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March 29, 2004
Philips Extends Sustainability Expectations to Suppliers, Including Child Labor Ban
    by William Baue

In its 2003 Sustainability Report, Philips Electronics introduced provisions requiring its 50,000 suppliers worldwide to practice social and environmental sustainability.

Last week, Amsterdam-based Royal Philips Electronics (ticker: PHG) released its Sustainability Report 2003, which unveils of a provision requiring the company's 50,000 suppliers to adhere to minimum expectations for sustainability performance. Foremost amongst the requirements of the Supplier Declaration on Sustainability is the explicit ban on child labor in accordance with Conventions 138 and 182 of the International Labor Organization (ILO).

"We place high value on responsible conduct with respect to our own business behavior, and, with that, comes the need to address such behavior within our supply chain," said Barbara Kux, chief procurement officer for Philips, the world's third-largest consumer electronics maker. Ms. Kux will also chair the company's Sustainability Board starting next week. "The outsourcing of manufacturing activities means extending ethical, social and environmental standards related to those activities toward our suppliers."

"In the Sustainability Report 2002, we said the company would establish a policy on child labor in relation to key suppliers, as well as requirements on other sustainability issues," added Ms. Kux.

The Sustainability Report 2003 delivers on this promise, as the supplier declaration also bans forced labor and discrimination, protects worker rights to organize and bargain collectively, and requires suppliers to achieve ISO 14001 certification. The report underlines the reach of these stipulations by pointing out that 2003 supply chain product and service purchases amounted to €19.2 billion, a whopping 66 percent of the company's €29 billion in total sales for the year.

Enforcing these sustainability requirements so broadly promises to be challenging, prompting the company to weigh the factors of scope versus manageability.

"While we expect all of our suppliers to be committed to sustainable development, we’ve decided to actively manage sustainability issues with those suppliers that are already part of our existing management review systems," said Ms. Kux. "At the same time, we realize that if we were to find instances of non-compliance, they probably would not occur among this group of key suppliers, so we have decided to add suppliers in countries we perceive to have a higher risk factor, given earlier studies done in the area of child labor."

Failure to adhere to the requirements will not automatically disqualify eligibility to supply Philips.

"The overall approach is one of finding solutions through open and honest discussions with the supplier, but if no satisfactory solution can be found, suppliers can expect that this will affect the business relationship," said Ms. Kux.

Philips plans to introduce a self-assessment tool and audit methodology later this year to help suppliers improve and ensure their sustainability performance.

The report also assesses the company's fulfillment of its four-year environmental action plan, called EcoVision 2002-2005. This plan resulted in reductions in absolute terms from 2002 of 9 percent in energy consumption, 11 percent for CO2 emissions, and 15 percent for water usage, though waste production remained flat.

The report, which was verified by KPMG, highlights the link between sustainable social, environmental, and economic performance by pointing out that Philips stock outperformed the Dow Jones Sustainability Index (DJSI) over the past five years.

"And we are particularly proud to have been selected as the number one company in our main industry sector in the Dow Jones Sustainability Index," the report states.

In September 2003, DJSI announced the results of its 2003 review, with Philips topp ing the cyclical goods and services sector, which includes companies in the consumer electronics, leisure goods, home construction, apparel, and airlines market sectors. Philips rated highest in its sector in the corporate governance, environmental policy and management, and eco-efficiency subcategories. It also received a 100 percent rating on its environmental reporting.


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