Risk appetite and tolerance
Risk appetite can be defined as ‘the amount and type of risk that an organisation is willing to take in order to meet their strategic objectives. Organisations will have different risk appetites depending on their sector, culture and objectives. A range of appetites exist for different risks and these may change over time.
Risk appetite and tolerance need to be high on any board's agenda and is a core consideration of an entreprise risk management approach. IRM’s guidance provides practical direction, advice and information to support boardroom debate.
While risk appetite will always mean different things to different people, a properly communicated, appropriate risk appetite statement can actively help organisations achieve goals and support sustainability.
“The risk appetite statement is generally considered the hardest part of any enterprise risk management implementation. However, without clearly defined, measurable tolerances the whole risk cycle and any risk framework is arguably at a halt”. Jill Douglas, Head of Risk, Charterhouse Risk Management
Risk appetite and performance
While risk appetite is about the pursuit of risk, risk tolerance is about what an organisation can actually cope with.
Organisations have to take some risks and avoid others. To do so, they need to be clear about what successful performance looks like. This question may be easier to answer for a commercial organisation than for a government department, but can usefully be asked by boards in all sectors.
Putting it into practice
We have sought to develop an approach to risk appetite that:
Is theoretically sound
Is practical and pragmatic: we do not want to create a bureaucracy, instead we are looking to help find solutions that can work for organisations of all shapes and sizes
Will make a difference.
We have developed two guidance documents. An Executive Summary aimed at boards and a detailed guidance document for risk professionals.
IRM's practical guidance
The full document Risk appetite and tolerance: guidance for practitioners can be downloaded FREE by IRM members from the Online Resource Centre.
Non-members can purchase the document for £150. To do so, please contact:
+44 (0) 20 7709 9808
Practical learning opportunity
Risk appetite is a complex area involving the balancing of threats against opportunities and managing the differing expectations of regulators and other stakeholders. IRM’s one-day workshop will explain this role and how to implement an effective risk appetite framework and system. Read more
Risk appetite webinar