Koninklijke Philips N.V. – Annual report – 31 December 2023
Industry: manufacturing
12 ESG statements (extract)
12.1 Approach to ESG reporting
Philips has a long tradition of Environmental, Social and Governance (ESG) reporting, beginning with our first Environmental Annual Report published in 1999. Next, in 2003, we expanded the Environmental Annual Report with the launch of our first Sustainability Annual Report. This report provided details of our social and economic performance in addition to our environmental results. In 2008, we published our first integrated financial, social and environmental report. Our 2023 Annual Report is our 16th 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 reasonable assurance on its financial, social and environmental performance (except for EU Taxonomy disclosures with limited assurance). With that reasonable assurance level, Philips is a front-runner in our industry.
12.1.1 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, the World Business Council for Sustainable Development (WBCSD), and various rating agencies and analyst reports. Our work also involves tracking topics of concern to governments, non-governmental organizations (NGOs), regulatory bodies, academia, and following the resulting media coverage.
12.1.2 ESG reporting frameworks
Building on our extensive experience of environmental and social impact measurement and of providing transparency on governance, Philips has taken an active role – in collaboration with, in particular, the International Financial Reporting Standards (IFRS) Foundation, the World Economic Forum (WEF) and the European Union – to help drive the evolution towards a standard ESG reporting framework.
At the World Economic Forum in January 2017, Philips signed the Compact for Responsive and Responsible Leadership – an initiative (initiated by WEF and Philips) to promote and align the long-term sustainability of corporations and the long-term goals of society, with an inclusive approach for all stakeholders. The WEF secured a commitment from over 200 CEOs to align their corporate values and strategies with the United Nations’ Sustainable Development Goals (SDGs). In this Annual Report we also included the new ESG framework from WEF’s International Business Council.
In 2020, the WEF’s International Business Council (IBC) published its core set of Stakeholder Capitalism Metrics and disclosures. These can be used by companies to align their mainstream reporting on performance against environmental, social and governance (ESG) indicators and track their contributions towards the SDGs on a consistent basis. Thus far, 166 companies reported in line with this framework. Based where possible on existing standards, the full set is comprised as follows:
- Core metrics: A set of 21 more‑established or critically important metrics and disclosures that focus primarily on activities within an organization’s own boundaries.
- Expanded metrics: A set of 34 metrics and disclosures that tend to be less well‑established in existing practice and have a wider value chain scope or convey impact in a more sophisticated or tangible way, e.g. in monetary terms.
The recommended metrics are organized under four pillars that are aligned with the SDGs and principal ESG domains: Principles of Governance, Planet, People and Prosperity. There is no intention to replace industry- or company-specific metrics (like our Lives Improved metric). Companies are encouraged to report against as many of the core and expanded metrics as they find material and appropriate, on the basis of ‘disclose or explain’.
In Philips’ ESG performance at a glance, starting on page 73, we show how Philips performed in 2023 on the above-mentioned 21 Core metrics, mapped to the three dimensions of our ESG commitments, as well as a number of additional Philips-specific metrics that we consider fundamental to the strategy and operation of our business.
IFRS and CSRD/ESRS
Philips is also contributing to the IFRS Foundation’s endeavors to drive standardization of non-financial reporting as well as the development of sustainability standards by the European Union by EFRAG. We are preparing for the enhanced disclosure requirements under the EU Corporate Sustainability Reporting Directive (CSRD) that will start to apply as from our annual report over the financial year 2024. In preparation for the CSRD requirements, Philips has included in this annual report several metrics and textual disclosures in accordance with reporting criteria developed by Philips, in anticipation of the upcoming ESRS requirements.
GRI
This integrated annual report has been prepared with reference to the GRI Universal Standards 2021. A detailed overview of the GRI indicators can be found in the GRI content index on our sustainability website. We also developed additional company-specific indicators and started to measure the impact we are having on society, for example through our Environmental Profit & Loss account. The information on definitions, scope and measurement can be found in this chapter.
IIRC
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’. The European Commission has published the Corporate Sustainability Reporting Directive and European Sustainability Reporting Standards. In this report we aim to prepare for this new regulation and already address a number of the relevant disclosure requirements that will be applicable to us in the future. We have also created an overview of our value creation process ( please refer to How we create value with sustainable impact, starting on page 12.)
