash and debt-free basis for 80% of the company. Through this acquisition, Essity is the global market leader in leakproof apparel¹⁾, the fastest growing product segment in Intimate Hygiene, which includes Feminine Care and Incontinence Products.

Knix was consolidated in Essity's consolidated financial statements from September 1, 2022. In 2021, the company reported net sales of CAD 133.6m (approximately SEK 914m) and sales growth of 97%. EBITDA amounted to CAD 13.8m (approximately SEK 95m) and EBITA to CAD 13.4m (approximately SEK 92m). The gross margin was high and the EBITA margin amounted to 10.0%.

Other Group information

Parent Company

The Group's Parent company, Essity Aktiebolag (publ), is a holding company with the main task of owning and managing shares in a number of business group companies and performing Group-wide management and administrative functions. The company's corporate registration number is 556325-5511 and it is domiciled in Stockholm, Sweden. The company's address is PO Box 200, SE-101 23 Stockholm. In 2022, the Parent company recognized operating income of SEK 237m (312) and a loss before appropriations and tax of SEK -2,712m (profit: 2,280). Investments in property, plant and equipment totaled SEK 1m (1) during the year. Cash and cash equivalents at year-end amounted to SEK 0m (0).

Research and development (R&D)

Research and development (R&D) costs during the year amounted to SEK -1,631m (-1,471), corresponding to about 1.0% of consolidated net sales. R&D is coordinated and conducted from a global perspective. Product development is carried out in close cooperation with the local units, as well as through direct collaboration with customers.

Holdings of treasury shares

Essity Aktiebolag (publ) holds no treasury shares.

Share distribution

In 2022, 206,154 Class A shares were converted to Class B shares. The proportion of Class A shares was 8.7% at year-end.

Dividend

The Board of Directors proposes an increase in the dividend of 4% to SEK 7.25 (7.00) per share or SEK 5,092m (4,916). The record date for entitlement to receive dividends is proposed as March 31, 2023 and payment is expected to be made on April 5, 2023. The Board is of the opinion that the company's and the Group's equity after the proposed dividend is sufficiently high in relation to the nature, scope and risks of the operations, solvency requirements, liquidity and financial position and provides scope for the company and the Group to fulfill its obligations and conduct desirable investments.

Sustainability report

Essity's statutory sustainability report, in accordance with the requirements of the Swedish Annual Accounts Act, can be found on pages 40-48, 50-61 and 138-147 in the Board of Directors' Report. The company's business model can be found on page 15. This sustainability report for Essity Aktiebolag (publ) encompasses the entire Group. Further information on the reporting principles for sustainability can be found in Note H1, page 138.

Guidelines for remuneration of senior executives

The most recent guidelines approved by the Annual General Meeting may be found under Note C2 on pages 99-101. The company's application of the guidelines can be found in the remuneration report on pages 157-158 and in Note C2.

For information on the company's calculated expenses for remuneration of senior executives, see Note C2 on pages 99-101.

Net sales and earnings

Net sales

Net sales increased 28.2% compared with the corresponding period a year ago to SEK 156,173m (121,867). Sales growth, including organic sales growth and acquisitions, amounted to 17.7%. Organic sales growth, which excludes exchange rate effects, acquisitions and divestments, amounted to 15.7%, of which volume accounted for 1.7% and price/mix for 14.0%. Organic sales growth in mature markets amounted to 17.5% and in emerging markets to 12.8%. Emerging markets accounted for 37% of net sales. Exchange rate effects increased net sales by 10.6%. Acquisitions increased net sales by 2.0%. Divestments reduced net sales by 0.1%.

Earnings

The Group's gross margin was 23.8% (28.8).

The Group's adjusted gross margin decreased by 3.8 percentage points year on year to 25.1% (28.9). Higher costs for raw materials, energy and distribution reduced the margin by 11.7 percentage points. The margin was positively impacted by higher selling prices, higher volumes and a better mix. Continuous cost savings amounted to SEK -956m. Higher cost inflation had a negative impact on reported cost savings.

The Group's EBITA margin was 7.0% (11.5). The Group's adjusted EBITA margin decreased 2.8 percentage points to 8.4% (11.2). Sales costs, including marketing costs, were higher but decreased as a share of net sales.

Operating profit before amortization of acquisition-related intangible assets (EBITA) amounted to SEK 10,887m (14,051). Adjusted operating profit before amortization of acquisition-related intangible assets (adjusted EBITA) decreased 5% (16% excluding currency translation effects, acquisitions and divestments) to SEK 13,058m (13,680).

Items affecting comparability amounted to SEK -2,463m (371). Costs were mainly attributable to the impairment of assets in Russia of SEK -1,718m. Restructuring costs amounted to SEK -592m. Other amounted to SEK -153m.

Financial items increased to SEK -1,370m (-662), on account of higher average net debt and higher interest rates.

Profit before tax amounted to SEK 8,109m (12,537). Adjusted profit before tax decreased 13% (24% excluding currency translation effects, acquisitions and divestments) to SEK 10,572m (12,116).

The tax expense was SEK 2,045m (2,727). The tax expense, excluding effects of items affecting comparability, was SEK 2,245m (2,803).

Profit for the period decreased 38% (49% excluding currency translation effects, acquisitions and divestments) to SEK 6,064m (9,810). Adjusted profit for the period decreased 11% (22% excluding currency translation effects, acquisitions and divestments) to SEK 8,327m (9,363).

Earnings per share were SEK 7.93 (12.27). The adjusted earnings per share were SEK 12.28 (12.50).

Key figures

Return on capital employed was 8.1% (12.3). The adjusted return on capital employed¹) was 9.7% (12.0). Return on equity was 8.1% (15.0). The adjusted return on equity¹) was 11.1% (14.3).

Summary income statement

¹⁾ Excluding items affecting comparability.

Cash flow and financing

The operating cash surplus amounted to SEK 20,974m (20,471). The cash flow effect of changes in working capital was SEK -3,684m (-844). Working capital was negatively impacted by an increase in trade receivables as a result of higher sales and increased inventory value due to higher raw material prices. Investments in non-current assets, net, excluding investments in operating assets through leases, amounted to SEK -6,875m (-7,304). Operating cash flow before investments in operating assets through leases amounted to SEK 9,714m (11,598). Operating cash flow was SEK 9,167m (11,118).

Financial items increased to SEK -1,370m (-662), on account of higher average net debt and higher interest rates.

Tax payments had an impact on cash flow of SEK -2,426m (-3,634).

The net sum of acquisitions and divestments was SEK -4,955m (-11,800). Net cash flow totaled SEK -4,852m (-10,193).

Net debt increased by SEK 7,436m during the period to SEK 62,869m. Excluding pension liabilities, net debt amounted to SEK 62,163m. Net cash flow increased net debt by SEK 4,852m. Fair value measurement of pension assets and updated assumptions and assessments that affect measurement of the net pension liability, together with fair value measurement of financial instruments, reduced net debt by SEK 2,281m. Exchange rate movements increased net debt by SEK 4,303m. Investments in non-operating assets through leases increased net debt by SEK 562m. The debt/equity ratio was 0.82 (0.81). Excluding pension liabilities, the debt/equity ratio was 0.81 (0.77). The debt payment capacity was 26% (29). Net debt in relation to EBITDA amounted to 3.13 (2.69). Net debt in relation to adjusted EBITDA amounted to 3.08 (2.77).

Operating cash flow statement

Financial position

Assets and capital employed

The Group's total assets increased 20% compared with the preceding year, amounting to SEK 210,600m (175,050). Non-current assets increased SEK 15,533m compared with the preceding year to SEK 139,580m (124,047), of which property, plant and equipment amounted to SEK 62,898m (58,918) and intangible assets to SEK 70,132m (59,609). Current assets totaled SEK 71,020m (51,003). Working capital amounted to SEK 14,033m (11,157). Capital employed was 13% higher and totaled SEK 139,433m (123,940).

Equity

The Group's equity increased by SEK 8,057m during the period, to SEK 76,564m (68,507). Profit for the period increased equity by SEK 6,064m. Equity decreased due to dividends to shareholders of SEK 5,314m. Equity increased net after tax by SEK 1,637m as a result of fair value measurement of pension assets and updated assumptions and assessments that affect the valuation of the pension liability. Fair value measurement of financial instruments decreased equity by SEK 1,455m after tax.

Exchange rate movements, including the effect of hedges of net foreign investments, after tax, increased equity by SEK 7,093m. Other items increased equity by SEK 32m.

Financing

The Group's interest-bearing gross debt amounted to SEK 67,232m (54,419) at year-end. The average maturity period was 3.9 (4.1) years.

Net debt increased by SEK 7,436m during the year to SEK 62,869m. Excluding pension liabilities, net debt amounted to SEK 62,163m. Net cash flow increased net debt by SEK 4,852m. Fair value measurement of pension assets and updated assumptions and assessments that affect measurement of the net pension liability, together with fair value measurement of financial instruments, reduced net debt by SEK 2,281m. Exchange rate movements increased net debt by SEK 4,303m. Investments in non-operating assets through leases increased net debt by SEK 562m.

Key figures

The debt/equity ratio was 0.82 (0.81). Excluding pension liabilities, the debt/equity ratio was 0.81 (0.77). The visible equity/assets ratio was 32% (34). Return on capital employed was 8.1% (12.3). The adjusted return on capital employed was 9.7% (12.0). Return on equity was 8.1% (15.0). The adjusted return on equity was 11.1% (14.3). The capital turnover rate was 1.2 (1.1). At year-end, working capital amounted to 9% (9) of net sales.

Consolidated capital employed by currency, SEKm

Consolidated balance sheet

Risks and risk management

Essity is exposed to a number of strategic, operational and financial business risks, which could have a negative impact on the Group's operations. Accordingly, it is of major importance that the company has a systematic and effective process to identify, manage and mitigate the effects of these risks.

Processes for risk management

The responsibility for the management of business risks follows the company's delegation scheme, from the Board of Directors to the President, and from the President to each Business Unit President. The delegation scheme involves business risks being managed primarily by Essity's business units with clear central coordination and follow-up. Responsibility for certain specific risks, such as financial risks, insurable operational risks, information security, and ethics and human rights, is managed centrally.

Essity's financial risk management is centralized. The Group's internal bank handles financial risks and energy risks. The financial risks are managed in accordance with the Group's Finance Policy, which is adopted by Essity's Board of Directors. Together with Essity's Energy Risk Policy, the Finance Policy constitutes a framework for financial risk management. The financial risks are compiled and continuously monitored. Responsibility for insurable operational risks is managed by the Group's insurance department.

Identification of business risks and risk management are a key part of the annual strategy process. Identified risks are assessed according to the likelihood of these becoming a reality and the potential impact each risk could have on the Group. This process also includes specifying who is responsible for managing the respective risk, and measures for how these shall be mitigated and followed up. Development of the identified risks is monitored and assessed on an ongoing basis.

Essity has an internal audit function, which ensures that the organization complies with the adopted policies.

Based on current knowledge, the following are deemed to be the main factors that risk materially negatively impacting the operations and Essity's ability to achieve established targets:

GDP trend and economic conditions

Risk

Demand for Essity's products is affected by general macroeconomic fluctuations and the resulting changes to customer purchasing power and consumption patterns. For example, a tighter budget situation in the public sector or among business customers influences sales in the healthcare sector and business-to-business, respectively. Sales to the retail sector, which accounts for the bulk of sales of hygiene products, may also be affected by reduced purchasing power among consumers.

Action

Essity continuously works to manage the effect of cyclical fluctuations that arise, for example, through measures to reduce costs, increase efficiency and to create higher customer value through product innovations. Essity also works on differentiation to move toward product areas that are less sensitive to economic fluctuations.

Environmental impact and climate change

Risk

Essity's operations and the products used in the manufacturing process have an impact on air, water, land, biodiversity and the climate. Essity is subject to extensive environmental regulations. More stringent environmental requirements, remediation of the environment in connection with plant closures or breaches of permits could incur higher costs.

Action

Essity's strategy and sustainability targets stipulate guidelines for the Group's measures within the environmental area. Environmental impact and the impact of climate change are part of the annual strategy process, which includes the identification, assessment and actions for managing these types of risks. Risks are managed, for example, through preventive work in the form of certified environmental management systems, environmental risk inspections in conjunction with acquisitions, and remediation projects in connection with plant closures. Essity has integrated a risk assessment of biodiversity into its risk management process. The use of energy, water, transport, production waste and raw materials is controlled using the company's Resource Management System (RMS). The system also enables the simulation of investments on the basis of climate aspects. The data is used for internal control and follow-up of established targets. Essity also works continuously to reduce the volume of production waste.

Global health risks

Risk

Extensive outbreaks of disease entail risks for Essity's operations, not least in terms of the risks posed to our employees' health and safety and their ability to carry out their work. Lockdowns, more stringent border security measures or other restrictions may cause disruptions at our production facilitates or in the supply chain. More extensive outbreaks of disease may also result in a temporary fall in demand for some of our products and changed consumer behavior.

Action

In connection with extensive outbreaks of disease, the highest priority is to take action to safeguard the health of employees. Essity takes a series of measures adapted to the local operations to reduce the risk of infection. Where necessary, the company also modifies its solutions for sourcing of raw materials, storage and logistics, and has increased digital interaction.

Changes in demographics, consumer behavior and preferences

Risk

Changing demographics, consumer behavior and preferences alter demand from customers and consumers. There is a risk of a decline in demand for our products if we do not successfully satisfy customer and consumer needs and adapt our innovation program, product portfolio, sales channels, brand-building activities and communication accordingly.

Action

Customer and consumer insight constitute the core of Essity's innovation work. Through knowledge about people's daily needs and challenges, we create an offering that improves quality of life for users. We continuously analyze customer and consumer data and listen to consumers, customers, experts and opinion formers to improve our offering.

Political decisions and regulatory measures

Risk

Essity conducts operations in many different countries. In some countries, the institutional structures are more established and developed, while the political, financial, legal and regulatory systems in other countries are less predictable. In both cases, political changes and decisions, as well as amended legislation and regulations could have a negative impact on Essity's operations in the form of higher costs or some other obstruction. In general, the regulatory requirements imposed on Essity's operations, products and services are intensifying.

Action

Essity works continuously to monitor, evaluate and anticipate changes in its business environment in the form of political decisions and amended regulations in the areas that are of importance for the business.

Essity participates in various national and international industry organizations, as well as in other types of partnerships. The aim is to gain early knowledge of, and to contribute actively with expertise and solutions to, the development of areas of significance to our operations. The public sector is both a significant customer and an important stakeholder group for Essity. The company is therefore working actively on matters relating to health and medical care, as well as care for the elderly.

