We utilise a framework of inter-related processes and methodologies to aid us in the assessment and management of business risks. The application of these processes to the risks associated to sustainability practices allows a defined strategy for managing a portfolio of social, environmental and economic risks.

The Priority Risk Management Process
A four-stage cyclical process serves as our framework for assessing business risks:

Identification: By considering the three elements of sustainability (social, environmental and economic responsibilites), an extensive list of possible risks to the business is compiled with no preference to priority.

Prioritisation: The prioritisation of risks is undertaken separately but in parallel for the three elements, as their severities are not necessarily directly comparable. Risks with a high consequence are identified and taken forward for senior management attention. To ensure timeliness, risks are reviewed periodically and as material events take place.

Action: For each priority risk, ownership is agreed, actions identified and key performance indicators assigned. While risks are identified and prioritised by senior management, the actions to be taken are identified within the relevant division(s).

Monitor and Report: The implementation and effectiveness of the system and actions are monitored on an ongoing basis using key performance indicators wherever possible. Senior management is informed of risk, action status and applicability of the system through regular reporting. A corporate sustainability report is issued demonstrating robustness of the system and achievement of indicators.

Linking business risk to stakeholder engagement is an issue that invites universal discussions amongst sustainability business experts. For the Corporation, our strategy for competitive advantage illustrates the synergies between these two factors. Based upon the accepted Michael Porter model for competitive advantage we position the principal inputs, components of risk (cost leadership) and engagement (adding value), to develop the process for corporate focus/strategy. Through this application, we align and prioritise our resources to provide value leadership, positive stakeholder buy-in and the end strategy of sustainable competitive advantage.

Risk strategy
The prioritised business risk management process in conjunction with existing risk management practices serve as the basis for the broader enterprise-wide risk management (EWRM) strategy currently in development. This new strategy will incorporate the processes to cover business, operational, compliance and financial risks as well as the identification and management of risks linked to our business objectives. It will cover management of new and unknown risks when operating in mainland China. The strategy will provide a corporate level view of risk to allow senior management to understand the most important risks being taken by the business as a whole, how individual business areas can support the management of such risks to achiev e corporate objectives and, the application of resources in the most cost-effective manner to achieve our business goals.

Sustainability accounting
Our internal sustainability accounting methodology seeks to link sustainable business risks to financial consequence. This framework, based on our prioritised business risk model and the Corporate Sustainability Assessment questionnaire developed by the independent Sustainable Asset Management research group, is used principally to measure and systemise the actual financial costs in managing identified risks and any further sustainability costs.

The methodology employs our activity-based costing system for data comprising staff and departmental operating expenses. Added in 2004 was HKD136 million of non-risk capital costs mainly generated through the asset improvement programme. Excluded, as in 2003, were most capital and project works and extension works, which cover the majority of costs incurred in rail project and property development activities. While not presenting a 360 degree view of the company, this methodology nonetheless, enables us to utilise a common base for year-on-year measurement and analysis of quantified risk on a passenger-services basis and provides practical information to our shareholders. On comparison, costs have remained relatively constant since 2003 with increases owing mainly to increased resources employed for operational safety improvement and management activities related to the proposed rail merger. We will continually review the relevance of this metric through the development of the EWRM system.

Hazards to operations
We control our hazards to operation through a formalised HAZOP (Hazards of Operations) management system. Based on international standards, this proactive risk management system operates through a process which is repeated regularly: hazard identification and ranking, registration and resolution, verification, endorsement by senior management, implementation and monitoring, updating of risk profiles and reviews. The purpose of the system is to reduce all risks and hazards to the ALARP (as low as reasonably practical) level.

Integrity of risk processes
A substantial portion of our efforts undertaken in preparation of the 2004 Sustainability Report focused largely on the processes and systems that support our management strategies, business risks and their related influences. Under our four-year assurance programme undertaken by PricewaterhouseCoopers, the development of these processes will continue to be analysed for integrity and suitability of purpose over the next two years. Changes and refinement in these areas are expected as our footprint of operations and our markets continue to expand.

Further reading:
Competitive Advantage
Stakeholder Engagement