United Nations Global Compact
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.
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 Advocacy activities and expenses, starting on page 269 for more details.
12.1.3 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 our Double Materiality Assessment, starting on page 13 for more details on this process and the results for 2023. Below you will find an overview of the key material topics, further references, KPIs and the boundaries of these topics.
12.1.4 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 44 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.
12.1.5 Boundaries of ESG reporting
Our ESG performance reporting encompasses the consolidated Philips Group activities in the Environmental, Social and Governance sections, following the consolidation criteria detailed in this section. Thus, the scope of the financial statements is the same as the scope of our ESG statements, with the exception of value chain information in the ESG statements. 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 ESG statements.
Philips has not used the option to omit a specific piece of information corresponding to intellectual property, know-how or the results of innovation. Philips also did not use the exemption from disclosure of subsidiaries provided for in articles 19a (3) and 29a (3) of Directive 2013/34/EU.
The consolidated selected financial information in this ESG statements section has been derived from the Group financial statements, which are based on IFRS.
Lives improved by the Philips Foundation have been consolidated.
12.1.6 Comparability and completeness
We used expert opinions, estimates, and proxies for some parts of the Key Performance Indicator calculations. There is therefore an inherent uncertainty in our calculations, e.g. Lives Improved, Environmental Profit & Loss account, Scope 3 carbon emissions, and Social Impact calculations. The figures reported are Philips’ best estimate. As our insight increases, or higher-quality sources become available, we may enhance the methodology in the future.
We have excluded data from the former Domestic Appliances business from the ESG information wherever possible. In a limited number of cases, for example for road logistics emissions, we have used proxies for previous years. 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 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, refer to Environmental performance, starting on page 46 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 controlled 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; 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.
In order to report on our Scope 3 emissions, Philips follows the Scope 3 Greenhouse Gas Reporting Guidance, in line with our Science Based Targets initiative (SBTi) submission. More details can be found in Philips’ Corporate Emission Accounting methodology documents.
Data on emissions of substances are based on measurements and estimates at manufacturing site level. The figures reported are Philips’ best estimate. The basis of preparation is data submitted by our environmental coordinators at our manufacturing sites, which is validated and consolidated by Group Sustainability.
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.
Philips did not identify material misstatements in prior reporting periods.
12.1.7 Scope of reporting
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 improve people’s health and wellbeing. 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); reporting is voluntary for smaller locations. With this approach, the total FTE coverage of H&S reporting is above 90%. The remainder is not extrapolated. 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 an employee is injured or becomes ill and is unable to work in the same capacity for one or more days following a workplace incident or has medical treatment above first-aid treatment. We also provide the Lost Workday Cases (LWC) rate, which measures work-related injuries and illnesses (predominantly occurring in manufacturing operations and field service organizations) where the incident leads to at least one lost workday. Fatalities are reported for staff, contractors and visitors. The TRC and LWC KPIs apply 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 for 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.
Total 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 carbon footprint. As part of our carbon footprint, Philips also reports on four Scope 3 categories, namely emissions from purchased goods and services, business travel, transportation and distribution and use of sold products.
- Scope 1 greenhouse gas emissions are direct emissions caused by company owned and -controlled entities. For example, the burning of fossil fuels and the use of refrigerants or chemicals on-site generates scope 1-related CO2-e (carbon dioxide equivalent) emissions. Sites report their consumption of anthropogenic or biogenic-based fuels, and refrigerants via our internal sustainability reporting system. Consumption per resource is then aggregated across all sites and multiplied by resource-specific emission factors. This approach is being used for all industrial sites and 80% of our non-industrial sites’ floor area. For all other sites consumption is extrapolated. For scope 1 emissions we use two sets of emission factors. For fossil fuels and natural gases, we use the UK Department for Business, Energy & Industrial Strategy (BEIS) database (v1.3 2022 – Global Warming Potentials (GWP) 5th intergovernmental Panel on Climate Change (IPCC) Assessment Report (AR)). For all other relevant scope 1 refrigerants, we use the IPCC database (AR6, v1.2).
