Integrated annual report, sustainability, IIRC Framework, GRI Standards, UN Global Compact, stakeholders

Koninklijke Philips N.V. – Annual report – 31 December 2021

Industry: manufacturing

13 Sustainability statements (extract)

13.1 Approach to sustainability reporting

Philips has a long tradition of sustainability reporting, beginning with our first environmental Annual Report published in 1999. Next, in 2003, this was expanded 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 2008, we decided to publish an integrated financial, social and environmental report. This is our 14th annual integrated financial, social and environmental report. For more information, please refer to the company’s website.

Royal Philips publishes its integrated Annual Report with the highest (reasonable) assurance level on the financial, social and environmental performance. With that overall reasonable assurance level, Philips is a front-runner in our industry.

13.1.1 Tracking trends

We follow external trends continuously to determine the issues most relevant for our company and 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 United Nations Environmental Programme (UNEP), World Bank, World Economic Forum, IFRS, EFRAG, World Health Organization, and the World Business Council for Sustainable Development (WBCSD). Our work also involves tracking topics of concern to governments, nongovernmental organizations (NGO), regulatory bodies, academia, and following the resulting media coverage.

13.1.2 Stakeholders

We derive significant value from our diverse stakeholders across all our activities and engage with, listen to and learn from them. Working in partnerships is crucial to delivering on our purpose to improve people’s health and well-being through meaningful innovation. We incorporate their feedback on specific areas of our business into our planning and actions. In addition, we participate in meetings and task forces as a member of organizations including the World Economic Forum, WBCSD, Responsible Business Alliance (RBA), EFRAG, Dutch Sustainable Growth Coalition, the Ellen MacArthur Foundation, European Round Table for Industry, Platform for Accelerating the Circular Economy (PACE) and the European Partnership for Responsible Minerals.

Furthermore, we engage with the leading Dutch labor union (FNV) and a number of NGOs, including Enough, GoodElectronics, the Chinese Institute of Public and Environmental Affairs, UNICEF, Amnesty International, Greenpeace and Friends of the Earth, as well as a variety of investors and analysts.

Our sustainability e-mail account (philips.sustainability@philips.com) enables stakeholders to share their issues, comments and questions, also about this Annual Report, with the sustainability team. The following table provides an overview of the different stakeholder groups, examples of those stakeholders and the topics discussed, used for our materiality analysis.

13.1.3 Reporting standards

We have prepared this integrated annual report in line with the International Integrated Reporting Council (IIRC) Integrated Reporting framework, and complying with the EU Non Financial Reporting decree (2014/95/EU) and the ‘EU Taxonomy’. We have also included a visualization of our value creation process.

This integrated annual report has been prepared in accordance with the GRI Standards: Comprehensive option. A detailed overview of the GRI Comprehensive indicators can be found in the GRI content index on our sustainability website. Next, we developed additional company-specific indicators and started to measure the impact we are having on society. The information on definition, scope and measurement can be found in this chapter. We signed up to the United Nations Global Compact in March 2007 to advance 10 universal principles in the areas of human rights, labor, the environment and anti-corruption. Our General Business Principles, Human Rights, 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 also our annual Communication on Progress (COP) submitted to the UN Global Compact Office.

At the World Economic Forum in January 2017 Philips signed the Compact for Responsive and Responsible Leadership. The Compact is an initiative to promote and align the long-term sustainability of corporations and the long-term goals of society, with an inclusive approach for all stakeholders. In this Annual Report we also included the WEF’s International Business Council new ESG framework.

We use this report to communicate on our progress towards the relevant Sustainable Development Goals (SDGs), in particular SDG 3 (Ensure healthy lives and promote well-being for all at all ages), SDG 12 (Ensure sustainable consumption and production patterns) and SDG 13 (Take urgent action to combat climate change and its impacts). Please refer to Stakeholder engagement, starting on page 267 for more details.

13.1.4 Material topics and our focus

Every year, we identify the environmental, social, and governance topics which have the greatest impact on our business and the greatest level of concern to stakeholders along our value chain. Please refer to Materiality analysis, starting on page 14 for more details on this process and the results for 2021. Below you will find an overview of the Key material topics, further references, KPIs and the boundaries of these topics.

13.1.5 Programs and targets

In 2020, as we ended the 5-year ‘Healthy people, Sustainable planet’ program, Philips’ ESG commitments were introduced. An overview of these commitments has been provided in Philips’ ESG commitments, starting on page 46 and more detailed targets can be found in the respective sections.

