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ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk

Zenith Hydro, a utility, has a board statement saying it will accept a maximum of 5% variation in annual project cost overruns before escalating to the board. Which risk concept does this statement most precisely describe?

This is risk tolerance. Tolerance sets the acceptable variation around a specific objective, here a 5% cost overrun before escalation. Appetite is the broader strategic level of risk the board will pursue, and capacity is the maximum risk the firm could absorb.

  1. ARisk appetite, being the overall amount and type of risk the organisation is willing to pursue to achieve objectives
  2. BRisk tolerance, being the acceptable level of variation in performance relative to a specific objectiveCorrect
  3. CRisk capacity, being the maximum risk the organisation can bear before failing
  4. DRisk culture, being the shared values and behaviours towards risk

Explanation

A numerical limit on acceptable deviation for a specific objective (project cost) is risk tolerance. Appetite is broader and strategic, usually stated for the organisation as a whole. Capacity is the absolute ceiling, far beyond an escalation trigger at 5%.

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