- Scope 2 emissions are indirect emissions caused by the purchase of electricity, heating, steam, and cooling. These emissions are not generated on our sites but are still directly impacted by our consumption level and contractual agreements. We can therefore reduce these emissions by reducing consumption or by ensuring purchased energy comes from low-emission sources. We report on both market-based and location-based emissions. For the market-based approach, we first subtract the amount of renewable energy acquired or self-generated in a specific region from the actual amount of electricity consumed. 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. To ensure additionality, all certificates were generated in 2023 – or maximum 6 months prior – in the country of consumption and are retired on behalf of Philips. The remainder can then be considered grey electricity meaning of a nonrenewable source. We then multiply this by a residual mix emission factor. For the location-based approach, we examine energy purchases and disregard any renewable energy certificates acquired. This amount is then multiplied by grid-average emission factors. The grid emission factors used for the market-based approach are dependent on the location. For sites in the US, we apply the eGrid-specific Residual Mix emission factor (Green-e 2022 v1.3 (2020 Data)), and for sites in Europe we use the AIB European Residual Mixes (2021 v1.1). For all other countries, we apply the International Energy Agency (IEA) emission factors because residual mix emission factors are nonexistent for these regions (2022 v1.1 – GWP AR4). For the location-based approach we use eGrid and IEA grid average emission factors (Both v1.1 – GWP AR4). For all other energy purchases we use the emission factors from BEIS (v1.3 2022 – GWP AR5).
- Scope 3, category 1 – Purchased goods and services – includes any emissions generated by the consumption of raw materials, components, packaging, and services that are acquired to create and distribute Philips products. This only includes production-related goods (e.g., components and parts) and all services that fall under the GHG Protocol described category. Goods related emissions are calculated using an average data method and services using a spend based method. Components and material specific emission factors are determined using EcoInvent (v3.9.1 – GWP AR6). These factors are regularly updated and consider the sourcing as well as raw material processing. The impact of purchased services is in contrast based on an input output model. To derive emissions the Exiobase database (v3.8.2 – GWP AR5 and AR6) is leveraged, which factors in all activities connected to the corresponding service.
- Scope 3, category 6 – Business travel – covers any mode of transportation that is used by employees for business purposes and operated by a third party, excluding commuting. To calculate business travel emissions, we distinguish air travel and automobile travel. For automobile travel, we include leased vehicles and rented vehicles. All other modes of transportation are not considered due to their minimal usage for business purposes and negligible total impact (e.g. trains in the Netherlands run on renewable electricity). The emissions factors from BEIS (v1.3 2022 – GWP AR5) are leveraged as these are updated annually.
- Scope 3, category 9 – Downstream transportation and distribution – includes all emissions generated by transporting components, products, or raw materials from one location to another via a mode owned by a third party. This can include transport via air, road, or sea. Rail transport is rarely used by Philips and therefore has a negligible influence on total emissions. Upstream and downstream transportation paid by Philips are reported under the same category, because of our inability to distinguish between each trip. This has no influence on total emissions and merely simplifies the accounting process. For air freight, road freight or less than a container load ocean freight the emission factors from BEIS are leveraged (v1.3 2022 – GWP AR5). For full container load transports the emission factors from Clean Cargo are used (version 2021 – GWP AR6).
- Scope 3, category 11 – Use of sold products – constitutes the majority of Philips’ environmental impact. To determine emission we are interested in three key variables: the lifetime energy per device, number of products sold per country and country specific emission factors. It should be noted that the energy consumption during the full lifetime of the products sold is included in the emission calculation of the year of sale. To calculate emissions the country grid average emission factors from EcoInvent (v3.9.1 – GWP AR6) are used.
For more information on our calculation methodologies please refer to the ESG download page.
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 for 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.
ESRS definitions
Our definitions of short-, medium-, and long-term are defined in preparation for ESRS 1 section 6.4.
12.1.8 ESG governance
ESG is strongly embedded in our core business processes, like innovation (EcoDesign), sourcing (Supplier Sustainability Program), manufacturing (Sustainable Operations), logistics (Green Logistics) and programs like our Circular Economy program.
In Royal Philips, the Board of Management is the highest governing ESG body. Subject to the topics discussed, other Executive Committee members attend these meetings, together with functional executives. The Board of Management normally convenes four times per year on ESG. The Board of Management also defines Philips’ ESG strategy, commitments, programs, action plans and policies, monitors progress and takes corrective action where needed. On a quarterly basis, ESG reporting is also discussed in the Audit Committee of the Supervisory Board.