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

13.1.6 Boundaries of sustainability reporting

Our sustainability performance reporting encompasses the consolidated Philips Group activities in the Environmental, Social and Governance Performance sections, following the consolidation criteria detailed in this section. As a result of impact assessments of our value chain we have identified the material topics, determined their relative impact in the value chain (supply chain, our own operations, and use phase of our products) and reported for each topic on the relevant parts of the value chain. More details are provided in the relevant sections in the Sustainability Statements.

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

Lives improved by the Philips Foundation have been consolidated.

13.1.7 Comparability and completeness

We used expert opinions and estimates for some parts of the Key Performance Indicator calculations. There is therefore an inherent uncertainty in our calculations, e.g. Lives Improved, Environmental Profit and Loss account and Social Impact calculations. The figures reported are Philips’ best estimate. As our insight increases, we may enhance the methodology in the future.

We have excluded the data from Domestic Appliances from the E, S and G information wherever possible. In a limited number of cases, for example for road logistics emissions, we have used proxies. If Domestic Appliances information was not available for past years, and could therefore not be excluded, we have indicated this in the respective section. The EEI and GBP results have not been restated.

In 2020, Philips has made changes to the EP&L use case scenario, the energy mix of the use phase of its products and added the full Sleep & Respiratory Care portfolio to the EP&L scope. For more information we refer to Environmental performance, starting on page 48 and our methodology document.

In 2019, Philips re-aligned its ‘Lives Improved’ target with the UN 2030 Sustainable Development Agenda following the completion of its portfolio transformation. Philips targets an ambitious, average annual Lives Improved growth rate of around 6% for the 2019 – 2030 period.

In order to report on our corporate scope 2 emissions, Philips follows the Scope 2 Greenhouse Gas Reporting Guidance. This guidance requires that companies operating in liberalized electricity markets, where renewable energy certificates (also referred to as “contractual instruments” and “energy attribute certificates) such as Guarantees of Origin (GO), RECs, etc. are available, shall report two Scope 2 totals based on the following methods; the location-based method and the market-based method. In short, the location-based method total can only be reduced by decreasing the activity data (or electricity consumption) since the grid average emission factor is largely outside of corporate control and more in control by governments and utilities. By contrast, the market-based method is designed to highlight supply choices, including low-or zero carbon supply from renewable sources like wind or solar. In 2021, the emission factor set for our scope 2 market-based and location-based have been updated. For our market-based scope 2 calculations in Europe and the US, we apply the Reliable Disclosure (RE-DISS) and AIB European Residual Mixes 2019 Version 1.1 (GWP Applied) and 2020 Green-e® Residual Mix Emissions Rates (2018 Data) where residual mix factors are available and for all other countries we apply the International Energy Agency (IEA) 2020 v1.1 (AR4 Applied) emission factors. For our location-based scope 2 calculations, we apply the US Environmental Protection Agency eGRID (Sub Region & US Average) – 2018 (Released Jan 2020) v1.1 and the International Energy Agency (IEA) 2020 v1.1 (AR4 Applied) emission factors.

The emissions of substances data is based on measurements and estimates at manufacturing site level. The figures reported are Philips’ best estimate.

The integration of newly acquired activities is scheduled according to a defined integration timetable (in principle, the 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. Environmental data are reported for manufacturing sites with more than 50 industrial employees.

13.1.8 Scope

Lives improved

The Key Performance Indicator on ‘lives improved’ and the scope are defined in the methodology document that can be found in Methodology for calculating Lives Improved. We used opinions from Philips experts and estimates for some parts of the Lives Improved calculations. Philips has made strong commitments to enabling healthy living and wellbeing for all. To track our impact, Philips identifies countries where the need for access to healthcare is highest. This is determined by four selected health indicators, as provided by United Nations Sustainable Development Goal 3, which focuses on health and well-being. The specific methodology for how we determine an underserved health community can be found in the same document.

Health and safety

Health and safety data is reported by sites with over 50 FTEs (full-time equivalents) and is voluntary for smaller locations. The data are reported and validated each month via an online centralized IT tool. The Total Recordable Cases (TRC) rate is defined as a KPI for work-related cases where the injured employee is unable to work one or more days, or had medical treatment or sustained an industrial illness. We also provide the Lost Workday Injury Cases (LWIC) rate, which measures work-related injuries and illnesses that predominantly occur in manufacturing operations and Field Services Organizations where the incident leads to at least one lost workday. Fatalities are reported for staff, contractors and visitors. The TRC and LWIC KPIs refer to all reported cases.

