Local governments in Australia play a critical role in delivering services and infrastructure that support community well-being and development. As these entities navigate an increasingly complex environment, effective risk management becomes essential. The development of a Risk Appetite Statement (RAS) is a strategic tool that helps councils balance risk and opportunity while achieving their objectives. Guided by ISO 31000, a RAS outlines the level of risk a local government is prepared to accept in pursuit of its strategic goals, ensuring informed decision-making and robust governance.
The Importance of a Risk Appetite Statement
A well-crafted RAS provides a clear framework for local governments to assess and manage risks consistently across all levels of operations. It helps align risk-taking with strategic objectives, ensuring resources are allocated efficiently and priorities are met. For example, a council might have a higher risk appetite for innovative community programs that offer long-term benefits, while maintaining a conservative stance on risks related to regulatory compliance or environmental sustainability.
Key Components of a Risk Appetite Statement
- Strategic Alignment: The RAS should directly support the strategic objectives outlined in the council’s community strategic plan. It must reflect the community’s priorities and aspirations, balancing the pursuit of goals with the inherent risks in delivering outcomes. For instance, if a council’s strategic plan emphasizes urban development, the RAS might indicate an open risk appetite for infrastructure projects that drive growth, provided they comply with safety and environmental standards.
- Risk Categories and Appetite Levels: The RAS should classify risks into categories such as financial, operational, reputational, and environmental. Each category should have a defined risk appetite level—ranging from minimal to risk-positive—indicating how much risk the council is willing to take. For example, in the financial category, a council might have a cautious risk appetite, accepting minor budget variations but avoiding actions that could jeopardize long-term financial sustainability.
- Risk Tolerances: While the RAS sets an overall risk-taking tone, establishing specific risk tolerances helps operationalize these principles. These tolerances define acceptable risk thresholds, allowing councils to monitor and manage exposure effectively. For example, a council may accept minor service delivery disruptions during the implementation of new technologies but will address any outages exceeding predefined durations promptly.
- Implementation and Monitoring: Successful implementation of a RAS requires integration into the council’s governance and risk management framework. It should inform the enterprise risk management policy, providing a basis for risk assessment, mitigation, and reporting processes. Regular monitoring and review of the RAS are essential to ensure it remains relevant and responsive to changes in the council’s operating environment.
Practical Application of a Risk Appetite Statement
Consider a local government facing decisions on expanding public transportation infrastructure. By leveraging a RAS, the council can evaluate potential projects against its risk appetite and strategic goals. If the RAS indicates an open risk appetite for infrastructure that enhances community mobility, the council might pursue ambitious projects with innovative solutions. However, it would also set boundaries to ensure these projects meet safety standards and budget constraints.
Another example involves environmental management. A council may have a cautious risk appetite for activities affecting local ecosystems. This would entail strict adherence to environmental regulations and a preference for projects that incorporate sustainable practices. However, the council might still be open to piloting new technologies that promise significant environmental benefits, provided risks are well-managed.
Adapting to Changing Conditions
Local governments operate in dynamic environments where new risks and opportunities continuously emerge. Therefore, a RAS must be adaptable, with regular reviews and updates to reflect changes in strategic priorities, community expectations, or external factors. ISO 31000 recommends periodic reassessment of the RAS to ensure it remains aligned with the council’s objectives and the broader risk landscape.