Geopolitical risks

Risk

A series of geopolitical events and developments risk impacting Essity's business. The risk of political or military conflicts within or between states, trade disputes or other significant changes to international relations, as well as terrorist acts are examples of events that risk negatively impacting Essity's business in various ways.

Action

Essity continuously monitors and assesses political developments in the countries and regions where Essity has operations. A geopolitical risk assessment also constitutes part of the annual strategy process. When there is reason to do so, surveillance is extended and it is determined which measures Essity can take to limit the impact on the Group.

Competition

Risk

Essity is subject to considerable competition from other industry players offering similar products. Essity is also exposed to the risk that alternative products, solutions or business models that meet customer or consumer needs may replace Essity's offering, which risks jeopardizing the company's position in the market.

Action

Essity's focus on customer and consumer insight guides its innovation activities, ensuring that new products and services are attractive and competitive. Essity develops the company's offering to meet the needs of customers and consumers in terms of the products themselves, and to ensure that they are provided in the relevant sales channels.

Dependence on major customers and sales channels

Risk

Essity's products are sold through retailers, pharmacies, e-commerce, distributors and resellers. Retail represents the single largest customer category. If these players are not successful in selling Essity's products, this could have a negative impact on Essity's earnings. In general, there is a consolidation trend in several of Essity's sales channels and markets, particularly in the retail trade, through mergers and purchasing alliances, which could increase dependence on individual, large customers.

Action

Essity's customer structure is relatively dispersed, with customers in many different geographies and areas of business. In 2022, Essity's ten largest customers, most of them retail companies and distributors, accounted for 20.8% of net sales. The company works to maintain strong long-term customer relationships in strategic customer segments, and to build relationships with new customers. Essity is participating by increasing the share of e-commerce and also by aligning to the new and changing purchasing patterns.

Production facilities

Risk

Essity has around 90 production facilities in some 30 countries. Fires, machinery breakdowns and other types of harmful incidents in plants could lead to considerable value destruction, and loss of production and income, which ultimately, could have a negative impact on Essity's market position.

Action

Essity strives to create and maintain a balance between loss-prevention activities and insurance coverage. Essity invests continuously in loss-prevention measures. These efforts are conducted in accordance with established guidelines that include repeated risk inspections carried out by external risk engineers. Other important elements of loss-prevention activities are maintenance of production plants and machinery, staff training, and orderliness. All wholly owned facilities are insured at replacement cost and for the loss of income. Within the EU, insurance is primarily conducted within the company's own insurance company, with external reinsurance for major damages. Outside the EU, Essity cooperates with market-leading insurance companies.

Unethical business practices

Risk

Essity works in a large number of countries and in environments where unethical business practices and violations of human rights may occur. The risk of such business practices is deemed to be very serious. The financial consequences of violations may be very severe in the form of various sanctions and fines. Violations also risk having a negative impact on the company's reputation.

Action

Essity has a program for regulatory compliance, which aims to minimize the risk of Essity taking part in or being associated with unlawful or unethical business practices or committing violations of human rights. The program is based on a Code of Conduct adopted by the Board of Directors. Within certain areas, such as corruption and competition regulations, Essity has an indepth program for risk evaluations, audits of third parties and various training courses for employees. The implementation of the regulatory compliance program is reported continuously to the Compliance Council, which includes parts of the Essity management team and where internal audit has an opportunity to take part in work.

Employees

Risk

To meet its targets, Essity is dependent on being able to recruit, retain and develop qualified and motivated employees. There is high competition for skilled employees.

Action

Through annual staffing, competency and succession planning, Essity ensures that employees are recruited and that these remain with the company and develop the right skills. Essity continuously strives to build a reputation for the company as an attractive employer, highlighting health and safety in the workplace, health promotion, market-based and competitive forms of employment, continuous learning and the possibility to take on new challenges in the Group. A modern and attractive corporate culture also plays a highly significant role in the recruitment of employees.

Suppliers

Risk

Essity is dependent on a large number of suppliers. A sudden loss of key input goods could result in increased costs and disruptions to the company's production. Suppliers could also cause problems for Essity through non-compliance with applicable legislation and guidelines or by otherwise acting in an unethical manner.

Action

Essity enters into supply contracts of various durations that ensure the supply of key input goods. The Group has several suppliers for essentially all important input goods. In-depth collaboration also occurs with specially selected suppliers in the development of materials and processes. Essity continuously evaluates its suppliers to ensure compliance with agreements entered into. Particular importance is placed on suppliers operating in countries and industries deemed to be more vulnerable to risks. Key suppliers are assessed through questionnaires, on-site visits or independent audits.

Information and IT

Risk

Essity is dependent on IT systems and information security. Disruptions or faults in critical systems, as well as the increasing prevalence of cyber-attacks, may have a direct impact on production and other important business processes. Errors in financial systems may affect the company's reporting of results.

Action

Essity has a management model for IT that contains governance, standardized processes and an organization for information security. Actions within the areas of information and cyber security are carried out on the basis of continuous risk assessments. Technical protection, such as preventive, detective, responsive and restorative measures are implemented, in addition to regular security training courses for each employee. Standardized procedures are in place for implementing and changing systems and IT services, as well as for daily operations. The head of Global Digital & Business Services, who is a member of the company's Executive Management Team, is responsible for managing IT and information security-related risks.

Energy price

Risk

Energy price risk is the risk that increased energy prices could adversely impact Essity's operating profit. Essity is exposed to movements in the prices of electricity and natural gas, but the prices of other energy commodities also directly and indirectly impact Essity's operating profit.

Action

Essity manages the energy price risk related to electricity and natural gas centrally. According to Essity's Energy Risk Policy, these price risks can be hedged for a period of up to 36 months. Exceptions are made for regulated and non-hedgeable markets. Energy prices are hedged through financial instruments and, in part, through fixed pricing in existing supply contracts.

Essity safeguards the supply of electricity and natural gas through centrally negotiated supply contracts. The portfolio of supply contracts and financial hedges is effectively spread to minimize Essity's counterparty risk. In 2022, Essity purchased about 5 TWh (5; 5) of electricity and about 7 TWh (7; 7) of natural gas.

The graph shows Essity's price hedges in relation to forecast consumption of electricity and natural gas for the next three years. The graph includes financial hedges and hedging effected via supply contracts.

Legal risks

Risk

Legal risks comprise various risks in, to some extent, diverse areas. Amended legislation, violations of laws in the operations or errors in any agreements signed by Essity, are examples of legal risks that could have negative financial implications for Essity. In certain instances, they may also entail protracted and costly legal processes.

Action

Essity constantly monitors developments in a number of areas and addresses any legal risks that arise in cooperation with external advisers. Legal issues are often national, which means that local experts are also often engaged by Essity in various issues.

Cost of input goods

Risk

Input goods account for a considerable part of Essity's total operating expenses. The market price of input goods fluctuates over time and could influence Essity's earnings positively or negatively. The price trend for a number of input goods over the past ten years is presented in the diagram below.

Action

Fiber (pulp and recovered paper) is a significant cost, mainly in the Consumer Goods and Professional Hygiene business areas. Essity is evaluating alternative types of fiber, such as straw from wheat as a means of diversifying fiber sourcing in the future. The cost of oil-based materials is driven by the trend in oil prices and represents a major cost in the Consumer Goods business area and for various packaging materials. The trend in oil prices also impacts transport costs. The impact of price movements on input goods can be delayed through purchasing agreements with fixed durations. Efficiency improvements in the company's operations, altered product specifications and price increases are examples of measures to offset the effect of rising costs for input goods.

Currency

Risk

Transaction exposure

Transaction exposure is the risk that exchange rate movements in export revenues as well as import expenses and other costs could negatively impact the Group's operating profit and the cost of non-current assets.

Action

Most of Essity's business is conducted outside Sweden and transaction exposure therefore arises primarily in currencies other than SEK. The largest exposure comprises a purchase requirement for USD and selling requirements for CNY and GBP. The significant USD exposure is a consequence of the Group's purchase of pulp that is invoiced in USD.

Transaction exposure, resulting from exports and imports, can be hedged for a period of up to 18 months. Contracted future payments for non-current assets in foreign currencies can be hedged up to the full cost. The currencies with the greatest net volume were hedged as follows: USD 1.7 months, CNY 0 months and GBP 1.8 months. During the year, there was continuous hedging of, primarily, trade receivables and payables, as well as future payments for non-current assets. The majority of hedges mature during the first quarter of 2023.

Risk

Long-term currency sensitivity

The table below presents a breakdown of the Group's net sales and operating expenses by currency, which provides an overview of its long-term currency sensitivity. The largest exposures are denominated in EUR, USD, CNY and GBP.

¹⁾ Excluding items affecting comparability.

Risk

Translation exposure

Translation exposure is the risk to which Essity is exposed when translating foreign Group companies' balance sheets and income statements to SEK.

Action

Essity manages translation exposure by distributing the liability across the various currencies where the Group owns assets so that key figures that are important for the company's credit rating are protected in the long term against exchange rate effects. Translation exposure in the income statements of foreign Group companies is not currency-hedged. As at December 31, 2022, net debt amounted to SEK 62,869m (55,433; 42,688).

Net debt distributed by currency

Credit

Risk

Credit risk refers to the risk of losses due to a failure by Essity's customers, or counterparties in financial agreements, to meet payment obligations.

Action

Credit risk in trade receivables

Credit risk in trade receivables is managed through credit checks of customers using credit rating companies. The credit limit is set and regularly monitored. Trade receivables are recognized at the amount that is expected to be paid based on an assessment of the expected credit losses for the remaining lifetime of all trade receivables at the balance sheet date. For further information concerning trade receivables and recognition of expected credit losses, see Note E3 Trade receivables on page 112.

Financial credit risk

Essity's Finance Policy regulates the maximum permitted counterparty risk depending on the counterparty's credit rating from the credit rating agencies Standard & Poor's, Moody's and Fitch. The objective is that counterparties must have a minimum credit rating of BBB+ or equivalent from at least two of these credit rating agencies.

Credit exposure in derivative instruments is calculated as the market value of the instrument on the balance sheet date. Credit exposure in derivative instruments amounted to SEK 4,416m (4,784; 1,650), gross. Taking net calculation agreements per counterparty into consideration, credit exposure of derivatives amounted to SEK 1,096m (1,563; 887). At year-end, the total credit exposure was SEK 6,891m (6,338; 6,208). This exposure includes credit risk of SEK 4,461m (4,119; 5,048) for financial investments. Refer to the table to the right for the distribution of credit risk by category.

Financial credit exposure

¹⁾ A: Investment grade, a long-term credit rating from one or more of the agencies of at least: Moody's (Baa3), Standard & Poor's (BBB-) and Fitch (BBB-).B: Non-investment grade, a long-term credit rating lower than: Moody's (Baa3), Standard & Poor's (BBB-) and Fitch (BBB-).C: No credit rating (mainly assets that lack a separate credit rating and cash and cash equivalents in regulated markets).

Liquidity and refinancing

Risk

Liquidity and refinancing risk is the risk that Essity is unable to meet its payment obligations as a result of insufficient liquidity or difficulty in raising new loans.

Action

To ensure good access to loan financing, regardless of economic situation and on attractive terms, Essity strives to maintain a solid investment grade rating.

Essity maintains a financial flexibility in the form of a liquidity reserve consisting of cash and cash equivalents and unutilized credit facilities totaling at least 10% of the Group's forecast annual sales. Essity limits its refinancing risk by having a well distributed maturity profile of its gross debt.

The gross debt must have an average maturity in excess of three years, taking unutilized credit facilities which are not part of the liquidity reserves into account. Surplus liquidity should primarily be used to amortize external liabilities. Essity's policy is to avoid terms that entitle the lender to terminate loans or adjust interest rates as a direct consequence of movements in Essity's financial key ratios or credit rating.

The Group's financing is mainly secured by bank loans, bond loans and through issuance of commercial papers. The refinancing risk in short-term borrowing is mitigated through long-term credit facilities from bank syndicates and individual banks with favorable creditworthiness.

Essity's net debt increased by SEK 7,436m in 2022. At year-end, the average maturity of gross debt (excluding leases and pensions) was 3.9 years (4.1; 3.1). If short-term loans would be replaced with long-term unutilized credit facilities, the average maturity would amount to 4.3 years.

Unutilized credit facilities amounted to SEK 22,245m at year-end. In addition, cash and cash equivalents totaled SEK 4,288m.

Liquidity reserve

¹⁾ Liquidity reserve as a percentage of net sales.

Interest rate

Risk

Interest rate risk relates to the risk that changes to interest rates could have a negative impact on Essity. Essity is affected by interest rate movements through financial income and expenses, cash flow and the value of its financial assets and liabilities.

Action

Essity strives to achieve a solid distribution of its interest maturity dates to avoid large debt volumes of renewals occurring at the same time. Essity's policy states that the average interest duration shall be a minimum of 3 months and a maximum of 36 months. Essity's financial items increased in 2022. Higher average interest rates had a negative impact. Essity's major funding currencies are EUR, SEK and CNY, refer to the graph below. To achieve the desired interest rate duration, Essity uses financial derivatives. The average interest rate duration for the gross debt, including derivatives, was 13.9 months (19.0; 21.2) at year-end.

The average interest rate for the total outstanding net debt including derivatives, amounted to 3.48% (1.30; 1.61) at year-end.

Climate-related risks and opportunities

Climate change affects Essity and the company continuously maps the risks and opportunities this entails using, for example, scenario analyses. The purpose is to identify, manage and minimize the risks and to take strategic action. Strengths and opportunities identified and agreed upon actions provide a basis for the company's strategic priorities in the area of sustainability.

Strategy and governance

The identification and assessment of climate-related risks and opportunities are part of Essity's strategy process. Climate risks and opportunities are evaluated in each business unit and in a centrally coordinated internal expert group that represents key functional competencies for climate-related topics in Essity.

Responsibility for managing climate risks follows the company's delegation scheme, which is described on page 40. Sustainability issues are discussed on an ongoing basis by Essity's Executive Management Team and Board of Directors and has also in 2022 comprised a focus area in the work of the Board of Directors.

A steering committee has been appointed to ensure that Essity fulfills the company's ambitious climate and environmental targets. The steering committee is led by members of Essity's Executive Management Team and its tasks include preparing plans and strategies to deliver on all emission reductions targets for Scope 1, 2 and 3. Read more under Sustainability Governance on page 61.

Climate-risk analysis process

Essity's climate-risk analysis is based on the recommendations of the framework of the Task Force on Climate-related Financial Disclosures (TCFD) and has been conducted twice a year since 2020. In 2022, a more in-depth scenario analysis was conducted based on two different climate scenarios. The purpose of analyzing climate-related risks and opportunities is to inform the strategy of the company. This is performed with a ten-year perspective to enable conclusions and identification of long-term strategic actions and priorities.

