Sustainability statements

Approach to sustainability reporting

Philips has a long tradition of sustainability reporting, beginning in 1999 when we published our first environmental annual report. We expanded our reporting in 2003 with the launch of our first sustainability annual report, which provided details of our social and economic performance in addition to our environmental results.

In 2011 we published our third annual integrated financial, social and environmental report, reflecting the progress we have made to embed sustainability in our way of doing business. This is also supported by the inclusion of sustainability in the Philips Management Agenda and in Vision 2015, our 5-year strategic plan.

Reporting standards

We have followed relevant best practice standards and international guidelines while compiling the sustainability performance covered in this report. Most important are the Global Reporting Initiative’s (GRI) G3 Sustainability Reporting Guidelines.

With regard to the GRI Application Levels system, we assessed ourselves at the A+ level. A detailed overview of our Management Approach and the G3 Core Indicators is provided at the end of this section.

We signed on to the United Nations Global Compact in March 2007, joining thousands of companies from all regions of the world as well as international labor and civil society organizations to advance 10 universal principles in the areas of human rights, labor, the environment and anti-corruption. Our General Business Principles, Sustainability and Environmental Policies, and our Supplier Sustainability Declaration are the cornerstones that enable us to live up to the standards set by the Global Compact. This is closely monitored and reported, as illustrated throughout this report, which is our annual Communication on Progress (COP) submitted to the UN Global Compact Office.

Tracking trends

We continuously follow external trends to determine the issues most relevant for our company and those where we can make a positive contribution to society at large. In addition to our own research, we make use of a variety of sources, including the World Bank, World Business Council for Sustainable Development (WBCSD), World Economic Forum and World Health Organization. Our work also involves tracking topics of concern to governments, regulatory bodies, academia, and non-governmental organizations, and following the resulting media coverage.

Stakeholder engagement

Across all our activities we seek to engage stakeholders to gain their feedback on specific areas of our business. Working in partnerships is crucial in delivering on our commitment to bring “sense and simplicity” to people’s health and well-being. We participate in meetings and task forces as a member of organizations including the WBCSD, Electronic Industry Citizenship Coalition (EICC), Carbon Disclosure Project Supply Chain, European Committee of Domestic Equipment Manufacturers (CECED), Federation of National Manufacturers Associations for Luminaires and Electrotechnical Components for Luminaires in the European Union (CELMA), European Coordination Committee of the Radiological, Electromedical and Healthcare IT Industry (COCIR), Digital Europe, European Lamp Companies Federation (ELC), European Roundtable of Industrialists (ERT), National Electrical Manufacturers Association (NEMA), Environmental Leadership Council of the Information Technology Industry Council (ELC ITIC), Consumer Electronics Association (CEA) and Association of Home Appliance Manufacturers (AHAM).

In 2010, we started a multi-stakeholder initiative with the Dutch Sustainable Trade Initiative (IDH), the leading Dutch labor union (FNV) and GoodElectronics focusing on improving working circumstances in the electronics industry in China.

Furthermore, we engaged with a number of NGOs including Enough, MakeITfair, the Chinese Institute of Public and Environmental Affairs, SOMO, Amnesty International and Greenpeace.

In 2009 we established a dedicated Professional and Public Affairs team to further steer and professionalize our stakeholder engagement activities with key business influencers including government, non-governmental institutions, industry associations, industry partners, influencers and opinion formers.

