The E in ESG: Philips Drives For Science-Based Targets In Carbon Zero Challenge

With a product mix that includes high energy consumption imaging, capital equipment and personal health care, Philips has a unique spectrum of challenges in driving low carbon health care. Nevertheless, it has set the bar high in environmental sustainability goals, and is pressing suppliers to follow its lead.

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Philips' head of global sustainability Robert Metzke has a habit of setting challenging environmental compliance targets.

The Dutch provider of solutions in diagnostic imaging, image-guided therapy, connected care technologies and personal health care products has been carbon neutral in its own operations since 2020 – an impressive marker to lay down by the world’s sixth largest healthtech company on current annual sales. (Also see "FY2022: Medtech Innovators Exchange Top 10 Placings" - In Vivo, 7 Mar, 2023.)

There is more. “We were the first healthtech company to commit to science-based targets and recently became the first healthtech provider to have Scope 1 to 3 targets approved by the Science Based Target initiative (SBTi),” Metzke told In Vivo.

Robert Metzke: Systematic about sustainability 

“This is the most stringent pathway for a company to reduce its emissions,” he continued. For Koninklijke Philips N.V., it is all about reducing absolute emissions. Only unavoidable carbon emissions will require offsetting “in order to drive down the company’s emissions to zero.”

It does not stop there. “We want to get at least half of our suppliers (based on spend) to commit to science-based targets,” Metzke said. By the end of 2022, more than 40% of the company’s suppliers had done so. “That’s unique. I know of no one else who has done that.”     

Philips achieved this rate of uptake through a major supplier program of sharing experiences on how to become carbon neutral. The company also decided to incentivize suppliers who opt for transparency and follow the carbon disclosure program. It tied working capital financing to its suppliers’ endeavors.

“In that way, we are leveraging relationships to drive sustainability by changing behaviors and reducing carbon emissions,” Metzke said.

Philips’ early engagement with EcoDesign (embedding sustainability into the innovation process) dates back to the 1990s. Then, as now, buying into the environmental imperative meant doing lifecycle assessments and looking at the environmental footprint of any given product, including sourcing, production, use and dismantling.

Climate change has accelerated in the past two decades and the stakes have got incrementally higher. Health care is not blame free. Metzke notes that the health care industry emits more CO₂  than the aviation and shipping industry put together – a little known fact.

More familiar is the claim that half of humankind still has inadequate access to health care. The dual challenge for Metzke and Philips is to find ways of making the universal right of health care more accessible and, at the same, more sustainable.

The challenge is not an easy one. Health care is responsible for more than 4.4% of CO₂ (plus methane and nitrous oxide) emissions worldwide, according to Health Care Without Harm’s health care climate footprint report.

Above this global health care average reported by HCHW – measuring just CO₂ emissions alone  ̶  are nations like the US, Japan, Korea, the Netherlands and Switzerland. The UK and Germany are only marginally below the average.

Metzke said: “That is totally unsustainable, especially as we want to make health care accessible to everyone on earth.”

Owning the problem is the first step to doing something about it, he continued. “Before you change something you need to understand what the baseline is. That is a central theme of what we are doing at Philips.”

But while making its own carbon emissions reduction progress, Philips found that emissions in its supply chain were typically a factor of seven bigger than those from its own operations.

And user emissions are a factor of 10 bigger than in the supply chain – i.e. users are responsible for 100 times higher emissions than from Philips’ own manufacturing operations. This is hardly a surprise, however, given the megawatt hours of electricity needed to power high-throughput MR scanners, for instance.

Clearly, working with suppliers is critical for driving change, Metzke said. The insights Philips gains from collaborative initiatives are informing the company’s new innovation and value creation strategy. (Also see "Philips Healthcare: Targeting Healthtech Market Recovery Via Value Creation" - In Vivo, 22 Feb, 2023.)

Supporting Hospital And Provider Systems

Helping hospitals control their often high indirect emissions and reset their carbon footprint is another element of the challenge for Philips. Engaging providers on circular economy principles, renewable energy sourcing, refurbishing imaging equipment and workflow improvements through digitization are increasingly part of the dialog Philips has with its customers.

For instance, in March 2023 the company announced a long-term partnership with Portugal’s Champalimaud Foundation. This deal focused not just on CT, MR and other cancer diagnostic systems, but also on reducing CO₂ emissions from those systems and diagnostic departments by 50% by 2028.

Responsible end-of-use management, avoidance of landfill, implementing hybrid operating room solutions and providing technology that leads to shorter hospital stays compared to traditional surgical interventions are part of the partnership agreement.

The technology in the Champalimaud deal includes Philips’ low energy Spectral CT 7500 model and installation of MR helium-free systems and the low power consumption Ingenia Ambition 1.5T MR system. This uses only seven liters of helium over its lifetime, compared with roughly 1,500 liters with other Philips’ systems.

“We really believe that health care providers should take the lead in driving change,” Metzke said.

He noted a strong trend whereby individuals are increasingly aware of their impact on climate and how they can make more sustainable choices.

Low Carbon Supply Chain Success

Although it was initially unclear to Philips if its supplier-compliance target of 50% of companies was too ambitious, it transpired that the company now has one of the lowest carbon supply chains around the globe, Metzke said.

“We tried to prioritize by engaging big suppliers first and hopefully create a kind of ‘tsunami,’ which happened, and continues, and is fantastic to see,” he said.

Science-Based Targets

Over the past two years, Philips has developed specific product category roadmaps using science-based targets. It based this work on a framework devised by the SBTi, which is widely seen as the gold standard for reducing the carbon emissions end-to-end in Scopes 1, 2 and 3.

Philips was able to establish required energy efficiency levels for the next decade for its entire installed equipment base.

