What does a risk appetite statement define?

A risk appetite statement serves as a critical guideline for an organization, defining the types of risks it is willing to accept in pursuit of its objectives. It articulates the level and types of risk tolerance that are appropriate within the context of the organization’s strategic goals and operational framework. This enables decision-makers to understand what risks can be taken on and to what extent, allowing for informed risk-taking that aligns with their overall strategic vision.

Defining the types of risks that an organization is willing to accept ensures clarity and consistency in risk management practices and facilitates effective communication about risk within the organization and with stakeholders. This context helps in developing risk management approaches that are consistent with the organization's appetite for risk, leading to more strategic risk-taking and planning.

In contrast, while the specific financial goals of an organization are essential, they do not explicitly define what risks the organization will accept. Risk management strategies develop from understanding the risk appetite but are not articulated within the statement itself. Additionally, analyzing historical performance of risk over time can provide insights into past behaviors and outcomes, but it does not establish the current risk appetite.