The climate risk and opportunities process used a scenario analysis of two key scenarios, valid both for the operations as well as for business continuity.

Within each scenario, key questions were defined to identify and understand risks and opportunities to Essity's business related to climate change:

Scenario 1: Global warming of 1.5°C - "transition scenario"

Scenario 2: Global warming of 4°C - "physical climate scenario"

Reporting is conducted based on the recommendations of the TCFD framework.

See also page 153 for an index of where more TCFD-related information can be found in the Annual and Sustainability Report.

Process

Business intelligence and situation assessment from a climate perspective

Identification of possible climate scenarios and their consequences

Assessment according to Essity's risk process

Detailed analysis in centrally-coordinated internal expert group

Conclusions about the impact on Essity, assessment of risks and opportunities, and necessary action

Scenario 1: Global warming of 1.5°C¹

Description: Global warming is limited to no more than 1.5°C by 2100 through global collaboration between governments, industries, companies and individuals pushing for tougher legislation, green innovation and rising demand for environmentally friendly products and services. Carbon emissions are strictly limited and carbon tax is extended, which promotes processes with low carbon emissions and greater use of circular material and products.

¹⁾ The scenario includes consideration of Shared Socioeconomic Pathways (SSP) scenarios 1-1.9 and the International Panel for Climate Change (IPCC) scenario (RCP scenario 2.6).
²⁾ The scenario includes consideration of Shared Socioeconomic Pathways (SSP) scenarios 3-70 and the International Panel for Climate Change (IPCC) scenario (RCP scenario 6-8.5).

Scenario 2: Global warming of 4°C²

Description: Global warming of 4°C in 2100, due to the failure to effectively reduce emissions and other negative environmental impacts. Extreme weather becomes more frequent. Sea levels continue to rise, desertification and deforestation continues. Access to key resources such as raw materials, energy, water and food declines, resulting in greater volatility and uncertainty for prices and food security.

Strategic action areas

Investment decisions consider both financial and environmental impact. Investments are made in state-of-the-art technology, improving process efficiency and reducing carbon emissions. Through "Industry 4.0" and the development of smart production facilities, Essity is achieving more efficient production, shorter lead times, higher quality and lower environmental impact.

Essity researches and invests in several ground-breaking ideas in sustainable technology in its manufacturing processes with the aim of reducing the company's environmental impact and setting new standards for the entire industry.

Essity production of pulp from alternative fiber at its facility in Mannheim, Germany has been in operation since 2021. The production facility produces high-quality pulp from wheat straw, using less water, energy and chemicals as well as reducing carbon emissions. This will also offer Essity access to a new source of raw materials, which may over time reduce the company's exposure to wood-based pulp.

Essity prioritizes emissions-effective transport methods for long-distance transportation. The company has a strong focus on and prioritizes vehicle types that meet the requirements of the latest environmental and emissions classes combined with the most up-to-date alternatives, such as CNG fuel (vehicle gas) and electric trucks.

New offerings, business models and partnerships are under development in Essity that contribute to a more sustainable society and reduce the environmental impact of the company, and of customers and consumers. For example, Essity offers leakproof apparel that facilitates reuse, the proportion of renewable material has increased in the company's packaging, and more customers are using Tork PaperCircle®, which is the world's first recycling service for paper hand towels.

Essity urges its suppliers to promote increased sustainability and several of Essity's major raw material suppliers have their own ambitious sustainability targets that are often approved by the Science Based Targets initiative.

Essity strives to increase the use of recycled and renewable material in packaging and products. The company's target for sourcing of fresh fiber means that all wood-based fresh fiber is to be FSC™ or PEFC™ certified, meaning sourced from responsibly managed forests that promote the principles of biodiversity and forest conservation.

Essity has contingency plans in place in high-risk countries and is continuously working to safeguard production and sourcing of input goods.

All of Essity's production facilities and associated distribution centers (regardless of their location) are obligated to follow Essity's loss-prevention policies, not only for fire, explosion, and machinery breakdowns but also for climate-related risks. In addition to contingency plans, this may involve tangible measures such as reinforcements for roofs and doors against wind, shut-off valves for gas in the event of an earthquake, or various customizations to keep rapidly rising water outside of a plant or warehouse. Essity has also engaged the services of external consultants to model the company's exposure to natural catastrophes where possible and is working with loss-prevention activities. Reduced resource consumption, efficiency enhancements, altered product specifications and price increases.

Targets and key performance indicators

For many years, Essity has worked with sustainability across the value chain: from responsible raw material sourcing, more efficient production with a smaller climate footprint, and sustainable solutions to customers and consumers. The sustainability work has been broken down into several ambitious targets and key performance indicators to be achieved in parallel with the continued growth of the company. This places demands on the need to make a transition and on new production methods and circular business models, which is a challenge but if handled correctly also contributes to business opportunities and cost savings.

Materiality analysis

Part of the basis for Essity's strategy work consists of a materiality analysis where Essity and the company's stakeholders rank the issues and other areas that are perceived as being important for the company.

Essity conducts every other year a materiality analysis, which entails the use of a centrally coordinated strategy process to analyze how the company influences its external environment and the potential impact of the external environment on the business.

The first step consists of the risk analysis, which ranks the impact of business risks on the Group's ability to achieve set targets. In this step, the probability and consequence of the impact of the risks are evaluated. Read more about the risk management process and risks on pages 40-48. In the second stage, the company distributes a web-based survey every second year to Essity's stakeholder groups: customers, consumers, suppliers, employees, investors, analysts, non-profit organizations and decision-makers.

The survey asks the stakeholders to rank the most important topics. The latest survey was conducted in 2021, and resulted in approximately 600 answers. In addition to the materiality analysis, Essity maintains a continuous dialogue at Board of Director meetings, meetings with shareholders and in daily contacts with customers and consumers, employees, suppliers and decision-makers, among others. The materiality analysis and these dialogues form part of supporting documentation in Essity's strategy work.

The results of the materiality analysis from 2021 are presented in the graph below. This summarizes and ranks all topics that are considered strategically important for the company. Interest increased for topics such as digitalization, health and well-being, as well as responsible sourcing and product safety. These topics received the highest ranking, together with innovation, climate action and business ethics, which stakeholders also considered most important in previous years.

A more comprehensive account of all topics in the survey and how it was implemented can be found at www.essity.com/sustainability. There is also a presentation of the process and changes the company continuously undertakes in the selection, grouping and description of the topics assessed by stakeholders.

The stakeholders' ranking of the subject areas

Essity's commitment to sustainability

For the well-being of people and planet

Sustainability is and has been high on our agenda for many years. Essity improves the well-being of people through its leading hygiene and health solutions. To us, the well-being of people also includes our own people, our suppliers and partners, and the communities in which we operate. We work to ensure that Essity is an inclusive and safe workplace and that operations are conducted in a responsible manner.

We are committed to reducing our environmental impact, reduce waste and providing circular solutions, and protecting and restoring biodiversity. Our business is dependent on healthy and functioning ecosystems for our long-term survival and future success.

As a leading global hygiene and health company, Essity plays an important role in contributing to the achievement of the UN Sustainable Development Goals. We focus on goals 3, 5, 6, 12, 13 and 15, as this is where we have our expertise and can make the greatest contribution. Essity supports the UN Global Compact and works to overcome global challenges through cooperation and partnerships.

Read about Essity's commitment to sustainability

Improving well-being for people and societies

Reducing our environmental impact

Sustainability governance

Improving well-being for people and societies

Our greatest contribution

In pace with world population growth and rise in average life expectancy, there is increased need and demand for more preventive and easily accessible hygiene and health solutions. Driving awareness around and improvements to these issues is equally needed. Our products and services both save and improve lives by preventing the spread of bacteria, viruses, infections and diseases, and increase well-being and quality of life worldwide.

As Essity reaches many people around the world, it is important for us to recognize, understand and serve the diverse needs of our customers and consumers in multiple markets, while simultaneously creating a culture among our employees with a strong sense of belonging and engagement. We are building a workplace that attracts talent motivated by a clear purpose and vision for social change.

Essity conducts business in a responsible way and contributes to sustainable and inclusive societies in the communities where we operate. Furthermore, we are determined to offer the highest product and workplace safety standards to provide easily accessible, transparent product information to our customers and consumers.

Our #WoundWarriors campaign was designed to increase awareness among healthcare professionals of the role of wound management in the global challenge of antimicrobial resistance (AMR). We also work across industries and through multi-stakeholder platforms to support systemic changes and address the challenges of AMR.

Hygiene and health

Essity's core business is directly linked to Sustainable Development Goal (SDG) 3 Good health and well-being, SDG 6 Clean water and sanitation, and SDG 12 Responsible consumption and production.

Every day, millions of people refrain from going to work or school or taking part in social events because of hygiene and health-related concerns. With Essity's expertise and solutions, we work to spread knowledge, create awareness and empower people to address hygiene barriers. We play an important role in improving well-being in areas where gender, generational divides and variable abilities may constitute barriers to living a full and active life.

Essity initiates global dialogue and raises awareness around unspoken issues, perceived social stigma and the physical implications surrounding menstruation, incontinence, phlebology and personal and public hygiene. By challenging stigmas and providing access to products, Essity works to ensure that women and girls can continue to live an active life during menstruation and menopause. For example, our #bloodnormal campaign aims to call time on period taboos. Our TENA campaign #lastlonelymenopause aims to break barriers and the stigmas of menopause and encourage dialogue to increase the sense of inclusion and belonging.

Essity's ambition is to develop the hygiene and health solutions of tomorrow. In parallel, we are working with solutions and models for preventive measures, health promotion and improved self-care, which is important in a world that is experiencing a population increase and strained healthcare budgets. To ensure the continued improvement of global health and well-being, we work with hand hygiene, cleaning, wound care, solutions for chronic conditions, caretaking of family members, incontinence management, menstruation and digital solutions. We also work with health promotion and enabling care systems and models for this. We are leading the industry toward a future where the well-being of both people and planet can be met by developing more sustainable products and services.

Diversity, equity and inclusion

At Essity, we create change together. Our employees are the core of the company. We are determined to ensure an inclusive work environment for all, to achieve gender balance in senior positions, and accelerate representation of under-represented groups.

Our Beliefs & Behavior form the foundation of our culture. Essity's purpose is to improve people's well-being by breaking barriers. Most of our brands explicitly contribute to greater inclusion in society by challenging gender or age-related stigmas. We strive to have diversity, equity and inclusion (DEI) underpin what we do and how we do things.

Highlighting our efforts in the DEI area makes sense from a workplace and marketplace perspective. We know that DEI boosts innovation, improves decision making and increases employee engagement, which represent business-critical improvements for us.

Several programs and networks are offered at Essity to increase diversity in senior positions. Local activities are being carried out in various countries to target specific employee groups. Our employee survey shows that we are making good progress and provides valuable insights for our continued efforts.

Our approach to DEI includes a global strategy and roadmap, management team and workforce workshops, and the provision of inclusive leadership training to all managers. We have also included more DEI-related questions in our employee survey. In 2022, we partnered with Catalyst, a global non-profit organization that aims to create inclusive workplaces, which will enable us to accelerate our journey moving forward.

Essity's diversity work

In 2022, Essity was recognized as a Diversity Leader by the UK business daily Financial Times for the second consecutive year. The ranking surveyed more than 100,000 employees in European companies on a range of diversity aspects in their own and other companies.

Employee relations

Essity has a positive and constructive dialogue with employee representatives. As a global company, we experience many changes that require information and consultation with employee representatives at all levels of the company. Essity recognizes the right of every employee to be a trade union member and to participate in union activities. The company meets with employee organizations at various levels on a regular basis to inform them of and discuss issues such as the company's results, any organizational changes, health and safety and employment terms and conditions. Essity has an agreement with the industry organization IndustriAll. When there is no union representation, Essity establishes other channels where possible, such as an employee council. We also support the global partnership Global Deal, which has members from the private and public sectors. The purpose is to improve dialogue between parties in the labor market and national governments.

Through our partnership with the United Nations Foundation, we have committed to the organization's #EqualEvery-where initiative to accelerate progress toward achievement of the Sustainable Development Goal of gender equality. Essity works actively with diversity, equality and inclusion and strives for constant improvement in this area.

At Essity, all employees are to be treated with dignity and respect and we work systematically to prevent discrimination with regard to gender, ethnicity, religion, disability, sexual orientation, age or other grounds for discrimination protected by law. This is stipulated in our Code of Conduct and Diversity Policy. Breaches to our Code of Conduct and Diversity Policy can be reported using a reporting hotline, which is managed by a third party and offers anonymity. We strive to make our recruitment process fair, transparent, and free from bias. We track representation from nationality, age, and gender perspectives, for all employees and all management levels yearly, to ensure there are no systematic biases. Pay differences due to gender, age or background are followed up every year and any unjustified differences are addressed.

Product safety and transparency

We never compromise on the safety or quality of our products. To ensure this throughout a product's life cycle, we have extensive requirements and procedures in place, which our internal experts continuously improve in accordance with rules and regulations. We also have a certified quality system.

Essity collaborates with external experts in toxicology and life science to guarantee independent reviews. Every product and product component Essity receives from third parties must comply with Essity's product safety and chemicals criteria, according to the specifications in our Global Supplier Standard. Internal business practices ensure that information that may be relevant for product safety, including complaints and feedback from customers and consumers as well as quality incidents, are part of the product safety concept. Essity also actively participates in contributing to public policy developments and discussions on improving product safety and transparency. We communicate with customers and consumers to raise awareness and understanding about our product content.

Answers to frequently asked questions regarding product safety are published on www. essity.com and each brand's local website, together with detailed information about product contents. To further strengthen the availability of product information, we support the development of the EDANA Stewardship program on substances of concern, to drive transparency and align approaches to product assessments for absorbing hygiene products. We also launched the "Product Safety, For Us It's Personal" and "Our 5 Pillars of Protection" campaigns during 2021.

Occupational health and safety

Health and safety also has the highest priority. Everyone working at our production facilities and offices, or visiting Essity, should be safe and secure. The safety, health and well-being of our employees is crucial to the success of our operations. It is also aligned with our Beliefs & Behaviors and the ethical standards and requirements expressed in our Code of Conduct.

Essity regularly monitors employee perception of health and well-being and the evolution of our safety culture. We offer clear plans and programs to lead in this field. We strive to promote physical and mental health and well-being. By developing new digital ways of working and training courses, we offer a more effective and systematic manner with which to assess, analyze and work with continuous improvements in employee health, well-being and engagement.

