What does risk tolerance refer to?

Risk tolerance refers to the level of risk an organization is willing to accept in pursuit of its objectives. It reflects the organization's willingness and capacity to take risks based on its mission, values, and the perspectives of its stakeholders. This tolerance can vary greatly depending on the organization's context, strategy, and the specific risk under consideration. Understanding risk tolerance is crucial for effective risk management because it helps guide decision-making on what risks to undertake, how to mitigate them, and how to balance potential rewards against potential consequences.

An organization's risk tolerance is shaped by various factors, including financial resources, regulatory requirements, and the overall risk culture within the organization. By clearly identifying and articulating its risk tolerance, an organization can create more effective risk management practices that align with its strategic goals and stakeholder expectations.