Why is risk management important?

Risk appetite

What is risk appetite?

Risk appetite is the level of risk an organisation is prepared to accept in order to meet its strategic objectives, deliver its values and make its target returns.

Why is a risk appetite statement important?

By considering and defining the risk appetite, the organisation can arrive at an appropriate balance between uncontrolled activity and excessive caution. It provides guidance on the level of risk permitted and encourages consistency of approach across the organisation.

The risk appetite statement is then used to inform decision making by articulating the level of risk that the organisation is willing to take in different areas of its activity and operations in order to meet its objectives. It can be useful in selecting which projects or activity to undertake, as the organisation’s desire to take on risk or mitigate risk in given areas is clearly stated.

Risk appetite changes from time to time, and the organisation may vary the amount of risk it is prepared to take dependent on time and circumstances (e.g. it may be prepared to accept a higher degree of risk if something is a strategic priority, or if there is an agreed and appropriate exit strategy). It may also be necessary to tolerate risks that fall outside of the appetite if they are beyond the organisation’s control. As such, the risk appetite statement should be reviewed – at least annually.

What does a risk appetite statement look like?

A risk appetite statement is not complex and is usually set out in a table which lists each of the organisations objectives and then describes the amount of risk for each that the Board considers it appropriate to accept.

The risk appetite descriptors and definitions used are different for every organisation usually in line with the examples list set out below. What is important is that they are meaningful and consistently understood.

Enthusiastic: Eager (perhaps willing to be innovative) about delivering activity or projects and in doing so, will accept any increased or substantial risk levels associated with this
Open: Prepared to consider different options to delivery activity or projects and will take on increased risk if this results in positive outcomes
Balanced: Will only take on modest levels of risk to achieve desired outcomes
Cautious: Will take some low risks (or only take safe options) to achieve desired outcomes but these will be limited
Averse: Prepared to take only very low levels of risk (or avoid all risk and uncertainty) to achieve desired outcomes

A simple example of a risk appetite statement is as follows:

[Organisation Name]: Risk Appetite Statement

Organisational objective	Risk Appetite	Summary Rationale	Last reviewed (date)
To maintain an excellent reputation	Cautious	Generally low appetite for reputational risk Consider that a strong reputation aligns with high standards of service and compliance with legal requirements	October 2021
To attract and retain skilled and motivated staff	Cautious	We seek to use skills, knowledge and experience of staff flexibly and in ways that provide agile and responsive service to customers. We offer and expect high degree of autonomy from staff and place high level of trust in them. We actively manage change and are transparent in communications with staff.	September 2020

This resource has been written by Angela Lomax from David Tolson Partnership, Chair of the Co-operative Governance Expert Reference Panel.