General Business Principles

Alleged GBP violations are registered in our web-based reporting and validation tool.

Environmental data

All environmental data from manufacturing operations, except process chemicals, are reported on a monthly basis in our sustainability reporting and validation tool, according to company guidelines that include definitions, procedures and calculation methods. Process chemicals are reported on a half-yearly basis.

Internal validation processes have been implemented and peer audits performed to ensure consistent data quality and to assess the robustness of data reporting systems.

These environmental data from manufacturing are tracked and reported to measure progress against our Sustainable Operations targets.

A manufacturing site is classified as “Zero Waste to Landfill” if less than or equal to 0.5% of the total regular waste reported by the site is sent directly to landfill via an external contractor. This excludes waste that is landfilled due to a regulatory requirement and Onetime waste. A site needs to meet these requirements at least two consecutive reporting periods.

Reporting on ISO 14001 certification is based on manufacturing units reporting in the sustainability reporting system.

Environmental Profit & Loss account

The Philips Environmental Profit & Loss (EP&L) account measures our environmental impact on society at large. The EP&L account is based on Life Cycle Analysis methodology in which the environmental impacts are expressed in monetary terms using specific conversion factors. For more information we refer to our methodology report.

Operational carbon footprint

Philips reports in line with the Greenhouse Gas Protocol (GHGP). The GHGP distinguishes three scopes, as described below. The GHGP requires businesses to report on the first two scopes to comply with the GHGP reporting standards. As per the updated GHGP Scope 2 reporting guidance, from 2015 onward our scope 2 emissions reporting includes both the market-based method and the location-based method. The market-based method of reporting will serve as our reference for calculating our total operational carbon footprint. As part of our operational carbon footprint, Philips also reports on two scope 3 categories that can be influenced by operational choices, namely our scope 3 emissions from business travel and scope 3 emissions from transportation and distribution.

  • Scope 1 – direct CO2e emissions – is reported on in full, covering the direct emissions from all sites that Philips manages. This includes all so-called industrial and non-industrial sites, both leased and owned. Our scope 1 emissions reflect the direct emissions resulting from fossil fuel combustion and use of refrigerants on our sites. All direct energy and refrigerant consumption is reported in the sustainability reporting system. The data for our industrial sites is always reported in full. The direct energy consumption and refrigerant use in non-industrial sites are based on actual data where available. If this is not the case, they are estimated based on average energy usage per square meter, taking the geographical location and building type of the site into account.
  • The market-based method is designed to highlight supply choices, including low-or zero carbon supply from renewable sources like wind or solar. The emission factor used under this method is (where available) the residual-mix emission factor, reflecting only the emissions from fossil-fuel-based electricity production in a country in a given year. For instance, if a corporate like Philips sources renewable electricity globally, the emissions from its electricity consumption will be zero under this method. All renewable electricity claimed by Philips is sourced from the same energy market where the electricity-consuming operations are located, and is tracked and redeemed, retired, or cancelled solely on behalf of Philips. All certificates were obtained through Green-e certified Renewable Energy Certificates (RECs) in the United States, European Guarantees of Origin (GOs) from the Association of Issuing Bodies (AIB) of the European Energy Certificate System (EECS) and i-RECs for our ASEAN operations. To ensure additionality, all certificates were generated in 2021 – or maximum 6 months prior – in the country of consumption and are retired on behalf of Philips. To quantify our emissions, we have used the residual mix emission factors derived from the Association of Issuing Bodies (AIB) and Green-e where available. For our market-based scope 2 calculations in Europe and the US, we apply the Reliable Disclosure (RE-DISS) and AIB European Residual Mixes 2019 Version 1.1 (GWP Applied) and 2020 Green-e® Residual Mix Emissions Rates (2018 Data) where residual mix factors are available. For all other countries, we apply the International Energy Agency (IEA) 2020 v1.1 (AR4 Applied) emission factors.
  • Scope 3 – ‘Transportation & Distribution’ covers all emissions from our logistics operations, where we measure the CO2e impact from all distribution flows that Philips is responsible for, covering all modes of transport: air freight, ocean freight, road freight and parcel shipments. Emissions are calculated based on the number of tonne-kilometers (or TEU.km for ocean freight) transported. A tonne.km is a measurement unit corresponding to the transport of one metric ton over one kilometer. For ocean freight, we measure the twenty-foot equivalent unit (TEU) over a distance of one kilometer (TEU.km). Distances differ per mode of transport as a plane (for air freight or medium- to long-distance parcels) flies in a direct line, a container vessel can only take sea routes and a truck can only use the existing road networks. All distances are calculated modespecific, and DEFRA 2020 and Clean Cargo Working Group (CCWG) emission factors are assigned to convert tonne.km or TEU.km to CO2e emissions. The CCWG emission factors have been implemented from 2020 onwards only. For ocean freight and air freight we apply an additional 3% of ‘last leg’ emissions, estimating the additional impact from/to the airport or port. For air freight and parcel shipments, we define the haul types (distinguishing between short, medium and long-haul shipments), as emissions differ per tonne.km depending on the haul type, as typically more fuel is consumed per kilometer over shorter distances compared to long distances as a result of high fuel consumption during take-off versus flying idle at high altitudes. Emissions from non-Philips-managed warehouses and emissions from returns of vehicles and/or vessels are out of scope.

