Understanding and appropriately applying the concepts of risk tolerance and risk appetite is crucial for humanitarian organizations to ensure that they are operating within their ability to manage risk. Humanitarian action is taking place in inherently high-risk environments and humanitarian organizations are often under pressure to take on most of that risk under the current structure of funding agreements. The concepts of risk tolerance and risk appetite are particularly important for humanitarian actors to understand in order to shift from the current state of risk transfer in funding agreements to a more equitable sharing of risks among stakeholders in humanitarian operations.
On 8 September, ICVA and PHAP organized a webinar focusing on the twin concepts of risk tolerance and risk appetite. Following an introductory briefing on these concepts, we discussed with a panel of experts the practical challenges in identifying risk appetite and tolerance for NGOs. This was the second event of the Learning Stream on Risk Management in Practice, aimed at exploring the current state of risk management in the humanitarian sector.
ABOUT RISK APPETITE AND RISK TOLERANCE
For this next instalment in the ICVA series on risk management in the humanitarian space, we examined the concepts of risk tolerance and risk appetite. Risk appetite is the willingness or desire to take on risk. While this can (and should) vary between organisations, risk appetite in the humanitarian community is generally high due to the inherently high-risk contexts in which humanitarian operations take place. If risk appetite is the willingness to take on risk, risk tolerance is the ability to do so. Tolerance may vary depending on the individual risk areas faced by humanitarian organizations in their operations.
Defining and achieving an appropriate balance between risk appetite and tolerance are critical to ensure that an organization is operating within its ability to manage risk. In the humanitarian sector, this challenge is evident in the prevalence of “zero tolerance” approaches to risk that are often present in partnership arrangements between donors and NGOs. Pressure on NGO partners can be high to accept levels of risk in funding agreements – risk levels that may be higher than the organization’s ability to manage them well.
Ultimately, it is in the interest of all stakeholders to ensure that risk is shared appropriately between actors in the humanitarian system. However, effective risk sharing agreements can only be built when there’s a shared and solid understanding among partners and donors on concepts such as risk appetite and tolerance.