Approach to sustainability reporting

In 1999 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 on our social and economic performance in addition to our environmental results.

Now, for the first time, Philips is reporting on its annual financial, social and environmental performance in a single, integrated report. This approach reflects the progress we have made to embed sustainability in our way of doing business.

Reporting standards

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

In keeping with G3 we have sharpened our focus on the principles of materiality, stakeholder inclusiveness, sustainability context and completeness. As a result, with regard to the GRI Application Levels system, we see ourselves currently positioned at the B+ level. We cover a large part of the G3 Core Indicators, while our Management Approach is explained in this report and in our previous sustainability reports. A detailed overview of these 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, 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.

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, World Economic Forum and World Health Organization. As a member of organizations like the World Business Council for Sustainable Development and the Electronic Industry Code of Conduct, we participate in meetings and task forces, bringing new learning to bear. Our work also involves tracking topics of concern to governments, regulatory bodies and non-governmental organizations, and following the resulting media coverage.

Stakeholder input on innovations

We also engage directly with stakeholders to gain additional outside perspective. One of the most important platforms is our Sustainability Innovation Day held during our annual Corporate Research Exhibition (CRE).

At the 2008 CRE in May stakeholders from governmental and non-governmental organizations viewed our innovations designed to meet the global energy and climate change challenge as well as other environmental topics. The event was designed to encourage participants to listen to each other and begin an ongoing dialogue to envision innovative solutions to these challenges. They learned about projects on zero standby power, Organic LEDs, green urban living, air quality sensing and the Compact UV for safe drinking water, among others.

Launched in 1959 as an internal event intended to help researchers from different labs find synergies in their work, in 2001 Philips businesses began bringing strategic customers to CRE and extending invitations to other key external stakeholders in the following years.

Material issues and our focus

Based on our trend analysis and stakeholder input, we identify the key material issues for our company. Using the materiality matrix approach, we have mapped relevant issues on a scale from low to high in terms of the:

• level of concern to society at large and stakeholders, versus impact on Philips, or
• 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. Currently we consider the following items as material, making a distinction between clear risks and opportunities.

Based on this, we develop our strategy and vision, as well as the programs and policies to drive the implementation of our strategy. Our primary focus has been on business opportunities in energy efficiency and healthcare. We also have programs in place to manage risk, including our General Business Principles, Sustainability Policies and Supplier Sustainability Involvement Program.

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 four-year action programs with measurable targets since 1994. We are currently running two programs – EcoVision III, which covers the years 2006-2009, and EcoVision4, which runs through 2012.

EcoVision III is focused primarily on reducing the environmental footprint of our manufacturing processes spanning a broad range of parameters (full details on the program can be found at www.philips.com/sustainability). After EcoVision III was launched in 2005, two major developments affected the scope and relevance of this program. Internally, the divestment of our Semiconductors sector in September 2006 significantly reduced the overall environmental impact of most of the program’s parameters. Outside the company, the issue of energy efficiency emerged strongly at the global level.

These events drove us to create the complementary, more focused EcoVision4 program. Launched in September 2007, this latest EcoVision program focuses on reducing the energy consumption of our products and facilities. With EcoVision4 we have committed to:

• generate 30% of total revenues from Green Products (up from 15% in 2006)
• double our investment in Green Innovations to EUR 1 billion
• further increase the energy efficiency of our operations by 25% and reduce our operational carbon footprint by 25%, both compared with the base year of 2007.

We are reporting on the results of both programs versus targets and will continue to do so until each program concludes.

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 direct our efforts toward projects to upgrade lighting, particularly in schools, and to 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 performance chapter has been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP).

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 schedule, in principle for the first full reporting year after the year of acquisition. Data for activities that are divested during the reporting year are not included for the full-year reporting.

Social data cover all employees, including temporary employees, but exclude contract workers. Reporting of health and safety data by new acquisitions must start in the first year after acquisition. Data for activities that are divested during the reporting year are not included for the 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, Lifetime reliability. In addition, 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 the different product portfolios, sectors has 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.

Tracking and reporting these EcoVision data from manufacturing is conducted to measure progress against our EcoVision III program targets.

Reporting on ISO certification is based on actively reporting manufacturing units.

Operational carbon footprint

The Philips operational carbon footprint includes:

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

All conversion factors used to transform input data (for example, amount of ton-kilometers) into CO ₂ emissions are from the Greenhouse Gas Protocol, except for business travel, where the providers supplied CO ₂ data based on their own methodology. The Greenhouse Gas Protocol distinguishes three scopes, the first two of which are mandatory to report on.

• Scope 1 – direct CO ₂ emissions – is completely reported on with direct emissions from our industrial and non-industrial sites. Emissions from industrial sites, which consists 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 calculated based on average CO ₂ emissions per square meter of comparable sites in the same sector.
• Scope 2 – CO ₂ emissions resulting from the generation of purchased electricity for our premises – is completely reported on with electricity use from industrial and non-industrial sites. As reported in the EcoVision reporting system, this consists of indirect emissions from purchased electricity, steam and heat. As with Scope 1, emissions from industrial sites that are not yet reporting in the EcoVision database following recent acquisition are calculated based on average CO ₂ emissions per square meter of compatible sites in the same sector.
• Scope 3 – other CO ₂ emissions related to activities not owned or controlled by the Company – 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.The calculations for business travel by lease and rental cars are based on actual fuel usage. Emissions from business travel by airplane are calculated by the supplier based on airplane-specific emission factors, the number of take-off and landing movements, and the amount of climb, cruise and descent activities. 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). 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 air and sea transport was estimated to be around 3% of the total distance, consisting of a mix of modalities, and was added to the total emissions accordingly. CO ₂ emissions from road transport were also calculated based on ton-kilometers. If data were incomplete, the emissions were estimated based on spend. Return travel 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).

KPI (Key Performance Indicator) targets are defined yearly to drive improvement.

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 2008 were: Belarus, Brazil, China, South Korea, Mexico, Malaysia, Philippines, Russia, Taiwan, 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 performance is fairly stated. We refer to KPMG's Independent assurance report.