This information tells the company that it is in line with the maximum 1.5 degree Celsius global temperature/global warming scenario from the 2015 Paris Agreement.

These targets might be perceived as a constraint on innovation, but things have actually worked the other way. The R&D department was motivated by the challenge, Metzke said.

Philips has a broad aim of improving 2.5 billion lives by 2030. Within this top line goal are intermediate targets for 2025 for specific business units and annual operating plans. Meeting the targets is reliant on technology innovators factoring in future energy efficiency needs in their product development plans.

“Aligning the incentives structure and using a target setting process creates energy in the company,” Metzke said. That specific culture becomes embedded in the business, which prompts the question for Philips: “How can we make health care more accessible and make sufficient money to satisfy our shareholder needs?”

And once carbon neutrality can be monetized, providers must also get a fair share of the additional benefits, Metzke stressed.

Let’s Talk About It

Talking about sustainability achievements has not traditionally been on Philips’ agenda. “We have not been very vocal about these matters in recent years, but if you want to play a part in changing the industry you need to have a voice and explain to people why you are doing what you are doing,” Metzke said.

“In the past two to three years, we have improved, to the extent that people understand what Philips stands for and what we are passionate about.” This has been good both for employees, who become motivated when they hear their leaders talk, and for wider society. Talking about it “is now one of our strengths,” he noted.

This extends to alerting suppliers to Philips’ ESG program, including expectations of behaviors in the areas of human rights and global business supplier principles.

The task of identifying suppliers’ qualifications to become or remain a Philips business partner has been made more efficient thanks to an AI tool co-developed five years ago by Philips and the Technical University of Eindhoven.

The tool makes use of the vast amounts of data Philips amasses on suppliers and identifies specific risk-related factors based on a supplier’s industry and location. The AI tool is claimed to be 95% accurate.

Rather than forcing partner companies to undergo an extensive Q+A, the tool presents the top factors suppliers should be aware of to ensure ESG compliance. It then goes into specific questions. The outcome is often a plan for how individual suppliers can and should improve.

Philips has seen a double-digit performance improvement among companies within two years of their entering the program.

The AI tool was very much against industry trends when it came about, Metzke observed. The industry’s standard practice was compliance audits and inspectors going into a company with a list of questions.

“We realized we needed to change the industry’s standard practice and go beyond auditing,” Metzke said.

The methods adopted by Philips led to a form of continuous improvement, which creates more resilient supply chains. This was a bonus during COVID-19 too.

In turn, suppliers’ production becomes more dependable, their costs go down, they build a safer working environment and their own management practices become better. “Their environmental footprint goes down, so they really see the benefits – and so do we in our supply chain,” Metzke said.

Early Efforts Pay Off

Philips takes pride in continued carbon neutrality across its operations, having achieved the status some time ahead of competitors. “We did it with an awareness of the relationship between health care and climate – and that it goes both ways: health care is polluting, but is also suffering from climate change.”

The company invested early in low carbon, in 2008 building its first system to reduce operational carbon emissions by 25% within five years.

Its aim was to understand the marginal carbon cost curve of environmental compliance, what levels of investment would be needed and by what amount carbon could be reduced.

“Using modality planning and forecasting, we saw we could shift from air freight to sea freight – and for example, for each tonne of CO₂ we would save, we would also save more than €500.” Philips has set out a sea freight plan for the years ahead, and is planning to work with shipping companies on identifying shipping lanes and setting up carbon-free shipping initiatives. “There is a lot more we can do,” said Metzke.

He added: “Others are spending on carbon offsets but we were already saving, having got our planning in order.”

“Everything we say on sustainability has the same level of assurance as financial data.” – Robert Metzke

It was after having reduced its carbon emissions five years in a row that Philips committed to operating on a carbon neutral basis globally by 2020. Its methodology included elements such as issuing innovation challenges, opting for more bio-based solutions and installing climate protection for its buildings.

“It is a continuous journey,” Metzke acknowledged, which, for Philips has included sourcing 100% of its electricity from green sources, building its own wind farms and setting up solar power purchasing agreements.

In addition, it is sharing its learnings with other suppliers across the world.

The Value Proposition

“If we can position ourselves as the leading provider of low carbon equipment, we will create value for both us and the customer,” Metzke said. “We know that what we claim is true, and we have said for many years that everything we say on sustainability has the same level of assurance as financial data.”

“Circularity is basically about designing out waste, which means preserving value and creating value.” – Metzke

Metzke says the journey to sustainability starts with value creation, but it needs to be framed in a business model. Philips’ newly launched value creation strategy aims to do just that.

Previewed by Philips CEO Roy Jakobs in January, the strategy is “a plan to create value with sustainable impact.” It is focused on organic growth, scalable innovation and improved execution...and is broader than brand perception,” Metzke stressed.

Philips aspires and intends to be the thought leader and leading partner in transforming health care and creating value for the customer, while also monetizing a fair share for itself and customers. “That sounds logical,” Metzke said.

Monetary benefits can be gained through circularity, which extends the life cycle of equipment. Refurbished equipment can be offered to customers with the same warranties, but at a lower price-point. “Circularity is basically about designing out waste  ̶  in the broad sense, which means preserving value and creating value.”

The Heart Of The Matter

At the end of the day, sustainability is a challenge, but one worth fighting for. The driver is no longer “If” but “How?”

“My key learning  is that you need to be systematic about it,” Metzke said. Leaving the responsibility to the head of HR or PR and Communications is not the right response, in his view. “It must not be a Friday afternoon program.”

He said: “It really needs to be at the heart of the matter. It needs informed leaders to build capabilities to address the key issues at all levels within the organization. It needs to be embedded in technical processes and in remuneration. And it needs to be addressed consistently and persistently.”