Social return on investment

Social return on investment (SROI) is a principles-based method for measuring extra-financial value (i.e., environmental and social value not currently reflected in conventional financial accounts) relative to resources invested. It can be used by any entity to evaluate impact on stakeholders, identify ways to improve performance, and enhance the performance of investments.

A network was formed in 2006 to facilitate the continued evolution of the method. Over 700 globally are members of this network called Social Value UK (formerly the SROI Network).

The SROI method as it has been standardized by the Social Value UK provides a consistent quantitative approach to understanding and managing the impacts of a project, business, organisation, fund or policy. It accounts for stakeholders' views of impact, and puts financial 'proxy' values on all those impacts identified by stakeholders which do not typically have market values. The aim is to include the values of people that are often excluded from markets in the same terms as used in markets, that is money, in order to give people a voice in resource allocation decisions.

Some SROI users employ a version of the method that does not require that all impacts be assigned a financial proxy. Instead the "numerator" includes monetized, quantitative but not monetized, qualitative, and narrative types of information about value.

Development

While the term SROI exists in Cost–benefit analysis, a methodology for calculating social return on investment in the context of social enterprise was first documented in 2000 by REDF^[1] (formerly the Roberts Enterprise Development Fund), a San Francisco-based philanthropic fund that makes long-term grants to organizations that run businesses for social benefit. Since then the approach has evolved to take into account developments in corporate sustainability reporting as well as development in the field of accounting for social and environmental impact. Interest has been fuelled by the increasing recognition of the importance of metrics to manage impacts that are not included in traditional profit and loss accounts, and the need for these metrics to focus on outcomes over outputs. While SROI builds upon the logic of cost-benefit analysis, it is different in that it is explicitly designed to inform the practical decision-making of enterprise managers and investors focused on optimizing their social and environmental impacts. By contrast, cost-benefit analysis is a technique rooted in social science that is most often used by funders outside an organization to determine whether their investment or grant is economically efficient, although economic efficiency also encompasses social and environmental considerations.

In 2002, the Hewlett Foundation's Blended was brought forward by a group of practitioners from the US, Canada, UK and Netherlands who had been implementing SROI analyses together to draft an update to the methodology. A larger group met again in 2006 to do another revision which was published in 2006 in the book Social Return on Investment: a Guide to SROI. New Economics Foundation in the UK began exploring ways in which SROI could be tested and developed in a UK context, publishing a DIY Guide to Social Return on Investment in 2007.

The UK government's Office of the Third Sector and the Scottish Government commissioned a project beginning in 2007 that continues to develop guidelines that allow social businesses seeking government grants to account for their impact using a consistent, verifiable method. This resulted in another formal revision to the method, produced by a consortium led by the Social Value UK, published in the 2009 Guide to SROI.^[2]

Developments in the UK led to agreement between the Social Value International and the Social Value UK on core principles. As of 2009 all but one of the seven identified principles are now common to the two frameworks. These are:

Involve stakeholders.
Understand what changes.
Value the things that matter.
Only include what is material.
Do not over-claim.
Be transparent.
Verify the result.

'Value the things that matter' includes the use of financial proxies and monetisation of value and is unique to the SROI approach.

Since 2008 Social E-valuator from The Netherlands have been working on solutions for impact measurement. In 2013 Social E-valuator built a brand new online software platform for measuring impact and late 2014 they have launched an inclusive impact measurement platform called Sinzer.^[3] This enables people to map impact, collect data in an efficient way and analyze the results. The online tool from Sinzer is created in such a way that organizations can make better decisions, improve impact and be accountable to stakeholders.

More recently, Social Asset Measurements Inc.,^[4] a Canadian software and consulting company, developed the Social Return Intelligence Suite, which is made up of two interlinked software products: The Ira Impact Reporting & Management Suite (IIRM) and the Sabita Indicator & Financial Proxy Database Service (SDS). Sabita was created with funding from the National Research Council of Canada and houses over 500 indicators and financial proxies, which are adjusted for inflation and graded according to the SAM Factor – a proprietary algorithm that provides a grading from 0-10 based on the quality of the sources used in creating the financial proxy. Ira allows non-SROI practitioners to report within the SROI framework, creating monetized and non-monetized impact reports, as well as outcome and output reports.

