Companies often fail to identify potential risk factors that can affect their growth. Firms that are good at recognizing risks usually get confused among the enterprise risk terminologies and use them interchangeably. The same issue frequently comes up in the context of risk appetite and risk tolerance. Business professionals often fail to acknowledge the significance and individuality of both risk-measuring components. In her article for ISACA, Mary Carmichael talks about the contribution of risk appetite and risk tolerance in enterprise risk management.
Understanding Risk Appetite
Risk appetite is the amount of risk an enterprise is willing to take to meet its objectives. The awareness of risk appetite makes it easier to analyze what risks a company should take and what it should avoid. Risk appetite brings more clarity to the enterprise risk management strategies and familiarizes businesses with their internal and external conflicts, goals, and resources.
The Contribution of Risk Tolerance in Enterprise Risk Management
Risk tolerance is the acceptable amount of deviation from the risk appetite goals set by an organization. Risk tolerance provides a limit to the risk appetite. To put it succinctly, risk appetite is about taking risks and risk tolerance is about controlling the risk factors.
How Risk Appetite Is Related to Risk Tolerance
Both risk appetite and risk tolerance focus on providing valuable insights to facilitate effective decision-making. They are equally important for enterprise risk management. To implement risk appetite efficiently, you must integrate it into a controlled business environment that is driven by risk tolerance.
Difference Between Risk Appetite and Risk Tolerance
The key differences between risk appetite and risk tolerance involve operating insights, such as strategic or tactical. Moreover, the other differences depend on how they are conveyed to your team members, i.e., quantitatively or qualitatively.
Why Enterprise Risk Management Is Crucial
Companies should familiarize their workforce with risk management strategies and frameworks so they can improve their decision-making abilities. In addition, risk management training improves the awareness of common business risks and how they can be mitigated.
Click on the link to read the original article: https://www.isaca.org/resources/news-and-trends/isaca-now-blog/2022/risk-appetite-vs-risk-tolerance-what-is-the-difference