Our approach to risk management is incorporated in our corporate governance framework. This framework requires the management teams of each business unit to review and to regularly report on the risks they face and the controls that are in place to manage them. The identification, management and reporting of social, environmental and ethical (SEE) risks is an integral part of the overall risk management process.

ABI Disclosure Requirements

The senior management teams of each of the principal business units have identified the risks facing their businesses and have made an assessment of the impact and likelihood of those risks. They also have a process to identify changes to the risk profile and to identify weaknesses in internal control. The controls that are in place to manage each of the more significant risks in each unit have been identified and an assessment has been made of the effectiveness of these controls.

Each business unit reports regularly to the Group Chief Executive on its risks and controls. The Executive Committee reviews these risks as well as carrying out a process to identify any other significant risks affecting the group, considers the controls in place to mitigate the risks faced by the group and ensures that its focus is on managing the most important risks and meeting any changes in the risk profile.

The board reviews risk management and the effectiveness of the system of internal control through the Audit Committee. They also keep under review ways in which to enhance the control and audit arrangements in the group. The Audit Committee receives reports every six months from the Group Chief Executive on the significant risks faced by the group, an assessment of the effectiveness of controls over each of those risks and an action plan to improve controls where this has been assessed as necessary.

The internal audit department provides objective assurance and advice on risk management and control and monitors the risk management process. The group's internal audit department was reorganised in 2005/06 and a dedicated Group Director of Internal Audit appointed.

Selected risks with social, environmental or ethical dimensions

Through its business operations the group is exposed to a number of commercial risks and uncertainties, which could have a material impact on our businesses, financial condition, operations and reputation, as well as the value and liquidity of our securities. Not all of these factors are within our control and, in addition, other factors besides those listed below may have an adverse effect on the group. The section below lists some of these risks which may have social, environmental or ethical dimensions. See the annual report and accounts for the full risk disclosure.

The results of our operations depend on a number of factors relating to business performance, including the ability to outperform regulatory targets and deliver anticipated cost and efficiency savings

Earnings from our regulated water business will be affected by our ability to meet or better our regulatory targets set by Ofwat, Environment Agency, Drinking Water Inspectorate and other regulators. To meet these targets, we must continue to improve management and operational performance. In addition, earnings from a regulated business also depend on meeting service quality standards set by regulators. To meet these standards we must improve service reliability and customer service. If we do not meet these targets and standards, both our results and our reputation may be adversely affected.

Various government environmental protection and health and safety laws and regulations govern our businesses

These laws and regulations establish, amongst other things, standards for drinking water and discharges into the environment which affect our operations. In addition, our businesses are required to obtain various environmental permissions from regulatory agencies for their operation. Environmental laws and regulations are complex and change frequently. These laws and their enforcement have tended to become more stringent over time both in relation to their requirements and in the levels of proof required to demonstrate compliance and, while we believe we have taken account of the future capital and operating expenditure necessary to achieve and maintain compliance with current and foreseeable changes in laws and regulations, it is possible that new or stricter standards could be imposed or current interpretation of existing legislation amended, which will increase the group's operating costs or capital expenditure by requiring changes and modifications to its operations in order to comply with any new environmental laws and regulations.

The failure of our assets or our inability to carry out critical operations could have a significant impact on our financial position and our reputation

We may suffer a major failure in our assets which could arise from a failure to deliver the capital investment programme for our businesses or to maintain the health of our systems. Any failure could cause us to be in breach of a licence or approval and even incidents that do not amount to a breach could result in adverse regulatory action and financial consequences, as well as harming our reputation. Severn Trent Water's regulated business controls and operates water and sewerage networks and undertakes maintenance of the associated assets with the objective of providing a continuous service. The failure of a key asset could cause a significant interruption to the supply of services, which may have an adverse effect on the group's operating results or financial position. In addition water supplies may, among other things, be subject to contamination, including contamination from the development of naturally occurring compounds and pollution from man-made sources and these may have an adverse effect on our operating results or financial position. The group could also be held liable for human exposure to hazardous substances or other environmental damage.

In addition, we are subject to other risks which are largely outside our control, such as the energy costs, impact of climate change, weather or unlawful acts of third parties, including terrorist attacks, sabotage or other intentional acts which may also physically damage our business or otherwise significantly affect corporate activities and, as a consequence, affect the results of our operations.