Essity is committed to offering a work environment that contributes to a long-term sustainable working life. We encourage an open culture, and all employees are encouraged to be aware of and take immediate action against conditions, acts and behavior that increase the risk of accidents. In April 2022, the "I Care" initiative was launched, which is our cultural journey toward a safe and healthy work environment. It brings essential tools that will empower Essity to be a safety leader. The I Care leadership training course provides various elements of safety awareness, helping us to recognize and work with safety using our hearts and minds. In 2022, we trained more than 1,000 managers and our target is to train all 16,000 employees and contractors in our production facilities by 2024. Rewards are also part of I Care and this year we recognized great achievements with our first edition of the Essity Global Health and Safety Award, delivered by Essity's CEO. The award was followed by a month during which there was a particular focus on health and safety, aligned with guidelines from the United Nations and International Labor Organization.

As a complement to our safety leadership program, Essity has put in place an ambitious roadmap for technical safety and safety framework to be best-in- class and reduce the occurrence of events that could result in fatalities. Key elements that have taken effect in 2022 are upgrades to the following frameworks: Machine Safety Risk Assessment (MSRA), Isolation of Hazardous Energies (IoHE), and Traffic Management. The upgrades to our safety processes are aligned with the ISO 45001 and 14001 principles and allow us to work systematically to achieve continuous improvements.

Health and safety

Decrease in total recordable incident rate compared with 2019

Target 2025: -75%

Outcome:

The Total recordable injury (TRI) figure includes Lost time accidents (LTA), Restricted work cases (RWC) and Medical treatment cases (MTC). All of Essity's production facilities are conducting purposeful and systematic work with safety issues.

We monitor our Total Recordable Injuries (TRI) performance and Potential Serious Injuries or Fatalities through our reporting culture and processes. Nevertheless, we regret to report a contractor fatality at one of our warehouses during 2022.

90% of Essity's new employees completed training in Essity's Code of Conduct.

90% of Essity's total purchasing spend was to suppliers that comply with Essity's Global Supplier Standard.

6,480 of Essity's employees completed mandatory online anti-corruption training.

Business ethics and human rights

Conducting Essity's business in a socially responsible way is part of our corporate DNA. We have a zero-tolerance approach to unethical business behavior and violations of human rights in the value chains where we exercise control.

Code of Conduct

Essity's Code of Conduct describes how employees should act, how the company operates, and our stakeholder's expectations of Essity and Essity's commitment to human rights, including children's rights. The Code is based on international standards, such as the United Nations Guiding Principles on Business and Human Rights (UNGP), the ILO Core Conventions, the OECD Guidelines for Multinational Enterprises, the UN Global Compact Principles and related legislation.

All of Essity's wholly owned subsidiaries are bound by the Code of Conduct. We expect joint-venture companies to implement a Code of Conduct and guidelines equivalent to those stipulated in Essity's Code of Conduct. To ensure that all employees comply with the Code of Conduct, it is included as a mandatory training course in all the company's onboarding programs. To address the risk of corruption, Essity has an anti-corruption program that includes due diligence programs for business partners, training programs for employees and risk analyses. For Essity employees who have frequent contact with external stakeholders, annual anti-corruption training is mandatory.

All our other business partners are expected to follow principles equivalent to those included in the company's Code of Conduct.

Essity has a Global Supplier Standard to ensure responsible business operations and respect for human rights across the company's supplier base. This standard contains requirements concerning quality, product safety, the environment and chemicals. It also contains a Code of Conduct for Suppliers that includes Essity's expectations as regards human rights and employee relations, health and safety and business ethics. Compliance with these principles is a key factor when choosing suppliers and other business partners.

Compliance and monitoring

Systematic activities, such as audits and other monitoring processes, take place to ensure compliance.

For Essity's own and wholly owned production facilities, compliance with the Code of Conduct is ensured through audits under SA8000 conducted by the Internal Audit unit. The preferred audit format is SMETA, the Supplier Ethical Data Exchange's (Sedex) social auditing methodology, which is the most widely used format in the world for social and ethical audits. Essity's own and wholly owned production facilities that have conducted self-assessments in Sedex are available to our customers who are part of Sedex. Customers conduct audits in accordance with SMETA at Essity's production facilities.

We apply a systematic approach to ensure that our suppliers globally operate in line with our Code of Conduct for Suppliers. Essity requires that the company's suppliers use Sedex to conduct a self-assessment linked to working conditions, environment, business ethics and health and safety. Audits at the suppliers' sites, in accordance with OECD guiding principles for Multinational Enterprises and UN Global Compact, are used to verify compliance and to identify and address potential social and ethical issues.

Reporting breaches

Essity encourages an open and honest culture in which all employees can report suspicions of violations of the Code of Conduct or legislation. Retaliation against individuals who submit reports in good faith will not be accepted. Essity offers its employees a number of internal channels to report violations. Essity's Code of Conduct includes a section on how the company's whistleblower system works. All employees have access to the whistleblower system, Essity's reporting hotline, which is managed by an external party. Our reporting hotline is available 24/7 by phone or online in more than 25 languages. Where permitted by law, breaches can be reported anonymously. Essity's Compliance & Ethics department receives all submitted reports from the whistleblower system and is responsible for ensuring that necessary action is taken. Reports are presented regularly to Essity's Compliance Council and to the Board of Directors. Read more about this on Essity.com.

Risk management

Essity is potentially exposed to a number of risks given that our solutions are produced in and sold in several markets worldwide. Essity conducts regular assessments and risk analyses related to human rights, which comply with the UNGP. Risk analyses are based partly on assessments carried out by Transparency International, and partly the Sedex tool. Other complementary sources of information are various risk indexes and tools such as Dow Jones and Everstream Analytics. Corruption risks are followed up and analyzed regularly within the scope of the anti-corruption program. In 2022, about 36% of Essity's revenue was from sales in countries with a relatively high risk of corruption. In the 2022 Sedex assessment, 98% of our production facilities received a low to medium risk classification relating to human rights and corruption.

Essity applies continuous risk management for identification of business ethics, human rights and environmental risks related to the company's suppliers and procurement categories. The risk management approach is based on OECD guidelines for Multinational Enterprises.

Many of the strategic suppliers' production facilities located in Asia and South America are part of large multinational corporations based in Europe and the USA. This is a conscious choice by Essity to reduce the social and ethical risks within the supply chain.

Partnering for improved global health and well-being

Greater impact can be achieved by collaborating with organizations that share our ambition to improve global hygiene, health and equality. We engage in initiatives where we can best contribute and these must be politically and religiously independent, as set out in Essity's Community Relations Instruction. In 2022, Essity invested approximately SEK 37M in more than 400 projects. For example, during the year we had a close and action-oriented collaboration with UNHCR to support people in Ukraine.

We work with partners to gather and share knowledge and insights. Through our different perspectives, expertise and resources, the aim is to identify solutions to global societal challenges and to drive global change, for example by raising hygiene and health standards, thereby improving well-being for millions worldwide. With important partners such as the United Nations Foundation, we focus on sharing knowledge and raising awareness on what is needed to achieve the UN Sustainable Development Goals. Our work in raising awareness of stigmas and breaking taboos related to hygiene and health are examples of how Essity can play an important role in society and participate in the global public debate around issues related to hygiene, health, and well-being.

For many years, Essity has been a strategic partner in the "Global Handwashing Partnership". We also support the "Hand hygiene for all" initiative together with the WHO and UNICEF in Mexico, the aim of which is to guarantee access to products and services for hand hygiene in countries and areas where knowledge of and access to good hygiene and handwashing solutions are limited. Through our partnership with UNICEF in Mexico, we are highlighting the rights of children and young people in relation to health, education and gender equality, with a focus on hand hygiene and menstruation.

As a means of contributing to the global dialogue on improving hygiene and health, driving societal progress and enabling solutions, we have - over the past 15 years - regularly published "The Hygiene and Health Report" in cooperation with the Sanitation and Hygiene Fund (SHF). The report contains new insights and relevant action and has been the base for engaging with stakeholders to drive urgently needed changes.

Hygiene Is Our Right - a partnership with UNICEF in Mexico

For a number of years, Essity has collaborated with UNICEF in Mexico under the project "Hygiene is our right". This initiative seeks to raise awareness about the importance of hand washing, to provide greater access to clean and safe toilets, and to empower children and adolescents to challenge myths and negative behaviors surrounding menstrual hygiene.

The partnership has had significant impact on educational participation by providing access to water, hygiene and sanitation in schools in Mexico. The initiative shows that health and hygiene are fundamental to guarantee the right to education, especially menstruating adolescents.

In 2022, the partnership was renewed for three more years, which will allow Essity and UNICEF in Mexico to continue working to guarantee the right to hygiene, health and quality education in Mexico.

Reducing our environmental impact

Our greatest contribution

The climate crisis is one of the most defining issues of our time. Its global effects are far-reaching and impact both individuals and Essity's business. As one of the world's leading hygiene and health companies, we have the scale and reach to take action and contribute to collective transformation.

Biodiversity is crucial for the environment and human health and well-being. Our operations impact biodiversity in all parts of the value chain - particularly our activities related to sourcing of raw materials, greenhouse gas emissions, water consumption and effluent water, and also waste leakages, in particular plastic waste. Essity has ongoing initiatives and measures in all of these areas. As part of a major analysis of our impact on biodiversity, Essity integrated biodiversity into our overall risk management in 2021. We help our customers and consumers to make simple environmental choices, by communicating our environmental improvements in our own communication or through eco-labelling.

We are working to reduce greenhouse gas emissions, air, land and water pollution, as well as water and plastic use, and waste. A central part of this is responsible forestry and procurement of fiber, reduced material use, sustainable consumption and circular solutions. These initiatives make a positive contribution to SDG 12 Responsible consumption and production, SDG 13 Climate action and SDG 15 Life on land.

Forest and fiber

Nature consideration and protection of biodiversity through responsible forestry is a priority for Essity. As a global purchaser of both fresh and recycled wood-based fiber materials, we are dependent on healthy and resilient forests. Our impact on forest biodiversity is primarily through use of wood-based fresh fiber. Responsible procurement and responsible forest management is an integral part of our fresh fiber procurement and is therefore central to Essity's sustainability strategy.

Responsible fiber procurement

Our long-standing work with responsible fiber procurement is an important part of our sustainability strategy. We ensure responsible fiber procurement through certifications such as the Forest Stewardship Council (FSC) and the Programme for the Endorsement of Forest Certification (PEFC) and can thereby prevent deforestation and promote biodiversity. Every FSC-certified forest must be annually assessed by the accredited body. Essity works with and encourages non-certified suppliers and forest owners to become certified. This secures our procurement of certified materials while increasing the availability of certified raw materials to other users. To further promote responsible forestry at the global, regional, and national levels, we support the further development of international certification systems. Essity participates in the Consumer Goods Forum (CGF) together with other leading consumer goods companies in the Forest Positive Coalition of Action initiative to combat global forest degradation, deforestation and to preserve biodiversity.

Recycled and alternative materials

As a means of reducing fresh wood fiber purchases, we invest in new technology to increase the possibility of utilizing a larger share of recycled and alternative materials. One step in this direction was Essity's investment in the production facility in Hondou-ville, France, in 2021. The investment made it possible to increase the recycling capacity for cartons and extract 98% of paper fiber in food and beverage cartons. We are also investing in alternative renewable fibers such as wheat straw, an agricultural by-product that often remains unused. Essity's production facility in Mannheim, Germany, began producing tissue from wheat straw pulp in 2021, with the first products launched on the market in 2022 under the Zewa brand. This is the first production facility of its kind in Europe and the first plant in the world that uses wheat pulp on a large scale to produce tissue. The breakthrough innovation leads to increased circularity and reduced climate footprint.

Targets and transparency

In 2022, Essity was again recognized for the company's leadership in sustainability by the non-profit environmental organization CDP.

Through CDP's database, everyone can access information about how Essity works with fiber suppliers, industry organizations and other stakeholders, including non-profit organizations, to manage and promote sustainable forestry.

Each year, Essity reports according to the agreed targets in the Forest Positive Coalition of Action that is part of the CGF. This report is available on our website and is included in CGF's annual aggregated report. Our joint targets form an essential part of our commitment together with other coalition members. Essity reports and follows up on these targets to drive a Forest Positive change within our own supply chains, our industry, and beyond.

Fresh fiber

Share of FSC or PEFC-certified fresh fiber

Target: 100%

Outcome:

Through certifications such as the Forest Stewardship Council (FSC) and the Programme for the Endorsement of Forest Certification (PEFC), Essity ensures sustainable fiber procurement, thereby preventing deforestation and promoting biodiversity.

Reduction in greenhouse gas emissions

Emissions and pollution have a negative impact on biodiversity. Reducing greenhouse gas emissions and the carbon footprint of our operations has been a major focus for Essity for many years. The company has committed to achieve net zero emissions of greenhouse gases by 2050 and has Science Based Targets for Scope 1, 2 and 3, encompassing both our own operations and our suppliers' value chain. We have raised our ambitions for existing Science Based Targets in Scope 1 and 2. Essity has a clear strategy and plan for how it will achieve these targets and the most important priorities have been identified. These actions will encompass the entire value chain, from raw materials, production, distribution, and consumer use to the management of used products. Essity has joined the UN Global Compact's "Business Ambition for 1.5°C". The climate targets are aligned with the ambitions of the Paris Agreement to reduce global warming. The initiative is supported by the CDP, World Resources Institute (WRI), WWF and UN Global Compact.

The road to net zero emissions

Essity focuses on the following areas to achieve our ambition of net zero emissions.

To ensure that we meet our targets, Essity has appointed a steering committee led by members of the Executive Management Team. Additionally, we are identifying the impact of climate change on Essity's business using the TCFD framework. Read more under Risk and risk management on pages 46-48.

Science Based Targets

Target 2030 (compared with 2016):

With the Libero brand, Essity offers a climate-smart diaper comprising an absorbent insert and a washable cloth diaper. Compared with a standard diaper, the climate impact of the hybrid alternative is 35% less while the reduction in waste is 22%.

Plastic

The production of fossil plastic has a negative impact on our planet as it releases carbon emissions into the atmosphere and thereby accelerates the existing climate crisis. Plastic waste and pollutants threaten human welfare as well as wildlife and biodiversity. Nations worldwide, with the European Union (EU) at the frontline, are placing bans on single-use plastics and transitioning toward a more circular economy that considers every stage of a product's journey - before and after it reaches the customers and consumers. In parallel, plastic is required to ensure necessary levels of sanitation, safety and functionality for hygiene and health products. Our industry must change how we design, use, and reuse plastic by shifting from linear to circular business models. This calls for creative thinking, new business models and partner ships where we develop new solutions that lead to less waste.

