What does a risk appetite statement indicate?

A risk appetite statement is a crucial element in an organization's risk management framework, as it articulates the level and types of risk that the organization is willing to accept in pursuit of its strategic objectives. It serves as a guiding principle for decision-making, ensuring that the organization undertakes risks that are aligned with its overall goals and capacities.

By defining the boundaries of acceptable risk, the risk appetite statement allows for informed risk-taking and helps to create a clear understanding among stakeholders regarding the organization's risk tolerance. For instance, a company may decide to take on higher risks in innovative projects to foster growth, while remaining more conservative in traditional operational areas.

This statement is not about the minimum returns expected from investments, regulatory standards, or operational funding sources; instead, it specifically focuses on the organization's willingness to accept certain risks to achieve its strategic objectives. It provides a framework within which risk management practices can develop and align with the organization's overall vision and strategy.