The Philips Center for Health and Well-being

Through the creation of the Philips Center for Health and Well-being, Philips seeks to address key societal issues and solutions on themes such as healthy and active aging, livable cities and healthy lifestyles. The Center launched in December 2009 and brings together teams of multidisciplinary experts from all over the world in think tanks. Participants include EU Members of Parliament, NGOs such as the World Bank, UNICEF, Global Health Council, European Patient’s Forum, ISOCARP (international association of urban planners), and WBCSD. The active aging think tank is working from the USA and is debating how aging populations can remain independent and engaged through their life transitions. The livable cities think tank is working from Singapore, and is taking a holistic view of a livable city – and is defining “livability” which includes a city being resilient, sustainable, authentic and inclusive. Additionally, the Philips Index for Health & Well-being is a global research project being conducted by the Center. It aims to identify what citizens find important concerning their health and well-being. The research examines the mega-trends that shape each nation’s healthcare, lifestyle and who we are as a society, with a focus on what aspects of health and well-being are most important. It was conducted in 23 countries during 2010, with over 31,000 consumers surveyed. For more information on the work of the Center, go to www.philips-thecenter.org.

Working on global issues

In 2010, Philips participated in the United Nations Climate Change Conference in Cancun, Mexico. We partnered with other leading industry players, governmental organizations, NGOs (like The Climate Group) and the United Nations Environmental Program to create a global sectoral agreement on phasing out inefficient lighting. At COP16, this roll-out was welcomed by a range of different stakeholders given its triple benefits for consumers, environment and economy.

Philips also signed the CEO Water Mandate acknowledging that in order to operate in a more sustainable manner, and contribute to the vision of the UN Global Compact and the realization of the Millennium Development Goals, it has a responsibility to make water-resources management a priority.

As part of Philips’ participation in the WBCSD Vision 2050 project, Philips Research joined the WBCSD Sustainable Consumption activities. Philips Research hosted a workshop with special focus on health at the High Tech Campus in Eindhoven, in addition to participating in a series of cross-industry meetings. Another activity related to the Vision 2050 project was Philips Research’s participation in the National Health Service Low Carbon Healthcare dialog in London. Different types of care providers, care purchasers, community representatives, and many other stakeholders explored scenarios towards a low carbon healthcare system by 2030.

Biodiversity

Biodiversity is a complex phenomenon with different elements, such as preservation of species and ecosystems as enablers for those species to live in. Impact on biodiversity cannot be measured as easily as, for instance, CO₂ emissions or water consumption.

Furthermore, the impact is to a large extent dependent on the nature of the business activities, the space used and whether that space is located in or nearby protected areas. From that perspective the impact of our operations is very limited.

However, in general there is a trend noticeable that people expect industry to pay more attention to biodiversity, not only taking into account the impact of its operations but also the impact of its products. Our current policy focuses on the following:

• Continue to reduce the impact of our operations through our Green Manufacturing 2015 program, focusing on CO₂ emissions, water, waste and restricted and hazardous substances
• Continue our EcoDesign activities, resulting in Green Products
• Study concepts such as ‘Cradle to Cradle’, ‘Biomimicry’ and ‘The Natural Step’ – all focused on learning or imitating nature’s remarkably efficient designs – for our Sustainable Innovation efforts
• Continue our global partnership with IUCN, the International Union for the Conservation of Nature. Together we are exploring how specific lighting technology can redress the disturbance of fauna around the world, enabling it to co-exist with human sea and coastal development, for instance.

Material issues and our focus

Based on ongoing trend analysis and stakeholder input, we identify the key material issues for our company from a sustainability perspective. We have mapped the issues in the table below, taking into account the:

• level of concern to society at large and stakeholders, versus impact on Philips, and
• level of control or influence we can have on an issue through our operations and products/solutions.

This is a dynamic process, as we continuously monitor the world around us. Based on this, we develop our policies and programs.

Key material issues

Sustainability programs and targets

All of our programs are guided by the Philips General Business Principles, which provide the fundamental principles for all of our business decisions and actions.

With our longstanding commitment to reducing the environmental impact of our products and processes, we have been establishing action programs with measurable targets since 1994. In 2010, we ran EcoVision4 and EcoVision5 as well as our new Green Manufacturing 2015 program.

EcoVision4 which was launched in 2007 focuses on the environmental performance of our products and reducing the energy consumption of our operations. With EcoVision4 we have committed to realize the following by 2012:

• generate 30% of total revenues from Green Products
• double investment in Green Innovations to a cumulative EUR 1 billion
• improve our operational energy efficiency by 25% and reduce CO₂ emissions by 25%, all compared with the base year 2007.