Packaging

Essity has ambitious targets to reduce the total amount of primary plastic in the company's packaging, to increase the use of renewable or recycled plastic and to make all plastic packaging recyclable. Our packaging strategy includes innovating for increased circularity while simultaneously reducing existing greenhouse gas emissions.

The UN began negotiations for an International legally binding instrument to end plastic pollution in November 2022. This global treaty will focus on all plastic products, including packaging. The multilateral negotiations on the treaty are expected to conclude in mid-2025. Essity joined the Business Coalition for a Global Plastics Treaty. This new Coalition led by the Ellen MacArthur Foundation and WWF endorses a common vision, by providing a clear voice in the treaty negotiations to amplify the call for an ambitious and effective global treaty.

Plastic in our products

Essity aims to reduce and replace primary fossilbased plastics in our products and minimize the waste in our production and after use. By developing smarter designs, new services, and innovating to find alternative materials, we ensure less use of primary fossil plastic in general, less single-use plastic in particular, while also reducing the environmental impact through the product life cycle.

Essity constantly reviews product design to enable more sustainable consumption. One example is how we dispense our Tork tissue, which can reduce tissue consumption by more than 25%. In 2022, TENA Lights Sensitive were also launched, where the pads come in a renewable paper packaging contributing to less plastic waste and reducing the carbon footprint by using at least 50% plant-based materials in products and packaging.

We are broadening our collaboration with customers and consumers to better understand how we can support their sustainability strategies and targets, while helping them make more sustainable choices. Essity aims to create more value using less resources and innovate and design products that fit into a circular society. We strive to replace primary fossil-based plastics with renewable materials derived from plants such as corn or sugar cane.

In 2021, Essity joined the Digital Watermarks Initiative HolyGrail 2.0, which addresses the issue of plastic waste, and we are striving to introduce a digital watermark to improve sorting and increase the recycling rate of plastic packaging in the EU. An invisible watermark on packaging helps waste sorting facilities to identify the type of plastic and sort it correctly.

Waste

To reduce waste arising from Essity's production and waste after use, we are developing products and packaging containing less primary fossil-based plastic and more circular solutions.

Production waste

The target is that all production waste will be subject to material and energy recovery by 2030. Recycling or extracting energy from the waste instead of sending waste to landfill reduces greenhouse gas emissions. For example, recovered material from tissue manufacturing can be used as raw material for other industries, such as in the construction industry.

Production waste

Subject to material or energy recovery

Target 2030: 100%

Outcome:

Resource efficiency and the reduction of waste are important in Essity's production facilities. The target is that all production waste will be subject to material and energy recovery by 2030, which reduces greenhouse gas emissions.

Packaging

Share of packaging manufactured from renewable and/or recycled material

Target 2025: 85%

Outcome:

Essity is striving for 85% renewable and/or recycled material in the company's packaging. This target applies to both paper and plastic packaging for Essity's brands.

Share of technically recyclable packaging¹

Target 2025: 100%

Outcome:

In 2022, Essity estimated the technical recyclability of a large portion of the company's packaging. Essity has thereby improved packaging design to facilitate recycling using existing infrastructures.

¹⁾ Packaging is recyclable using existing infrastructures.

Waste after use

We can create less waste after use through the principles Reduce, Reuse and Recycle. Essity strives to be more resource efficient, develop smarter designs and reduce materials in our products and packaging. Our services are constantly improving, and new designs are utilized to reduce waste, and thereby cut greenhouse gas emissions.

Most of our packaging is recyclable and we are working to optimize other packaging. We are reducing and replacing primary fossilbased plastic in our packaging and products with renewable or recycled materials. Essity is also working to develop smarter designs and innovative plastic materials to reduce environmental impact. We are cooperating with customers, consumers, suppliers, and other partners to identify more sustainable and circular solutions. A challenge in many markets is the lack of infrastructure for collecting used packaging or products. Essity therefore supports national initiatives for large-scale recycling of packaging.

Circularity

Essity has integrated circularity in the company's business model, from responsible raw material procurement, more resource-efficient production with a smaller climate footprint, to circular solutions that enable customers and consumers to minimize waste.

We carry out circularity assessments as part of the innovation process to obtain a better understanding of how waste can be avoided during and after use. One example is TENA SmartCare, where product use is optimized and waste reduced through digital monitoring so the product is replaced at the right time and fewer and thinner products are used.

Water consumption

Water shortages and contaminated water have a negative impact on people, societies and the environment, and unsustainable water use could lead to the loss of biodiversity. This also affects Essity's operations. Water risks differ around the world, and we assess risks and impacts individually for our tissue production facilities, both from a geographic and an operating perspective. Water is mainly needed for transporting fiber during the production process. We circulate water several times in production to help reduce energy use for heating and treatment of water. Most of the water is treated after use and is discharged.

Environmental permits for tissue plants also include limits for typical pollutants, such as chemical oxygen demand, phosphorus and nitrogen. Essity is investing in new wastewater treatment technology to meet the higher requirements on quality of discharged water. This is particularly important in locations where water is a resource shared with many different users, such as along major rivers, where the temperature of the water released must also be carefully monitored. For a number of years, we have actively worked to reduce the amount of water used and the levels of suspended solids and organic content (BOD), with a main focus on improving our water management.

Partnership to reduce environmental impact

Essity works together with various players such as non-governmental organizations (NGOs) on both environmental and social issues, inter-governmental organizations (IGOs) such as the World Health Organization, European Union, and the OECD, as well as with trade and industry associations.

Essity has been a member of the UN Global Compact Action Platform on Climate Ambition since 2017. The platform provides an opportunity for collaboration between companies and important stakeholders to address the issues of limiting and adapting to climate change.

We take part in discussions throughout the value chain to promote the implementation of circular economy solutions designed to tackle waste, including the CGF, Edana, Ellen MacArthur Foundation and RecyClass. Through CGF's Coalition of Action on Plastic Waste, Essity works together with customers, other companies, and organizations to jointly reduce plastic waste and strive to improve social systems, so that no plastic waste is disposed in nature.

Essity is a partner in the Ellen MacArthur Foundation's Network, which provides a forum to share, learn and implement ideas to implement and scale circular economy solutions for products, packaging, and services, and to jointly promote societal change. We are part of the New Plastic Economy initiative, which is aligned with and impacts external prerequisites for Essity's target to ensure that all packaging is 100% recyclable and to increase the use of recycled plastic by 2025.

Sustainability governance

Sustainability is incorporated throughout Essity's operations and forms an integrated part of the Group's overall corporate governance.

Purpose, implementation and follow-up

The purpose of Essity's sustainability governance is to ensure the company's commitments to its stakeholders, including customers, consumers, employees, shareholders, suppliers, investors, decision makers and representatives from society. The company's commitments are expressed in targets, strategy and priorities. The Board of Directors has established sustainability targets that are regularly monitored and reported annually. Essity maintains an active and continuous dialogue with internal and external stakeholders to ensure priorities and methods over time. Based on well-defined areas of responsibility and follow-up, we ensure that we deliver on established sustainability targets. To tackle increasing sustainability challenges, Essity continuously develops its ambitions in dialogue with stakeholders and external experts.

Since sustainability is an integrated part of Essity's strategy and operations, the internal audit also encompasses sustainability. Essity's Annual and Sustainability Report is also included in our external auditor's review. Read more on page 156.

Public policy, regulations and internal steering documents

Essity's prioritized sustainability topics, strategies and targets are a result of the company's internal work and dialogue with a multitude of important external stakeholders and partners such as businesses, governments, consumers, NGOs, media, and the academic world. These are also aligned with a range of different principles and guiding frameworks. In addition to external frameworks and principles, Essity has several external certifications and ISO standards as well as internal policies and guidelines that ensure the company has well-defined management systems in place to monitor the company's results.

Essity has developed positions in the form of position papers in which we state our views on key topics. These are available at www.essity. com/sustainability.

Guiding external frameworks and principles

Guiding internal frameworks and principles

Essity's sustainability governance¹

^* = Cross-functional working groups that report to the Executive Management Team (EMT)
¹⁾ Significant functions in the company that influence sustainability work. For complete information on corporate governance, see page 62.
²⁾ The Compliance Council also reports regularly to the Board of Directors.

EU taxonomy

As part of the EU's green growth strategy, the EU taxonomy came into effect in 2020. This is a classification tool for environmentally sustainable investments. Essity has analyzed its operations to comply with current and future disclosure requirements. The company's sales (turnover), capital expenditure and operating expenditure are to be reported in accordance with Nomenclature of Economic Activities (NACE) codes. The EU is yet to determine which economic activities are to be deemed environmentally sustainable under each NACE code.

The same applies to additional subordinate economic activities identified in the analysis of Essity's sales, capital expenditure and operating expenditure. Most of Essity's economic operations can be allocated to the pulp and paper industry. Essity's sales (turnover), capital expenditure and operating expenditure are therefore not covered by the taxonomy directive for this reporting period. For taxonomy tables, see note H15 on pages 146-147.

Sustainability indexes and rankings

Essity voluntarily takes part in rankings of the company's sustainability work, as we believe this strengthens efforts moving forward. A summary is presented below of our scores in some of the most important rankings and ratings.

Sustainability indexes and rankings

Essity was awarded a Platinum Medal in the 2022 Ecovadis CSR Rating for the second consecutive year.

Essity has been listed on the FTSE4Good Global Sustainability Index since 2001.

In 2022, Essity was awarded a place on CDP's A List for its work in combating deforestation and was mentioned as leading in its management of climate change, with an A-.

In 2023, Essity was included in S&P Global's Sustainability Yearbook for its sustainability work in 2022.

Corporate Knights

Essity has once again been recognized as one of the world's 100 most sustainable companies by Corporate Knights.

Corporate governance

The task of corporate governance is to ensure the company's commitments to all of its stakeholders: shareholders, customers, suppliers, creditors, society and employees. It must be structured in a way that supports the company's long-term strategy, market presence and competitiveness. Corporate governance shall be reliable, clear, simple and business-oriented. This Corporate Governance Report forms part of the Board of Directors' Report for Essity's 2022 Annual and Sustainability Report. The report has been reviewed by the company's auditors.

Corporate governance, pages 62-71

This section describes applicable regulatory rules and regulations for the Group's corporate governance and the company's management structure and organization. It details the Board of Directors' responsibilities and its work during the year. It also contains a description of Essity's internal control with regard to financial reporting. Essity applies the Swedish Corporate Governance Code without any deviations (www.corporategovernanceboard.se).

Risk management, pages 40-48

Essity's processes to identify and manage risks are part of the Group's strategy work and are pursued at a local and central level. These sections dealing with risk management describe the most significant risks and measures taken to eliminate or limit these risks.

Sustainability, pages 50-61 and 138-147

Essity's sustainability work is an integral part of the company's business model. The company's statutory sustainability report forms part of the Board of Directors' Report. Sustainability work contributes to a sustainable and circular society, reduces risks, strengthens competitiveness, and attracts new employees and investors.

More detailed information about Essity's corporate governance is available on www.essity.com

Governance at Essity

1. Shares and shareholders

Essity has engaged Euroclear Sweden AB to maintain the company's shareholders' register. On December 31, 2022, Essity had 111,241 shareholders. The five largest shareholders in terms of voting rights on this date were AB Industrivärden (29.6%), Norges Bank Investment Management (6.8%), AMF Försäkring och Fonder (6.6%), Swedbank Robur Funds (2.8%) and MFS Investment Management (2.8%). Essity has two listed classes of shares: Class A and Class B shares. Every Class A share represents ten votes while every Class B share represents one vote. There are no other restrictions to voting rights in respect of shares used by shareholders at the general shareholders meeting. The two share classes carry the same entitlement to the company's assets and profits. Furthermore, according to the Articles of Association, owners of Class A shares are entitled to request conversion of their Class A shares to Class B shares. The 2022 Annual General Meeting (AGM) authorized the Board of Directors, for the period until the 2023 AGM, to decide on the repurchase of Class B Essity shares. Essity has not utilized this share repurchase mandate and holds no treasury shares.

2. General shareholder meeting

The general shareholder meeting is Essity's highest decision-making body, which all of the company's shareholders are entitled to attend, to have a matter considered and to vote for all shares held by the shareholder. The company's Board of Directors and auditor are elected at the AGM. The AGM also resolves on the remuneration of the Board members, determines guidelines for the remuneration of senior executives and approves the Board's annual remuneration report.

3. Nomination Committee

Shareholders appoint members of the Nomination Committee at the AGM, or stipulate how the members shall be appointed. The Nomination Committee represents the company's shareholders. A majority of the members shall be independent of the company and corporate management. The President and other members of corporate management may not be a member of the Nomination Committee. The main duty of the Nomination Committee is to prepare and present proposals for the AGM's resolutions with respect to election and remuneration matters.

4. External auditors

Essity's auditor is elected at the AGM and is responsible for reviewing the company's Annual and Sustainability Report and consolidated financial statements and the Board's and President's administration. The auditor conducts a limited review of the company's sustainability report and corporate governance report as well as the company's half-year report. The auditor submits an audit report from this review. The auditor also submits a statement concerning compliance with the company's guidelines for remuneration of senior executives. The audit is performed in accordance with the Swedish Companies Act, International Standards on Auditing (ISA) and generally accepted auditing principles in Sweden.

5. Board of Directors

The Board of Directors is elected by the shareholders at the AGM and has overall responsibility for the Company's organization and administration. This responsibility is fulfilled, inter alia, through regular monitoring of the business and by ensuring the appropriateness of the organization and the management team, and by issuing guidelines and reporting from the internal audit. The Board approves strategies and targets, and decides on major investments, acquisitions and divestments of operations, among other matters. Furthermore, the Board annually prepares a report on the remuneration that has been paid or is pending payment in accordance with the remuneration guidelines decided by the AGM. The Board of Directors comprises ten members with no deputies. According to the Articles of Association, the Board of Directors is to consist of not less than three and not more than twelve members elected by the AGM. The Board of Directors also includes three employee representatives with deputies, who are appointed by the respective employee organizations under Swedish law.

Essity's Articles of Association contain no provisions regarding appointment or dismissal of Board members or amendments to the Articles.

Chairman of the Board

The Chairman of the Board is elected by the shareholders at the AGM. The Chairman of the Board leads the work of the Board and is responsible for ensuring that it is effectively organized and that work is efficiently conducted. This includes continuous monitoring by the Chairman of the company's operations in close dialogue with the President and ensuring that other Board members receive information and decision data that will enable high-quality discussion and decisions by the Board. The Chairman leads the assessment of the Board's and the President's work. The Chairman also represents the company in ownership matters.

