Approach to sustainability reporting

Reporting standards Tracking Trends Stakeholder engagement Material issues and our focus Key material issues

Sustainability programs and targets Scope of sustainability reporting Comparability and completeness Data definitions and scope External assurance

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

In 2010 we published our second integrated financial, social and environmental report, reflecting the progress we have made to embed sustainability in our way of doing business.

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, 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 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 of bringing “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); 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 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 across the company.

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 home healthcare, preventive health, sleep, independent living and livable cities. The Center launched in December 2009 with a consultation event on the theme of ‘Keeping cities livable and healthy’. A diverse group of experts from multiple disciplines came together to discuss the underlying trends and important issues around keeping cities livable in the face of rapid urbanization. The session sparked debate and dialogue, and illustrated what a broad and diverse topic livable cities is, exploring areas like bringing nature back to cities, improving public spaces for social life and civic engagement, as well as renovating buildings. The event also provided input and feedback into how to develop the Center further with a global think tank on this theme.

Working on global issues

Philips participated in the 2009 United Nations Climate Change Conference in Copenhagen, seeking dialogue with organizations including the Corporate Leadership Group, Responding to Climate Change and the Climate Summit for Mayors, and calling upon government worldwide to set ambitious targets for emission reductions with efficient technologies available today.

Philips also signed a global partnership with IUCN, the International Union for the Conservation of Nature. Together we will explore further 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.

Philips Research held two events in 2009 that brought a variety of stakeholders together to explore innovation for sustainable development. On ‘Disruption Day’ in March experts from the United Nations University in Maastricht, IUCN and the Innovation Leadership Forum shared their perspectives on the disruptive innovation challenges ahead. This was followed up with ‘Connection Day’ in December, attended by 50 Philips employees, academics from the New York Academy of Sciences, representatives of institutions like the Earth Institute, the International Labor Organization and the emerging Green Economy Coalition, museum curators, employees of small and medium-sized enterprises, and engaged citizens. They explored the six themes – energy, materials, access to care, value-redefined, transitions and co-creation – seeking new ideas through new connections.

Material issues and our focus

Based on ongoing trend analysis and stakeholder input, we identify the key material issues for our company. We have mapped relevant risks and opportunities in the table below, taking into account 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.

Key material issues

Based on this, we develop our strategy and vision, as well as programs and policies to focus and drive the implementation of our strategy.

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. In 2009, we ran 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 (details on the program can be found at www.philips.com/sustainability). After EcoVision III was launched in 2005, Philips divested its Semiconductors sector the following year, thereby significantly reducing 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 factors led us to develop the complementary 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 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 CO_² emissions by 25%, all compared with the base year 2007.

We report on the results of both programs versus targets and will continue to do so until each concludes. As we want to remain focused on reducing the environmental footprint of our manufacturing processes, we will evaluate new targets as part of our Chemicals Management program introduction later in 2010.

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 install energy-efficient lighting, particularly in schools, as well as provide information on how to improve health and well-being through exercise, food, sleep and personal hygiene. 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 performance chapter has been derived from International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).

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 management decision. 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. Historical comparisons, however, may not be available. Reporting of health and safety data by new acquisitions must, in principle, start the first year after acquisition and subject to management decision. 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 EcoVision III program targets.

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

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
• Logistics – air, sea and road transport.

All emission factors used to transform input data (for example, amount of ton-kilometers) into CO₂ emissions are from the Greenhouse Gas Protocol, except for business travel, where the providers supplied CO₂ data based on their own 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. These 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 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 in our operational carbon footprint. 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 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. 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 3.5% 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 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 2009 were: 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 performance is fairly stated. We refer to KPMG’s Independent assurance report.