In February 2010 we launched EcoVision5 comprising three sustainability leadership key performance indicators on ‘care’, ‘energy efficiency’ and ‘materials’ including targets for 2015 and a set of complimentary performance indicators:

• bringing care to people (target: 500 million lives touched)
• improving energy efficiency of Philips products (target: 50% improvement (for the average total product portfolio) compared to 2009
• closing the materials loop (target: double global collection and recycling amounts and recycled materials in products compared to 2009).

In order to continue our efforts to improve our environmental performance in manufacturing, we developed in 2010 our new Green Manufacturing 2015 program, succeeding EcoVision III.

We report on the results of these programs versus targets.

In addition to our environmental initiatives we have been running programs in other areas. Our employee programs include engagement, diversity and inclusion, and health and safety. Through our Supplier Sustainability Involvement Program we have been embedding sustainability into our supply management processes since 2003. Further, we have a targeted approach to our social investment program that reflects our business. In keeping with this we rolled out our SimplyHealthy@Schools program globally in 2010, educating children on how to improve their health and well-being through exercise, food, sleep and personal hygiene as well as installing energy-efficient lighting in their schools. We also support healthcare projects that focus on children.

Scope of sustainability reporting

The scope of our sustainability performance reporting encompasses the consolidated Philips Group activities, following the consolidation criteria detailed in this section.

The consolidated selected financial information in this sustainability statements section has been derived from the Group Financial Statements, which are based on IFRS.

Comparability and completeness

For comparability reasons, all economic, environmental and social performance data exclude the former activities of the Semiconductors sector, which was divested in September 2006.

Environmental data are measured for those manufacturing sites with more than 50 industrial employees. Integration of newly acquired manufacturing sites is scheduled according to a defined integration timetable (in principle, first full reporting year after the year of acquisition) and subject to the integration agenda. Data for activities that are divested during the reporting year are not included in full-year reporting.

Social data cover all employees, including temporary employees, but exclude contract workers. Due to the implementation of new HRM systems, we are able to provide additional information on Philips employees for 2009 and 2010. Historical comparisons, however, may not be available.

Reporting of health and safety data is measured for units over 50 FTEs and is voluntary for smaller units. New acquisitions must report, in principle, the first year after acquisition and subject to the integration agenda. Data for activities that are divested during the reporting year are not included in full-year reporting.

Data definitions and scope

Green Products

Green Products offer a significant environmental improvement in one or more Green Focal Areas: Energy efficiency, Packaging, Hazardous substances, Weight, Recycling and disposal, and Lifetime reliability. The life cycle approach is used to determine a product’s overall environmental improvement. It calculates the environmental impact of a product over its total life cycle (raw materials, manufacturing, product use and disposal).

Green Products need to have a score in at least one Green Focal Area that is significantly better (at least 10%), compared to the reference product, which can be a competitor or predecessor product in the particular product family. Because of different product portfolios, sectors have specified additional criteria for Green Products.

Green Innovations

Green Innovations comprise all R&D activities directly contributing to the development of Green Products or Green Technologies. A wide set of additional criteria and boundaries have been defined as the basis for internal and external validation.

Environmental data

All environmental data from manufacturing operations are reported on a half-year basis in our intranet-based EcoVision reporting and validation tool, according to defined company guidelines that include definitions, procedures and calculation methods.

Internal validation processes are followed to ensure consistent data quality. The sector validation officers provide support to the data collectors at site level and regularly conduct audits to assess the robustness of data reporting systems.

These EcoVision data from manufacturing are tracked and reported to measure progress against our Green Manufacturing 2015 program targets.

Reporting on ISO 14001 certification is based on manufacturing units reporting in EcoVision.