6. Audit Committee

The role of the Audit Committee is to monitor the company's financial reporting and provide recommendations and proposals to ensure the reliability of reporting. With regard to the financial reporting, the Committee oversees the effectiveness of the company's internal control, internal audit and risk management. The Audit Committee keeps itself continuously informed about the audit of the Annual and Sustainability Report and consolidated financial statements and about the conclusions of the quality control by the Swedish Inspectorate of Auditors concerning the company's external auditor. The Committee receives and addresses the supplementary report to the audit report concerning the conducted audit that the auditor submits in accordance with the EU Audit Regulation. The Audit Committee informs the Board of its observations and the results of the audit. The Audit Committee also examines and monitors the impartiality and independence of the auditor. In respect to this, particular attention is paid to whether the auditor is providing the company with services other than auditing services.

The Committee also assesses the work of the auditor and provides proposals to the company's Nomination Committee concerning the appointment of auditor for the following mandate period. Members of the Audit Committee are not employed by the company and at least one member has accounting or auditing expertise.

7. Remuneration Committee

The Remuneration Committee drafts the Board's motions on issues relating to remuneration principles, remuneration and other terms and conditions of employment for the President and is authorized to make decisions in these matters for the company's other senior executives. The Committee monitors and assesses programs for variable remuneration, the application of the AGM's resolution on guidelines for remuneration of senior executives and evaluates the applicable remuneration structure and remuneration levels in the Group. The Remuneration Committee also prepares the annual remuneration report.

8. Portfolio Development Committee

The Portfolio Development Committee is tasked with preparing the Board's deliberations and resolutions in relation to general portfolio and acquisition issues and to prepare and propose strategies relating to such issues. When deemed appropriate, the Board may, to a certain extent, delegate decision-making power in these matters to the committee.

9. Internal audit

The internal audit assists the Group in improving and protecting the organization's value through a risk-based, independent and objective assurance and consultancy services. The internal audit also reports to the Audit Committee and to the Board in relation to internal audit issues. The audit field encompasses both financial and operational aspects across all of Essity. The internal audit also provides investigations and consultancy services in connection with internal control matters and risk management.

10. President and Executive Management Team

Essity's President and CEO is responsible for the day-to-day administration of the Group and follows the Board's guidelines and instructions. The President is supported by the Executive Management Team, see pages 70-71, the work of which is led by the President. The Executive Management Team comprises the President, five Group Function Senior Vice Presidents, four Business Unit Presidents and the Presidents of the three global units. The Executive Management Team holds regular meetings during the year to discuss and coordinate matters such as the business areas' economic development and budgets, important projects, strategy issues, sustainability issues and corporate culture. The Executive Management Team also has an advisory role for the President.

The working procedures for the Board of Directors and terms of reference issued by the Board of Directors to the President detail, for example, the division of work between the Board and President. In consultation with the Chairman and Secretary of the Board, the President prepares documentation and decision data for the Board's work.

Rules and regulations

Certain internal rules and regulations

Certain external rules and regulations

Compliance with stock market regulations Essity complies with rules that apply in Sweden for listed companies and was not sanctioned by Finansinspektionen, the stock exchange's disciplinary committee or any other authority or self-regulating body for violations of the rules concerning the stock market.

11. Business units and global units

Essity has four business units:

Furthermore, Essity has three global units:

These units are described in more detail on page 34.

Essity's business units and global units adhere to the principle of distinct decentralization of responsibility and authority. The business units and the global units have a delegated responsibility for managing and developing their respective operations through established objectives and strategies, a process that is also centrally coordinated. The business units are responsible for their operating results, capital and cash flow. The business and earnings position is followed up by the entire Executive Management Team on a monthly basis. Each quarter, business review meetings are conducted during which the management of each business unit personally meets with the President and the CFO. These meetings function as a complement to the daily monitoring of operations. Through working procedures and terms of reference, a number of issues of material significance are placed under the control of the President and the company's Board of Directors.

12. Group functions

Essity has five Group functions:

These have Group-wide responsibility for matters within their respective fields of responsibility, and coordinate with the corresponding functions in the respective business area or global unit.

Activities during the year

Annual General Meeting

Essity held its AGM in Stockholm on Thursday, March 24, 2022. The meeting was carried out solely via advance voting (postal voting) in accordance with temporary legislation.

The AGM elected the company's Board of Directors. Furthermore, guidelines for remuneration of the President and other senior executives were adopted, see Note C2 on pages 99-101. The Meeting also approved the Board's remuneration report for 2021.

Nomination Committee

The Nomination Committee of Essity is tasked with making proposals to the AGM in respect of the election of the Chairman of the Meeting, Board of Directors, Chairman of the Board and auditor, remuneration of each Board Member (divided between the Chairman of the Board and other Board Members), remuneration of the auditor and, where applicable, proposals for amendments to the instruction for the Nomination Committee. At the 2020 AGM, the following instructions to the Nomination Committee were adopted to apply until further notice:

"The Nomination Committee is to comprise representatives of the four largest shareholders, who express a wish to take part in the Nomination Committee, in terms of voting rights as per the shareholders' register maintained by the company on the final banking day of August, as well as the Chairman of the Board, who also convenes the first meeting of the Nomination Committee.

The member representing the largest shareholder in terms of votes is to be appointed as Chairman of the Nomination Committee. The Chairman of the Board shall not be Chairman of the Nomination Committee. If necessary, due to subsequent ownership changes, the Nomination Committee is entitled to call on one or two additional members from among the next largest shareholders in terms of voting rights. The total number of members shall be not more than seven. In the event that a member steps down from the Nomination Committee before the task is completed and the Nomination Committee decides it would be beneficial for a replacement to be appointed, such a replacement is to be appointed by the same shareholder or, if this shareholder is no longer among the largest shareholders in terms of voting rights, by the next largest shareholder in terms of voting rights. Changes to the composition of the Nomination Committee are to be disclosed immediately.

The composition of the Nomination Committee is to be announced by Essity no later than six months prior to the AGM. No remuneration is to be paid to the members of the Nomination Committee. Any expenses incurred during the work of the Nomination Committee are to be paid by Essity. The mandate period of the Nomination Committee extends until the composition of the next Nomination Committee is disclosed. The Nomination Committee is to submit proposals relating to the Chairman of the Meeting, the Board of Directors, the Chairman of the Board, Board fees for the Chairman of the Board and each of the other Board members, including remuneration for committee work, the company's auditor and auditor's fees and, to the extent deemed necessary, proposals for amendments to this instruction."

In its work, the Nomination Committee is to consider the rules that apply to the independence of Board members, as well as the requirement of diversity and breadth with the endeavor to achieve an even gender distribution and that the selection shall be based on expertise and experience relevant to Essity.

All shareholders have had an opportunity to submit proposals to the Nomination Committee. The Nomination Committee's proposal for the 2023 AGM is presented in the notice convening the AGM available on Essity's website www.essity.com. The 2023 AGM will be held on Wednesday, March 29, see page 10.

The Nomination Committee was convened on six occasions prior to the 2023 AGM. The Chairman of the Board presented the Board evaluation and provided the Nomination Committee with information regarding Board and committee work during the year. When preparing proposals for the Board for the 2023 AGM, particular attention has been paid to the issues of diversity and an even gender distribution, and the Nomination Committee thus applied Item 4.1 of the Swedish Corporate Governance Code as its diversity policy. When preparing its proposal for the election of auditors, the Nomination Committee also gave consideration to the recommendation of the Audit Committee.

Nomination Committee for the 2023 AGM

Board of Directors and composition of the Board of Directors

Essity's Board of Directors comprises ten members elected by the AGM. Ewa Björling, Pär Boman, Annemarie Gardshol, Magnus Groth, Bjorn Gulden, Torbjörn Lööf, Bert Nordberg, Louise Svanberg, Lars Rebien Sorensen and Barbara Milian Thoralfsson were elected as Board members in 2022. Pär Boman was elected as the Chairman of the Board.

The independence of Board members is presented in the table on page 66. Essity complies with the requirements of the Swedish Corporate Governance Code that stipulate that not more than one member elected by the AGM shall be a member of corporate management, that the majority of the members elected by the AGM shall be independent of the company and company management, and that not fewer than two of these shall also be independent of the company's major shareholders. All of the AGM-elected Board members have experience and a good understanding of the requirements incumbent upon a listed company. Four of the Board members are women, corresponding to 40% of the total number of AGM-elected Board members. The employees have appointed Susanna Lind, Örjan Svensson and Niclas Thulin as representatives to the Board for the period until and including the 2023 AGM, and their deputies Niklas Engdahl, Martin Ericsson and Andreas Larsson.

The AGM-elected Board members have broad international experience from various cultural and geographic areas and wide-reaching expertise and experience of relevance to Essity's areas of business and products. Accordingly, the Board has - with reference to the company's business, stage of development and general situation - a suitable composition. In addition, the Board of Directors and its Audit Committee and Remuneration Committee have an even gender distribution.

Board activities

The Board was convened 11 times during the year. The Board has fixed working procedures that describe in detail which ordinary agenda items are to be addressed at the various Board meetings of the year. Recurring agenda items are finances, the market situation, sustainability issues, investments and adoption of the financial reports. The Board also establishes and evaluates the company's overall targets and strategy and decides on significant internal rules. Another key task is to continuously monitor the internal control of the compliance of the company and its employees with relevant internal and external rules, and that the company has well-functioning procedures for market disclosures. On a regular basis throughout the year, the Board has also dealt with reports from the Audit and Remuneration Committees and reports on strategy, market, internal audit, internal control and financial operations. The company's auditor regularly presents a report on its audit work and these issues are discussed by the Board. The Business Unit Presidents present their respective operations and current issues affecting them.

In 2022, in addition to customary Board work, the Board of Directors continued to maintain a strong focus on digitalization, portfolio-related issues and sustainability, and closely monitored developments in view of the situation in Ukraine and Russia. The Board also focused on strategy work during the autumn.

Evaluation of the Board's work

The work of the Board, like that of the President and the Chairman, is evaluated annually using a systematic and structured process. The purpose of this work is to obtain a sound basis for the Board's own development work and to provide the Nomination Committee with decision data for its nomination work. External expertise were used and the evaluation took the form of an anonymous questionnaire and interviews as well as group and individual discussions. The evaluation covers such areas as the Board's methods of work, effectiveness, expertise and the year's work.

The Board was provided with feedback after the results were compiled. The Nomination Committee was also informed of the results of the evaluation.

Audit Committee

The Audit Committee comprises Barbara Milian Thoralfsson (Chairman), Pär Boman and Ewa Björling. In 2022, the Audit Committee held nine meetings. In addition, members have also held meetings with internal audit, the auditors and the CFO. In its monitoring of the financial reporting, the Committee dealt with relevant accounting issues, internal auditors' reviews, auditing work, risk management, a review of various valuation matters, such as testing of impairment requirements for goodwill, and the preconditions for the year's pension liability calculations. In addition, the Committee addressed issues relating to sustainability reporting. The Audit Committee also prepared a recommendation to be used by the Nomination Committee when deciding on its proposal to the AGM regarding the election of auditors.

Remuneration Committee

The Remuneration Committee comprises Pär Boman (Chairman), Bert Nordberg and Louise Svanberg. The Remuneration Committee held six meetings in 2022. Activities mainly concerned remuneration and other employment terms and conditions for senior executives, and current remuneration structures and remuneration levels in the Group. In addition, the Committee prepared the Board's remuneration report relating to remuneration of senior executives.

Portfolio Development Committee

The Portfolio Development Committee consists of Bert Nordberg (Chairman), Pär Boman, Torbjörn Lööf and Lars Rebien Sorensen. The Remuneration Committee held eight meetings in 2022. During 2022, the Committee held discussions with the President and parts of corporate management in relation to such issues as the company's portfolio and acquisition strategy.

Internal audit

The basis of the work of the internal audit is a risk analysis based on external and internal information carried out in close dialogue with management teams at Essity. The risk evaluation forms the basis of an audit plan, which is presented to the Audit Committee together with the risk analysis. In 2022, 126 audit projects were performed and reported at meetings with the Audit Committee.

Work in 2022 involved follow-up of the units' progress with process-based control, efficiency in internal governance and control, major investments, information security, sustainability and compliance with Essity's policies.

External auditor

The 2022 AGM appointed the accounting firm of Ernst & Young AB as the company's auditor for a mandate period of one year. The accounting firm notified the company that Hamish Mabon, Authorized Public Accountant, would be the auditor in charge. Hamish Mabon is also the auditor and has major assignments for SEB, Skanska AB and Assa Abloy AB. He owns no shares in the company.

In accordance with its formal work plan, the Board met with the auditor at three scheduled Board meetings in 2022. The auditor also attended each meeting of the Audit Committee. At these meetings, the auditor presented and received opinions on the focus and scope of the planned audit and delivered verbal audit and review reports. Furthermore, at the Board's third scheduled autumn meeting, the auditor delivered an in-depth verbal report on the audit for the year. The working procedures specify a number of mandatory issues that must be addressed. These include matters of importance that have been a cause of discussion or concern during the audit, business routines and transactions where differences of opinion may exist regarding the choice of accounting methods. The auditor shall also disclose consultancy work conducted for Essity as well as other dependencies in relation to the company and its management. On each occasion, Board members have had an opportunity to ask the auditors questions. Certain parts of the discussion on the accounts take place without representatives of corporate management being present.

¹⁾ Board meetings January 1-December 31, 2022.
^* = Dependent in relation to the company's major shareholder, AB Industrivärden.
^** = President of Essity, dependent in relation to the company and corporate management.

Remuneration, Management and Board of Directors

Guidelines

The 2022 AGM adopted new guidelines for remuneration of senior executives that are based on a total remuneration package comprising a ixed salary, variable compensation and other benefits, and pension, see Note C2 on pages 99-101.

Remuneration of the President and other senior xecutives

Remuneration of the President and other senior executives is presented in a separate remuneration report, which is available on the company's website and on pages 157-158. Furthermore, remuneration of the President and other senior executives is described in Note C2 on pages 99-101.

Remuneration of the Board

The total remuneration of the AGM-elected Board members amounted to SEK 12,030,000 in accordance with the AGM's resolution. See Note C3 on page 101 for firther information.

Internal control and financing reporting

The Board's responsibility for internal governance and control is regulated in the Swedish Companies Act, the Annual Accounts Act and the Swedish Corporate Governance Code. The Annual Accounts Act requires that the company, each year, ddescribes its system for internal control and risk management with respect to financial reporting. The purpose of these requirements is to create an internal framework for governance and control to reduce the risk of error in the financial reporting. Essity's processes for internal control of financial reporting is based on the model and principles developed by the Committee of Sponsoring Organisations of the Treadway Commission (COSO).

