Risk Appetite vs. Risk Tolerance: What's the Difference and Why It Matters
CovaCtrl
3 min read
Risk appetite and risk tolerance are often used interchangeably, but confusing them leads to weak decision-making and ineffective risk management. Understanding the difference is essential to connect strategy with day-to-day operations.
What Is Risk Appetite?
Risk appetite defines how much risk an organisation is willing to accept to achieve its strategic objectives.
It is set by the board and senior management and expresses the organisation's overall attitude toward risk. In simple terms, it answers the question: How much risk are we willing to take to achieve our goals?
Risk appetite is typically high-level and qualitative, providing direction rather than limits.
What Is Risk Tolerance?
Risk tolerance translates risk appetite into concrete, operational boundaries.
It defines how much deviation from objectives is acceptable before action is required. It answers the question: When does risk become unacceptable?
Risk tolerance is more specific and often measurable, making it usable in daily operations and monitoring.
What Is the Difference Between Risk Appetite and Risk Tolerance?
Why Is the Difference Crucial?
Risk appetite without risk tolerance stays theoretical. Risk tolerance without risk appetite becomes arbitrary. When both are clearly defined and aligned, organisations ensure that strategic intent is reflected in operational decisions—and that risks are identified and addressed before they escalate.
How Should They Work Together?
Risk appetite sets the direction. Risk tolerance defines the limits. Together, they turn abstract risk thinking into practical, actionable risk management.