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.
Philips publishes its integrated Annual Report with the highest (reasonable) assurance level from its independent auditor on its financial, environmental, social, and governance performance. With that overall reasonable assurance level, Philips is a frontrunner in its industry.
12.1.9 External assurance
EY has provided reasonable assurance on whether the information in Double Materiality Assessment, starting on page 13, ESG statements, starting on page 230 and Environmental, Social and Governance, starting on page 42, except for the sections EU taxonomy framework in EU Taxonomy disclosures, starting on page 252, Remuneration policy, starting on page 69 and Risk management approach, starting on page 67, presents fairly, in all material respects, the sustainability performance in accordance with the reporting criteria. Please refer to Independent auditor’s assurance report on the ESG information and the EU Taxonomy information, starting on page 285
Extract page 13
3.3 Double Materiality Assessment
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, for instance patient safety and quality. We do this through a multi-stakeholder process. Please refer to Working with stakeholders and advocacy, starting on page 65 for more information. Assessing these topics enables us to prioritize and focus upon the most material topics and effectively address these in our policies, programs, targets and actions. We do this with reference to the GRI standard and identify and assess impacts on an ongoing basis, for example through discussions with our customers, suppliers, investors, employees, peer companies, social partners, regulators, NGOs, and academics. We also conduct a benchmark exercise, carry out trend analysis and run media searches to provide input for our materiality analysis. GRI has not yet published a sector standard for the healthcare industry. Philips’ impact on society at large is covered through our Lives Improved metric and the Environmental Profit & Loss account, as well as a number of other KPIs addressed in Environmental, Social and Governance, starting on page 42. The result of our impact materiality assessment you will find below.
Similar to 2022, we used an evidence-based approach to materiality assessment, powered by a third-party AI-based application. The application allows 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. With this data-driven approach to materiality assessment 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. Topics were prioritized through a survey sent to a large and diverse set of internal and external stakeholders, combined with input from the application.
Changes in 2023
On both external and internal importance axis, the most significant increases compared to 2022 were Waste management and Social inclusion & engagement. Innovation & research went down on both axes. On the internal importance axis, there was a significant decrease on Pollution.
Double materiality
After completing the regular impact materiality assessment, we completed a preliminary ‘double materiality’ assessment, in preparation for the upcoming requirements of the EU Corporate Sustainability Reporting Directive (CSRD). The double materiality assessment addresses both financial materiality (the impact of society on Philips) as well as impact materiality (the impact of Philips on society): we only included the high and medium material topics from impact materiality and/or financial materiality. The data sources used for the financial materiality include corporate reports, mandatory regulations with sanctions, voluntary initiatives by e.g. central banks, and Sustainability Accounting Standards Board (SASB) accounting metrics. For impact materiality, we included sustainability data from corporate reports or sustainability reports, coverage in the news and voluntary initiatives and regulation. We calibrated the financial and impact materiality with a team of internal experts from Enterprise Risk Management, Group Control, Internal Audit, Insurance and Risk Management and Sustainability and aligned with our Enterprise Risk Management assessment. After this calibration the financial impact of Product responsibility & safety, Geopolitical events, and Big data, AI & Cybersecurity were increased. The results of the double materiality analysis are depicted below.
From the financial materiality assessment, the topics that ranked highest were: (1) Product responsibility & safety, (2) Geopolitical events, and (3) Big data, AI & Cybersecurity, as well as Business ethics & General business principles.
From the impact materiality assessment, the topics that ranked the highest were: (1) from the Environmental topics, Climate change, and Energy efficiency; (2) from the Social topics, Employee well-being, health & safety, and Access to (quality & affordable) care; and (3) from the Governance topics, Big data, AI & Cybersecurity, and Competition & market access. These topics are all covered in more detail in the Annual Report 2023 and monitored regularly.
The outcome of the double materiality assessment did not result in any significant changes in the material topics identified from impact materiality.
The results of our materiality assessment have been reviewed and approved by the Philips Board of Management and will be used to prepare for the upcoming EU legislation.
For more information on materiality, refer to Material topics and our focus, starting on page 232.
Accounts examples 