Control environment

A good control environment requires clarity in relation to decision-making paths, powers and accountability, in addition to a corporate culture characterized by strong values and awareness among employees of their role in maintaining good internal control. The Board of Directors has the overall responsibility for ensuring effective internal control and has, inter alia, adopted Group-wide internal rules for the purpose of establishing a foundation for a good corporate culture and to assure the quality of the financial reporting. In this context, Essity's Code of Conduct is an important steering document in issues concerning ethics, morality and regulatory compliance, and employees regularly receive information and training regarding the Code. Other significant steering documents for the control environment include the Finance Policy, Internal Control Policy, Communications Policy and Information Security Policy. Essity's Financial Reporting Manual is particularly important for the Group's financial reporting procedures as it contains a number of specific instructions and guidelines that are specially designed to ensure the quality of the financial reporting. Important steering documents are published in a separate database (Global Management System, GMS) that also contains a process for annual updates to the documents.

Risk assessment

Risks relate to material errors in the financial reporting that may arise, such as incomplete disclosures, valuation issues, the reporting process and correctness. Risks also include loss of assets, unduly favoring a third party and misappropriation.

Risks related to the financial reporting are evaluated and monitored by the Board via the Audit Committee, where an annual risk assessment is conducted. The risks that are identified and may result in material errors also form the basis for internal control activities that proactively manage these risks. Clear guidelines for accountability and the division of work also form a component of risk prevention efforts. Furthermore, measures are continuously taken to improve business processes and thus reduce risks.

Control activities

Significant instructions and guidelines related to financial reporting are prepared and updated regularly by the Group Function Finance and are easily accessible on the Group's intranet. The Group Function Finance is responsible for ensuring compliance with instructions and guidelines. Process managers at various levels within Essity are responsible for carrying out the necessary control measures with respect to financial reporting. An important role is played by the business unit's controller organizations, which are responsible for ensuring that financial reporting from each unit is correct and complete, and is conducted within the specified time. In addition, each business unit has a Finance Manager with responsibility for the individual business unit's financial reporting. The company's control activities are supported by the budgets prepared by each business unit and updated during the year through continuous forecasts. Essity has a standardized system of control measures involving processes that are significant to the company's financial reporting. These measures include company-wide controls related to the Code of Conduct, process controls and IT controls. Self-assessments are carried out based on a selection of critical controls for the respective operations in order to assess the effectiveness of the internal control and governance.

Information and communication

Financial reporting to the Board

The Board's working procedures stipulate which reports and information of a financial nature are to be submitted to the Board at each scheduled meeting. The President, together with the Chairman, ensures that the Board receives the reports required to enable the Board to continuously assess the company's and Group's financial position. Detailed instructions specifically outline the types of reports that the Board is to receive at each meeting.

Internal reporting

Ahead of each interim report, the company's finance department prepares detailed instructions regarding deadlines, changes to accounting principles and other circumstances of significance for reporting to ensure the quality of the financial statements. Furthermore, the company has a process and technical system support to limit the risk of price-sensitive information being leaked in conjunction with the submission of financial information ahead of the issue of interim reports.

Accounting and reporting for the majority of units is carried out by Essity's Shared Service Center, which ensures efficient and uniform reporting.

External financial reporting

The quality of external financial reporting is guaranteed via a number of actions and procedures. The President is responsible for ensuring that all information communicated, such as press releases with financial content, presentation material for meetings with the media, owners and financial institutions, is correct and of a high quality. The responsibilities of the company's auditors include reviewing accounting issues that are critical for the financial reporting and reporting their observations to the Audit Committee and the Board of Directors. In addition to the audit of the annual accounts, a review of the half-year report and of the company's administration and internal control is carried out.

Monitoring activities

Essity's Board of Directors, through the Audit Committee, as well as the corporate management continuously assesses the effectiveness of the processes applied by the company with respect to the internal control of the financial reporting. Of particular importance to this assessment are the reports submitted by the internal audit and feedback from the company's external auditor.

The company has a structured process within the scope of its day-to-day operations for monitoring significant observations from internal control or internal audit. Such observations and the status of measures taken to address these are regularly reported to corporate management and to the Audit Committee.

The results of the self-assessment in control activities are compiled in a list of activities that require resolution. The internal control and governance department lead these monitoring activities. To ensure the quality of the self-assessment, internal control conducts it own testing of control activities and reports the results to the units, the internal control and governance department, corporate management and the Audit Committee.

The external auditor also carries out testing of internal control and governance within the scope of its audit. The results are shared with corporate management, the internal control and governance department and the Audit Committee.

Board of Directors and Auditors

Elected by the Annual General Meeting

Pär Boman (1961)

Engineering and Business Administration degrees, Hon. D.B.

Chairman of the Board since 2016.

Chairman of the Board of Svenska Handelsbanken AB and Svenska Cellulosa Aktiebolaget SCA, Deputy Chairman of the Board of AB Industrivärden and member of the Board of Skanska AB. 2006-2015 President of Handelsbanken.

Elected: 2016

Independent of the company and corporate management.

Own shareholdings and those of related persons, Class B shares: 5,000

Ewa Björling (1961)

Med. Dr. Sci. and Associate Professor from Karolinska Institutet.

Chairman of the Board of Xolaris AB. Member of the Board of Biogaia AB and Nynäs petroleum AB.

Former member of the Board of Svenska Cellulosa Aktiebolaget SCA, the Swedish National Insurance Office and the Swedish International Development Cooperation Agency (SIDA). Former Chairman of SPBI (Svenska Petroleum och Biodrivmedelsinstitutet). Minister for Trade 2007-2014, and Minister for Nordic Cooperation 2010-2014. Former researcher at Karolinska Institutet.

Elected: 2016

Independent of the company, corporate management and Essity's major shareholders.

Own shareholdings and those of related persons: 0

Annemarie Gardshol (1967)

MSc Eng.

Member of the Board of Svenska Cellulosa Aktiebolaget SCA.

CEO of PostNord.

Former member of the Boards of Etac AB, Bygghemma AB, Ortivus and Semcon. Former President of PostNord Sverige, PostNord Stralfors Group AB and various management positions in Gambro AB and McKinsey & Company.

Elected: 2016

Independent of the company, corporate management and Essity's major shareholders.

Own shareholdings and those of related persons,

Class B shares: 4,100

Bjorn Gulden (1965)

Bachelor's Degree in Business & Administration and MBA in

Finance and Marketing

President and CEO of Adidas. Member of the Board of Borussia

Dortmund GmbH & Co.KGaA. Chairman of Salling Group.

Previously various positions at Puma, Deichmann, Helly Hansen, Adidas and Pandora. Previously member of the Boards of several companies, including Pandora, Ekornes and Helly Hansen.

Elected: 2022

Independent of the company, corporate management and Essity's major shareholders.

Own shareholdings and those of related persons: 0

Torbjörn Lööf (1965)

Technician

Member of the Board of AB Blakläder.

Former President of Inter IKEA Group 2016-2020, Inter IKEA Systems 2013-2016 and IKEA of Sweden 2007-2013. Previously held various senior positions within IKEA since 1999. Former Chairman of the Board in a number of IKEA Group companies 20132020 and member of the Board of Inter IKEA Holding 2016-2020.

Elected: 2021

Independent of the company, corporate management and Essity's major shareholders.

Own shareholdings and those of related persons, Class B shares: 8,500

Bert Nordberg (1956)

Engineer

Chairman of the Board of Vestas Wind Systems A/S. Member of the Board of SAAB.

Previously held various management positions in Digital Equipment Corp. and Ericsson, President of Sony Mobile Communications AB 2009-2012. Former Chairman of the Boards of Sony Mobile Communications and TDC Group A/S and member of the Boards of BlackBerry Ltd, Skistar AB, Axis AB and AB Electrolux.

Elected: 2016

Independent of the company, corporate management and Essity's major shareholders.

Own shareholdings and those of related persons,

Class B shares: 36,800

Louise Svanberg (1958)

MSc Econ

Member of the Boards of Dana Farber Cancer Institute, Boston and CERAS Health, New York. Chairman of the Swedes Worldwide organization. Previously held various management positions in EF Education First, including President 2002-2008 and Chairman of the Board 2008-2010. Former member of the Board of Svenska Cellulosa Aktiebolaget SCA.

Elected: 2016

Independent of the company, corporate management and Essity's major shareholders.

Own shareholdings and those of related persons, Class B shares: 28,540

Lars Rebien Sorensen (1954)

BSc Forestry and MSc Econ.

Chairman of Axcel, Novo Holding A/S, Novo Nordisk Foundation and Ferring Pharmaceuticals. Member of the Boards of Jungbunzlauer and Thermo Fisher Scientific Inc.

Former Deputy Chairman of the Board of Carlsberg A/S, President and CEO of Novo Nordisk 2000-2016.

Elected: 2017

Independent of the company, corporate management and Essity's major shareholders.

Own shareholdings and those of related persons: 0

Information regarding own shareholdings and those of related persons pertains to the situation on December 31, 2022.

Barbara Milian Thoralfsson (1959)

MBA, BA

Chairman of the Board of Exclusive Networks SA. Member of the Board of Hilti AG and Svenska Cellulosa Aktiebolaget SCA. Member of the Advisory Board Sparebank 1 Markets. Former President of NetCom ASA 2001-2005 and President of Midelfart & Co AS 1995-2000. Former member of the Boards of Cable & Wireless Plc, AB Electrolux, G4S Plc, Orkla ASA, Tandberg ASA and Telenor ASA. Elected: 2016

Independent of the company, corporate management and Essity's major shareholders.

Own shareholdings and those of related persons, Class B shares: 1,000

Magnus Groth (1963)

MBA and MSc ME

President and CEO of Essity.

Former President and CEO of SCA 2015-2017, former President of SCA Consumer Goods Europe 2011-2015. President of Studsvik AB (publ) 2006-2011 and SVP of Vattenfall 2001-2005. Former member of the Board of Acando AB and Svenska Cellulosa Aktiebolaget SCA.

Elected: 2016

Independent of Essity's major shareholders.

Own shareholdings and those of related persons, Class B shares: 76,000

Board members and deputies appointed by trade unions

Susanna Lind (1966)

Operator at Essity Hygiene and Health AB, Falkenberg Member of the Swedish Trade Union Confederation (LO). Appointed: 2019

Own shareholdings and those of related persons, Class B shares: 120

Örjan Svensson (1963)

Senior Industrial Safety Representative at Essity Hygiene and

Health AB, Edet Bruk, Lilla Edet

Member of the Swedish Trade Union Confederation (LO).

Former member of the Board of Svenska Cellulosa Aktiebolaget SCA 2005-2017.

Appointed: 2017

Own shareholdings and those of related persons,

Class B shares: 112

Niclas Thulin (1976)

Senior IT Business Analyst at Essity Hygiene and Health AB, Gothenburg

Member of the Council for Negotiation and Cooperation (PTK).

Appointed: 2017

Own shareholdings and those of related persons,

Class B shares: 36

Deputies

Niklas Engdahl (1980)

Employed at Essity Hygiene and Health AB, Lilla Edet

Member of the Council for Negotiation and Cooperation (PTK).

Appointed: 2017

Own shareholdings and those of related persons: 0

Martin Ericsson (1968)

Employed at Essity Hygiene and Health AB, Falkenberg

Member of the Council for Negotiation and Cooperation (PTK).

Appointed: 2017

Own shareholdings and those of related persons, Class A shares: 200, Class B shares: 200

Andreas Larsson (1989)

Employed at Essity Hygiene and Health AB, Gothenburg

Member of the Council for Negotiation and Cooperation (PTK).

Appointed: 2018

Own shareholdings and those of related persons, Class B shares: 2,120

Auditors

Ernst & Young AB

Senior Auditor:

Hamish Mabon, Authorized Public

Accountant

Own shareholdings and those of related persons: 0

Secretary to the Board

Mikael Schmidt (1960)

Master of Laws

Senior Vice President, Group Function

Legal Affairs, General Counsel

Employed since: 1992

Own shareholdings and those of related persons, Class B shares: 31,000

Executive Management Team

Magnus Groth (1963)

President and CEO

MBA and MSc ME

Employed since: 2011

Own shareholdings and those of related persons, Class B shares: 76,000

Fredrik Rystedt (1963)

CFO and Executive Vice President, Head of Group Function Finance

MSc Econ

Employed since: 2014

Own shareholdings and those of related persons, Class B shares: 27,200

Joséphine Edwall Björklund (1964)

Senior Vice President, Group Function Communications

University Degree in Communications

Employed since: 2012

Own shareholdings and those

of related persons, Class B shares: 11,110

Pablo Fuentes (1973)

President, Professional Hygiene

MSc, MBA

Employed since: 2006

Own shareholdings and those of related persons, Class B shares: 10,077

Donato Giorgio (1973)

President, Global Supply Chain

MSc Eng.

Employed since: 2009

Own shareholdings and those of related persons, Class B shares: 9,665

Andres Gomez (1977)

President, Consumer Goods Americas

MBA and MSc Eng

Employed since: 2021

Own shareholdings and those of related persons: 0

Ulrika Kolsrud (1970)

President, Health & Medical

MSc Eng.

Employed since: 1995

Own shareholdings and those of related persons, Class B shares: 8,553

Mikael Schmidt (1960)

Senior Vice President, Group Function Legal Affairs,

General Counsel and Secretary to the Board

Master of Laws

Employed since: 1992

Own shareholdings and those

of related persons, Class B shares: 31,000

Information regarding own shareholdings and those of related persons pertains to the situation on December 31, 2022.

Anna Sävinger Aslund (1969)

Senior Vice President, Group Function Human Resources

BSc Human Resources

Employed since: 2001

Own shareholdings and those

of related persons, Class B shares: 7,145

Sahil Tesfu (1982)

Senior Vice President Group Function Strategy & Business Development

MBA Business Administration

Employed since: 2021

Own shareholdings and those of related persons: 0

Volker Zöller (1967)

President, Consumer Goods EMEA

BSc BA

Employed since: 1994

Own shareholdings and those of related persons, Class B shares: 11,946

To be appointed

President, Global Digital & Business Services

Tuomas Yrjölä (1978)

President, Global Brand, Innovation and Sustainability

MSc Econ

Employed since: 2014

Own shareholdings and those

of related persons, Class B shares: 8,225

Financial statements including notes

Amounts that are reconcilable to the balance sheet, equity, income statement, statement of comprehensive income, cash flow statement and the operating cash flow statement are marked with the following symbols:

Consolidated income statement IS

¹⁾ Translation to EUR is provided for the convenience of thereader. The following average exchange rates were used; 10.61 10.14 10.47

Consolidated statement of comprehensive income CI

¹⁾ Excluding items affecting comparability.

Consolidated statement of change in equity EQ

¹⁾ Including payroll tax.
²⁾ Dividend of SEK 7.00 per share pertains to owners of the Parent company. For the 2022 fiscal year, the Board of Directors has decided to propose a dividend of SEK 7.25 per share to the Annual General Meeting.