Operational carbon footprint

The Philips operational carbon footprint is calculated on a half-year basis and includes:

• Industrial sites – manufacturing and assembly sites
• Non-industrial sites – offices, warehouses, IT centers and R&D facilities
• Business travel – lease and rental cars, and airplane travel
• Logistics – air, sea and road transport.

All emission factors used to transform input data (for example, amount of ton-kilometers transported) into CO₂ emissions are from the Greenhouse Gas Protocol, except for business travel, where the service providers supplied CO₂ data based on their own verified methodology. The Greenhouse Gas Protocol distinguishes three scopes. It is mandatory to report on the first two.

• Scope 1 – direct CO₂ emissions – is completely reported on with direct emissions from our industrial and non-industrial sites. Emissions from industrial sites, which consist of direct emissions resulting from processes and fossil fuel combustion on site, are reported in the EcoVision reporting system. Emissions from industrial sites that are not yet reporting in EcoVision following recent acquisitions are collected separately, or in case actual data is not available, calculated based on average CO₂ emissions per square meter of comparable sites in the same sector. Energy use and CO₂ emissions from non-industrial sites are based on actual data where available. If this is not the case, they are estimated based on square meters, taking the geographical location of the site into account.
• Scope 2 – CO₂ emissions resulting from the generation of purchased electricity for our premises – is completely reported on with electricity use from industrial and non-industrial sites. Indirect CO₂ emissions resulting from purchased electricity, steam and heat are reported in the EcoVision reporting system. Those emissions of industrial sites not yet reporting in EcoVision are calculated on the same basis as described in Scope 1. Indirect emissions of non-industrial sites are calculated in the same manner as described in Scope 1.
• Scope 3 – other CO₂ emissions related to activities not owned or controlled by the Group is reported on for our business travel and distribution activities. Commuting by our employees, upstream distribution (before suppliers ship to us), outsourced activities and emissions resulting from product use by our customers are not included in our operational carbon footprint. The calculations for business travel by lease cars are based on actual fuel usage and for rental cars on distance traveled. Emissions from business travel by airplane are calculated by the supplier based on mileage flown and emission factors from DEFRA (UK Department of Environment, Food and Rural Affairs) distinguishing between short, medium and long flights. Further, emissions from air freight for distribution are calculated based on the amount of ton-kilometers transported between airports (distinguishing between short, medium and long hauls), including an estimate (based on actual data of the lanes with the largest volumes) for trucking from sites and distribution centers to airports and vice versa. Express shipments are generally a mix of road and air transport, depending on the distance. Therefore the assumption is applied that shipments over less than 600 km are transported by road and the rest of the shipments by air (those emissions by air are calculated in the same way as air freight). For sea transport, only data on transported volume were available so an estimate had to be made about the average weight of a container. Transportation to and from ports is not registered. This fore and aft part of sea transport was estimated to be around 3% of the total distance (based on actual data of the lanes with the largest volumes), consisting of a mix of modalities, and was added to the total emissions accordingly. CO₂ emissions from road transport were also calculated based on ton-kilometers. If data were incomplete, the emissions were estimated based on sales volumes. Return travel of vehicles is not included in the data for sea and road distribution.

Health and safety

Health and safety data are reported monthly and validated on a half-yearly basis. The focus is on reporting work-related injuries, which predominantly occur in manufacturing operations. The annual number of cases leading to at least one lost workday is reported per 100 FTEs (full-time equivalents).

Supplier audits

Supplier audits are primarily focused on identified risk suppliers, based on identified risk countries and on spend of more than EUR 100,000.

• Based on the Maplecroft Human Rights Risk Indexes, risk countries for Supply Management in 2010 were the same as in 2009: Belarus, Brazil, China, India, Indonesia, Mexico, Pakistan, Philippines, Russia, Thailand, Ukraine and Vietnam.
• Suppliers of new ventures are included to the extent that the integration process of these ventures has been finalized. Normative integration period is two years after closure of the new venture.

External assurance

KPMG has provided limited assurance on whether the information in this section Sustainability statements is fairly stated. We refer to KPMG’s Independent assurance report.

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