Scope 3 emissions from employee commuting, upstream transportation and distribution, outsourced warehousing activities, purchased goods and services and product use by our customers are not included in our operational carbon footprint.

Employee Engagement Index (EEI)

The Employee Engagement Index (EEI) is the single measure of the overall level of employee engagement at Philips. It is a combination of perceptions and attitudes related to employee satisfaction, commitment and advocacy.

The reported figures are based on the Employee Survey. The total score of the employee engagement is an average of the quarterly results of the survey. The results are calculated by taking the average of the answered questions of the surveys.

13.1.9 ESG governance

Sustainability is strongly embedded in our core business processes, like innovation (EcoDesign), sourcing (Supplier Sustainability Program), manufacturing (Sustainable Operations), logistics (Green Logistics) and programs like the Circular Economy initiative. In Royal Philips, the ESG Committee is the highest governing ESG body and is co-chaired by the Chief Executive Officer and the Chief Legal Officer, who are both members of the Board of Management. Five other Executive Committee members, our Chief Operating Officer, our Chief Strategy & Innovation Officer, our Chief Human Resources Officer, our Chief Business Leader Precision Diagnosis and our Chief International Markets Market Leader, sit on the ESG Committee together with functional executives. The ESG Committee convenes four times per year, defines Philips’ ESG strategy, commitments, programs and policies, monitors progress and takes corrective action where needed.

Progress on ESG is communicated internally and externally (www.results.philips.com) on a quarterly basis and at least annually in the Executive Committee and Supervisory Board.

13.1.10 External assurance

EY has provided reasonable assurance on whether the information in Materiality analysis, starting on page 14, Sustainability statements, starting on page 242 and Environmental, Social and Governance, starting on page 43, except for sections Remuneration policy, starting on page 63 and Risk management approach , starting on page 64 and presents fairly, in all material respects, the sustainability performance in accordance with the reporting criteria. Please refer to Assurance report of the independent auditor, starting on page 269

Extract page 14

3.3 Materiality analysis

We identify the environmental, social, and governance topics which we believe have the greatest impact on our business and the greatest level of concern to stakeholders along our value chain. Assessing these topics enables us to prioritize and focus upon the most material topics and effectively address these in our policies and programs. Philips’ impact on society at large is covered through our Lives Improved metric and the Environmental Profit & Loss account.

Our materiality assessment is based on an ongoing trend analysis, media search, and stakeholder input. In 2021, we solicited input from a diverse group of external and internal stakeholders, including investors, NGOs, customers, suppliers, peer companies, academia, and senior management in Philips. Similar to 2020, we used an evidence-based approach to materiality analysis powered by Datamaran. By applying Datamaran’s automated sifting and analysis of millions of data points from publicly available sources, including corporate reports, mandatory regulations and voluntary initiatives, as well as news and social media, we identified a list of topics that are material to our business. With this data-driven approach to materiality analysis we have incorporated a wider range of data and stakeholders than was ever possible before and managed to get an evidence-based perspective on regulatory, strategic and reputational risks and opportunities. Public health risks emerged as a new material topic in 2020, as a result of the COVID-19 pandemic, and was again included in 2021.

Changes in 2021

In 2021, the topic of Human rights & responsible supply chains was split into two separate topics, considering the growing importance of both. Next, Responsible tax practices was carved out from the Business ethics & General Business Principles topic due to the growing importance of the topic in society. On the external view, the most significant increase compared to 2020 is climate change. The internal view saw a significant increase in importance on climate change, circular economy and employee rights.

Our materiality assessment has been conducted in the context of the GRI Sustainable Reporting Standards and the results have been reviewed and approved by the Philips ESG Committee.

For more information on materiality, refer to Material topics and our focus, starting on page 243.