¹⁾ Including payroll tax.
²⁾ Dividend of SEK 6.75 per share pertains to owners of the Parent company.
³⁾ For explanation, see note F5 Acquisitions and divestments of Group companies and other operations on page 124.

¹⁾ Including payroll tax.

¹⁾ Dividend of SEK 6.25 per share pertains to owners of the Parent company.

For further information, see Note E8 Equity on page 119.

Consolidated cash flow statement CF

¹⁾ Translation to EUR is provided for the convenience of the reader.The following average exchange rates were used; 10.61 10.14 10.47
²⁾ Translation to EUR is provided for the convenience of the reader.The following closing exchange rates were used; 11.12 10.23 10.03

For information about the Group's liquidity reserve, refer to page 45.

Adjustment for non-cash items T:1

Investments in intangible assets and property, plant and equipment including paid capitalized interest T:2

Change in liabilities attributable to financing activities

¹⁾ Other changes 2022 relate to change in accrued interest SEK 73m, change in liability related to financial leases in accordance with IFRS 16 of SEK 1,109m, of which SEK 547m relates to operating assets and SEK 562m to non-operating assets.
²⁾ Other changes 2021 relate to change in accrued interest SEK -10m, change in liability related to financial leases in accordance with IFRS 16 of SEK 865m, of which SEK 480m relates to operating assets and SEK 385m to non-operating assets, and other items SEK -1m.
³⁾ Other changes 2020 relate to change in accrued interest SEK -18m, change in liability related to financial leases in accordance with IFRS 16 of SEK 808m, of which SEK 409m relates to operating assets and SEK 399m to non-operating assets.
⁴⁾ Other changes 2020 relate to the impact from settlement of pension liability SEK -187m.

Correlation between consolidated cash flow statement and operating cash flow statement, supplementary disclosure

Consolidated operating cash flow statement, supplementary disclosure OCF

¹⁾ Translation to EUR is provided for the convenience of the reader. The following average exchange rates were used; 10.61 10.14 10.72

¹⁾ Translation to EUR is provided for the convenience of thereader. The following closing exchange rates were used; 11.12 10.23 10.03
²⁾ Translation to EUR is provided for the convenience of thereader. The following average exchange rates were used; 10.61 10.14 10.47

Consolidated balance sheet BS

ASSETS

¹⁾ Translation to EUR is provided for the convenience of thereader. The following closing exchange rates were used; 11.12 10.23 10.03

EQUITY AND LIABILITIES

1) Translation to EUR is provided for the convenience of the reader. The following closing exchange rates were used; 11.12 10.23 10.03

A. Accounting principles and use of alternative performance measures

A1. General accounting principles, new accounting rules and basis of preparation

Reading instructions

General accounting principles AP and new accounting rules are presented below. Other accounting principles considered material by Essity are presented in conjunction with the respective note.

Key assessments and assumptions KAA are presented under the respective note, see use of assessments below.

Amounts that are reconcilable to the balance sheet, equity, income statement, statement of comprehensive income, cash flow statement and the operating cash flow statement are marked with the following symbols:

Company information

Essity Aktiebolag (publ), Corp. Reg. No. 556325-5511, is a public limited liability company whose shares are listed and traded on Nasdaq Stockholm (for more information, see The share on page 8).

The registered office of the company is Stockholm, Sweden, with the postal address of Box 200, SE-101 23 Stockholm, Sweden. The Group mainly conducts operations in the fields of hygiene and health.

Basis for preparation

Essity's financial statements are prepared in accordance with the Annual Accounts Act and International Financial Reporting Standards (IFRS)/International Accounting Standards (IAS), as adopted within the EU, and the Swedish Financial Reporting Board, Recommendation RFR 1, Supplementary Accounting Rules for Groups. The accounts for both the Group and the Parent company relate to the fiscal year that ended on December 31, 2022. Essity applies the historical cost method for measurement of assets and liabilities except for financial assets and liabilities, including derivative instruments, measured at fair value through profit or loss. Changes in assets and liabilities measured at fair value through profit or loss are recognized either in profit or loss or other comprehensive income.

The annual report was approved for publishing by the Board of Directors on February 16th, 2023. The financial statements are subject to approval by the Annual General Meeting of shareholders on March 29th, 2023.

New or amended accounting standards 2022

A number of amended accounting standards published by the International Accounting Standards Board (IASB) are effective from January 1, 2022 following endorsement by the EU. Essity has applied these amendments, of which none have had a significant impact on the Group's financial statements and are therefore not commented on.

New or amended accounting standards after 2022

A number of new and amended accounting standards have not yet come into effect and have not been applied in advance in the preparation of the Group's and the Parent company's financial statements. The Group intends to comply with these new and amended standards when they come into force. These new standards and amendments to standards published by IASB are not expected to have any impact on the Group's or the Parent company's financial statements.

In December 2021, the OECD published Pillar Two rules entailing a global minimum tax rate of 15%. This minimum tax rate will apply to multinational companies with revenues in excess of EUR 750m. The respective rules have still to be introduced into national legislation and are scheduled to enter into force for financial years beginning after December 31, 2023. Essity has established a project team to evaluate the effects on Essity and any need for further reporting requirements. The new rules are not expected to have any material impact on Essity's recognized tax.

Use of assessments KAA

The preparation of financial statements in accordance with IFRS and generally accepted Swedish accounting principles requires assessments and assumptions to be made that affect recognized assets, liabilities, income and expenses as well as other information disclosed.

These assumptions and estimates are often based on historical experience, but also on other factors, including expectations of future events. With other assumptions and estimates, the result may be different and the actual result will seldom fully concur with the estimated result.

Uncertainty and risks have arisen as a result of the COVID-19 pandemic that may affect Essity's sales, earnings and financial position.

In Essity's opinion, the areas that are impacted the most by assumptions and estimates are:

Essity's assessments and assumptions are presented in the respective notes.

Principles of consolidation

The Group's consolidated financial statements include the Parent company and its Group companies, which comprise subsidiaries, joint ventures, associates and joint operations. Group companies are consolidated from the date the Group exercises control or influence over the company according to the definitions and accounting policies provided in Notes F1 Group companies on page 120, F3 Investments in associates and joint ventures on page 121 and F4 Joint operations on page 123. Divested Group companies are included in the consolidated accounts until the date the Group ceases to control or exercise influence over the companies. For additional information about accounting policies regarding acquisitions of Group companies and respective non-controlling interests, see Note F5 Acquisitions and divestments of group companies and other operations on page 124. Intra-Group transactions have been eliminated.

Translation of foreign currency

Functional currency and translation of foreign Group companies to the presentation currency

The functional currency of each Essity Group company is determined on the basis of the primary economic environment in which the respective company is active which, with a few exceptions, is the country in which the individual company operates. Essity's Parent company has Swedish kronor (SEK) as its functional currency. The consolidated financial statements of Group companies are translated to the Group's presentation currency, which is also SEK. Assets and liabilities are translated at the closing rate, while income and expenses are translated at the average rate for the respective period. Translation differences during the period on the Group's net assets are recognized in other comprehensive income in the translation reserve as a component of equity.

Exchange rate effects arising from financial instruments used to hedge foreign Group companies' net assets are recognized in the same manner in other comprehensive income in the translation reserve as a component of equity. On divestment, the accumulated translation differences on the foreign Group company and accumulated exchange rate effects on the financial instrument used to currency hedge the net assets in the company are recognized as part of the gain or loss on disposal.

Goodwill and fair value adjustments arising in connection with the acquisition of a foreign Group company are translated from their functional currency to the presentation currency in the same way as the net assets in the company are translated.

Transactions and balance sheet items in foreign currency

Transactions in foreign currency are translated to a functional currency using the rate prevailing on the transaction date. At the balance sheet date, monetary assets and liabilities in foreign currency are translated at the closing rate and any exchange rate effects are recognized in profit or loss. In cases where the exchange rate effect is related to the operations, the effect is recognized net in operating profit. Exchange rate effects pertaining to borrowing and financial investments are recognized as other financial items.

If hedge accounting has been applied, for example, for cash flow hedges or hedging of net investments, the exchange rate effect is recognized in equity in other comprehensive income.

If a financial instrument has been classified as financial assets measured at fair value through comprehensive income, the portion of the value change pertaining to currency is recognized in profit or loss, any other unrealized changes are recognized in equity under other comprehensive income.

Government grants

Government grants are measured at fair value when there is reasonable assurance that the grants will be received and Essity will comply with the conditions attached to them. Government grants related to acquisition of assets are recognized in the balance sheet by the grant reducing the carrying amount of the asset. Government grants received as compensation for costs are accrued and recognized in profit or loss during the same period as the costs incurred. If the government grant or assistance is neither related to the acquisition of assets nor to compensation for costs, the grant is recognized as other income.

A2. Use of alternative performance measures

Guidelines concerning alternative performance measures for companies with securities listed on a regulated market in the EU have been issued by the ESMA (The European Securities and Markets Authority). These guidelines are to be applied to alternative performance measures not supported under IFRS.

The Annual and Sustainability Report refers to a number of performance measures not defined in IFRS. These performance measures are used to assist investors and company management to analyze the company's operations and objectives. As these non-IFRS measures may differ from similar terms used by other companies, descriptions of the various measures used as a complement to the financial information required according to IFRS are presented below.

New segment division as of January 1, 2022

On October 22, 2021, Essity announced that the company had decided on new business areas which, as of January 1, 2022, consist of Health & Medical, Consumer Goods and Professional Hygiene.

See Note B2 on page 89 for the reasoning and background to the change. The Health & Medical and Consumer Goods business areas have replaced the former Personal Care and Consumer Tissue business areas and amounts for the comparative years of 2021 and 2020 have therefore been restated compared to the figures reported in Essity's Annual and Sustainability Report for 2021.

Calculation of performance measures not included in IFRS framework

¹⁾ Consists solely of currency translation effects.

B. Sales and earnings

B1. Net sales - Revenues from contracts with customers

Accounting principles and key assessments and assumptions AP KAA

Essity applies IFRS 15 Revenue from Contracts with Customers that regulates revenue recognition and disclosure requirements for commercial agreements (contracts) with customers. The standard pertains to commercial agreements with customers in which delivery of goods/services is divided into separately identifiable performance obligations that are recognized independently.

Revenue recognition

Essity primarily generates revenues from the sale of finished products to, for example, the retail sector, industries and the healthcare sector. Revenue from sales of services occurs to a certain extent but only accounts for a small portion of the Group's sales. Essity's operations and sales are divided into various segments that sell different products in several regions. The product portfolio is diversified but the principles for revenue recognition are the same for all segments. For a description of the products, see the section on Essity's three business areas, Health & Medical, Consumer Goods and Professional Hygiene on pages 27-33. Essity's contracts with customers primarily comprise framework agreements without established minimum volumes, which means that a binding contract according to IFRS 15 criteria does not arise until the customer places an order.

Performance obligations and timing of revenue recognition

Essity's performance obligations in the contracts involve providing the goods specified in the contracts. The performance obligations are satisfied and the revenue recognized when control of the products is passed to the customer. The timing of when control is passed to the customer is determined by the terms of delivery (Incoterms) applied in the contract. For most supply contracts, control is passed when the goods have been delivered to the customer's warehouse and the customer thereby can control the use and receive the benefits of the goods. Invoicing is normally done in connection with, or directly after, delivery and recognized at a specific point in time, no revenue is recognized over time. Essity has chosen to apply the practical expedient in IFRS 15 not to disclose the remaining performance obligations that have a term of less than one year.

Determination of transaction price

The transaction price primarily comprises the fixed price of the quantity sold less estimated volume discounts. Marketing subsidies and discount vouchers that reduce Essity's recognized revenue exist only to a very limited extent.

The outcome of volume discounts is continuously assessed over the year and reduces recognized revenues in parallel with a provision being made that includes the estimated discounts for each customer. At year-end, the final volume discounts are determined on the basis of the actual sales volume and the provision is reduced in the following year when the discount is credited to the customer. Marketing subsidies entail that the customer receives a discount for carrying out marketing activities. In certain cases, Essity reimburses customers in the retail sector in accordance with contracts for loss of income due to discount vouchers used by consumers. The probable outcome of used discount vouchers and thus discounts provided during the reporting period is assessed and revised every time the accounts are closed. Customers have only limited rights to return products and historically returned volumes have been low. Essity essentially grants customers no right of return except when the products are faulty. When the right arises to return goods sold, a liability is recognized for the repayment that is expected to be made and an asset is recognized for the right to recover the goods. Past experience is used to estimate the share of returns at the time of sale and revenue is only recognized for products that are not expected to be returned. The total transaction price is estimated at the amount that Essity deems will accrue to the company when the contract is signed with respect to volume discounts and any marketing subsidies, discount vouchers and returns. The transaction price is updated if the conditions forming the basis of the estimate have significantly changed.

Trade receivables

Once the goods and services have been delivered and control has been passed to the customer, a trade receivable is recognized since this is the point in time when the consideration becomes unconditional, only the passage of time is required for payment to be made.

Contract liabilities

Contract liabilities pertain to liabilities for volume discounts and advance payments from customers. Both items are recognized under Other current liabilities. Advance payments from customers are normally recognized as revenue in the subsequent fiscal year.

Assets that have arisen from expenses to fulfill contracts with customers

In the Professional Hygiene business area, Essity supplies dispensers to customers to fulfill contracts for delivery of the business area's other products, refer to page 32. Expenses for these dispensers are recognized as prepaid expenses under Other non-current assets since Essity expects to cover these expenses through the sale of the business area's other products. The dispensers are depreciated over three years according to the average term of the contract with customers. Recognition takes place in accordance with the rules in IFRS 15 since the expense is directly linked to securing contracts with customers. The rules on Property, Plant and Equipment in IAS 16 and IAS 2 Inventories are not deemed to be applicable since there are no economic benefits associated with the dispenser after it has been delivered to the customer.

New segment division as of January 1, 2022:

On October 22, 2021, Essity announced that the company had decided on new business areas which, as of January 1, 2022, consist of Health & Medical, Consumer Goods and Professional Hygiene. See Note B2 on page 89 for the reasoning and background to the change. The Health & Medical and Consumer Goods business areas have replaced the former Personal Care and Consumer Tissue business areas and amounts for the comparative years of 2021 and 2020 have therefore been restated compared to the figures reported in Essity's Annual and Sustainability Report for 2021.

The tables below show consolidated net sales broken down by operating segment: Health & Medical, Consumer Goods and Professional Hygiene.

Net sales in geographic markets reflects the perspective - sold to, which is based on sales to the countries where Essity has its customers, known as its "footprint." See pages 91-92 for further information.