diff --git a/apis/common/v1/resource.go b/apis/common/v1/resource.go
index bbefdbd..4a89432 100644
--- a/apis/common/v1/resource.go
+++ b/apis/common/v1/resource.go
@@ -77,10 +77,27 @@ type SecretKeySelector struct {
 	Key string `json:"key"`
 }
 
+// A ReferenceResolutionPolicy is a value for resolution policy for reference.
+type ReferenceResolutionPolicy string
+
+const (
+	// ReferencePolicyOptional is a resolution option.
+	// When the ReferenceResolutionPolicy is set to ReferencePolicyOptional the
+	// execution could continue even if the reference cannot be resolved.
+	ReferencePolicyOptional ReferenceResolutionPolicy = "Optional"
+)
+
 // A Reference to a named object.
 type Reference struct {
 	// Name of the referenced object.
 	Name string `json:"name"`
+	// Policy of the referenced object.
+	Policy ReferenceResolutionPolicy `json:"policy,omitempty"`
+}
+
+// IsReferenceResolutionPolicyOptional checks whether the resolution policy of relevant reference is Optional.
+func (in *Reference) IsReferenceResolutionPolicyOptional() bool {
+	return in.Policy == ReferencePolicyOptional
 }
 
 // A TypedReference refers to an object by Name, Kind, and APIVersion. It is
diff --git a/pkg/reference/reference.go b/pkg/reference/reference.go
index 06396e8..ea032a1 100644
--- a/pkg/reference/reference.go
+++ b/pkg/reference/reference.go
@@ -182,9 +182,9 @@ func (rr MultiResolutionResponse) Validate() error {
 		return errors.New(errNoMatches)
 	}
 
-	for _, v := range rr.ResolvedValues {
+	for i, v := range rr.ResolvedValues {
 		if v == "" {
-			return errors.New(errNoValue)
+			return getReferenceError(&rr.ResolvedReferences[i], errors.New(errNoValue))
 		}
 	}
 
@@ -216,11 +216,11 @@ func (r *APIResolver) Resolve(ctx context.Context, req ResolutionRequest) (Resol
 	// The reference is already set - resolve it.
 	if req.Reference != nil {
 		if err := r.client.Get(ctx, types.NamespacedName{Name: req.Reference.Name}, req.To.Managed); err != nil {
-			return ResolutionResponse{}, errors.Wrap(err, errGetManaged)
+			return ResolutionResponse{}, getReferenceError(req.Reference, errors.Wrap(err, errGetManaged))
 		}
 
 		rsp := ResolutionResponse{ResolvedValue: req.Extract(req.To.Managed), ResolvedReference: req.Reference}
-		return rsp, rsp.Validate()
+		return rsp, getReferenceError(req.Reference, rsp.Validate())
 	}
 
 	// The reference was not set, but a selector was. Select a reference.
@@ -255,7 +255,7 @@ func (r *APIResolver) ResolveMultiple(ctx context.Context, req MultiResolutionRe
 		vals := make([]string, len(req.References))
 		for i := range req.References {
 			if err := r.client.Get(ctx, types.NamespacedName{Name: req.References[i].Name}, req.To.Managed); err != nil {
-				return MultiResolutionResponse{}, errors.Wrap(err, errGetManaged)
+				return MultiResolutionResponse{}, getReferenceError(&req.References[i], errors.Wrap(err, errGetManaged))
 			}
 			vals[i] = req.Extract(req.To.Managed)
 		}
@@ -285,6 +285,13 @@ func (r *APIResolver) ResolveMultiple(ctx context.Context, req MultiResolutionRe
 	return rsp, rsp.Validate()
 }
 
+func getReferenceError(ref *xpv1.Reference, err error) error {
+	if !ref.IsReferenceResolutionPolicyOptional() {
+		return err
+	}
+	return nil
+}
+
 // ControllersMustMatch returns true if the supplied Selector requires that a
 // reference be to a managed resource whose controller reference matches the
 // referencing resource.
diff --git a/pkg/reference/reference_test.go b/pkg/reference/reference_test.go
index ec03413..a105747 100644
--- a/pkg/reference/reference_test.go
+++ b/pkg/reference/reference_test.go
@@ -91,6 +91,7 @@ func TestResolve(t *testing.T) {
 	now := metav1.Now()
 	value := "coolv"
 	ref := &xpv1.Reference{Name: "cool"}
+	optionalRef := &xpv1.Reference{Name: "cool", Policy: xpv1.ReferencePolicyOptional}
 
 	controlled := &fake.Managed{}
 	controlled.SetName(value)
@@ -204,6 +205,26 @@ func TestResolve(t *testing.T) {
 				},
 			},
 		},
+		"OptionalPolicy": {
+			reason: "No error should be returned when the resolution policy is Optional",
+			c: &test.MockClient{
+				MockGet: test.NewMockGetFn(nil),
+			},
+			from: &fake.Managed{},
+			args: args{
+				req: ResolutionRequest{
+					Reference: optionalRef,
+					To:        To{Managed: &fake.Managed{}},
+					Extract:   func(resource.Managed) string { return "" },
+				},
+			},
+			want: want{
+				rsp: ResolutionResponse{
+					ResolvedReference: optionalRef,
+				},
+				err: nil,
+			},
+		},
 		"ListError": {
 			reason: "Should return errors encountered while listing potential referenced resources",
 			c: &test.MockClient{
@@ -282,6 +303,7 @@ func TestResolveMultiple(t *testing.T) {
 	now := metav1.Now()
 	value := "coolv"
 	ref := xpv1.Reference{Name: "cool"}
+	optionalRef := xpv1.Reference{Name: "cool", Policy: xpv1.ReferencePolicyOptional}
 
 	controlled := &fake.Managed{}
 	controlled.SetName(value)
@@ -396,6 +418,27 @@ func TestResolveMultiple(t *testing.T) {
 				},
 			},
 		},
+		"OptionalPolicy": {
+			reason: "No error should be returned when the resolution policy is Optional",
+			c: &test.MockClient{
+				MockGet: test.NewMockGetFn(nil),
+			},
+			from: &fake.Managed{},
+			args: args{
+				req: MultiResolutionRequest{
+					References: []xpv1.Reference{optionalRef},
+					To:         To{Managed: &fake.Managed{}},
+					Extract:    func(resource.Managed) string { return "" },
+				},
+			},
+			want: want{
+				rsp: MultiResolutionResponse{
+					ResolvedValues:     []string{""},
+					ResolvedReferences: []xpv1.Reference{optionalRef},
+				},
+				err: nil,
+			},
+		},
 		"ListError": {
 			reason: "Should return errors encountered while listing potential referenced resources",
 			c: &test.MockClient{