Enterprise risk management consists of several fundamental components, including risk appetite. Despite the term “risk appetite” often being used interchangeably with “risk tolerance,” it is an entirely different concept. It refers to the type and amount of risk that an organization accepts as it pursues its business objectives. Determining risk appetite guides decision-makers as they choose different strategies and operations for business.
Each company’s risk appetite varies, depending on several things. Different factors, such as company culture, industry, and the nature of objectives that a business pursues, alter a company’s risk appetite. The amount of available resources that companies have also affects, their risk appetite since companies with more resources may be open to more risk. Over time, many of these factors change, meaning that risk appetite also changes.