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Risk appetite is a key component of enterprise risk management – it refers to the amount and type of risk that an organisation is willing to pursue or retain. Willingness to bear risk can be defined in two ways:
- An organisation’s desire or aversion to pursue opportunities in an uncertain business environment
- How much volatility around an expected outcome is tolerable in terms of capacity, regulatory compliance, ethics, reputation and alternative costs for the business.
Defining and implementing risk appetite (increasingly referred to as a risk attitude) is a strategic activity that involves the Board and top management, as it must be aligned with strategic objectives, and requires consensus and engagement from the organisation’s leadership.