What is Risk Appetite?

Risk appetite refers to the level of risk that an organization is willing to accept in pursuit of its objectives. It is a measure of how much risk an organization is willing to take on in order to achieve its goals. A board can create a risk appetite statement to provide direction at an enterprise level and for individual business processes. Business leaders usually create a risk appetite statement, which is tied directly to an organization’s risk tolerance, after consulting with staff and subject matter experts (SMEs).

Risk Appetite Scenarios

Here are three scenarios where companies would need to make a decision while utilizing risk appetite:

1. A company is considering expanding into a new market. Board members need to assess the level of risk involved in entering the market and determine if it aligns with their risk appetite. This will help them decide whether to proceed with the expansion or not.
2. A company is developing a new product that requires significant research and development costs. Board members need to evaluate the potential risks and uncertainties associated with the project and determine if it falls within their risk appetite. This will help them decide whether to allocate resources to the project or pursue alternative opportunities.
3. A company is considering investing in a new technology or innovation that has the potential to disrupt their industry. Its board needs to assess the risks and rewards of adopting the new technology and determine if it aligns with their risk appetite. This will help them decide whether to embrace the innovation or stick with their current strategies.

Further Reading

• Risk Tolerance vs. Risk Appetite: What's the Difference?
• Understanding Strategic Risk Assessment
• What is a Risk Assessment Matrix? (and How to Build One)