In 2009–2010 proponents affiliated with the Social Value UK proposed to establish linkages between SROI analysis and IRIS,^[5] an initiative to create a common set of terms and definitions for describing the social and environmental performance of an organization. Discussions about how best to do this are ongoing.

Some organisations that have used SROI have found it to be a useful tool for organizational learning.^[6]

Primary purpose

While in financial management the term ROI refers to a single ratio, unlike Social Earnings Ratio (S/E Ratio), SROI analysis does not refer not to one single ratio but more to a way of reporting on value creation. It bases the assessment of value in part on the perception and experience of stakeholders, finds indicators of what has changed and tells the story of this change and, where possible, uses monetary values for these indicators. It is an emerging management discipline: a skill set for the measurement and communication of non-financial value. Therefore, the approach distinguishes between "SROI" and "SROI Analysis." The latter implies: a) a specific process by which the number was calculated, b) context information to enable accurate interpretation of the number itself, and c) additional non-monetized social value and information about the number's substance and context.^[7]

The principles

There are seven principles of SROI.^[8]^[9] These are:

1. Involve stakeholders (i.e. everyone who has a 'stake' or an interest in the subject of the SROI): Inform what gets measured and how this is measured and valued in an account of social value by involving stakeholders
2. Understand what changes (for those stakeholders): Articulate how change is created and evaluate this through evidence gathered, recognising positive and negative changes as well as those that are intended and unintended
3. Value what matters (also known as the 'monetisation principle' – see below): Making decisions about allocating resources between different options needs to recognise the values of stakeholders. Value refers to the relative importance of different outcomes. It is informed by stakeholders' preferences
4. Only include what is material: Determine what information and evidence must be included in the accounts to give a true and fair picture, such that stakeholders can draw reasonable conclusions about impact
5. Do not over-claim: Only claim the value that activities are responsible for creating
6. Be transparent: Demonstrate the basis on which the analysis may be considered accurate and honest, and show that it will be reported to and discussed with stakeholders
7. Verify the result: Ensure appropriate independent assurance

Monetisation principle

The translation of extra-financial value into monetary terms is considered an important part of SROI analysis by some practitioners, and problematic when it is made a universal requirement by others. Essentially, the monestisation principle assumes that price is a proxy for value.

While prices represent exchange value – the market price at which demand equals supply – they do not completely represent all the value to either the seller or the consumer. In other words, they do not capture economic surplus (consumer or producer surplus). They also do not include the positive or negative value (i.e., externalities) for others who may be affected by an exchange. Moreover, prices will depend in part on the distribution of income and wealth: different distributions result in different prices which result in different proxies for value. Hence market prices do not always accurately reflect what people value.

Proponents of SROI argue that using monetary proxies (market prices or other monetary proxies) for social, economic and environmental value offers several practical benefits:

it makes it easier to align and integrate performance management systems with financial management systems;
it aids communication with internal stakeholders, especially those responsible for finances and resource allocation, and with those who prefer quantitative to qualitative ways of learning;
it induces transparency since it precipitates the clarification of which values have been included and which have not been included;
it permits sensitivity analysis to show which assumptions are more important in that the result is more affected by changes in some assumptions than others;
it helps identify the critical sources of value and so streamlines performance management.

Despite these benefits, on the con side there is concern that monetization lets the consumer of SROI analysis off the hook by too easily allowing comparison of the end number at the expense of understanding the actual method by which it was arrived at—a comparison which would be an apples to oranges comparison in nearly every case.

The SROI methodology has been further adapted for use in planning and prioritization of climate change adaptation and development interventions. For example, the Participatory Social Return on Investment (PSROI) framework builds on the economic principles of SROI and CBA and integrates them with the theoretical and methodological foundations of Participatory Action Research (PAR), Critical systems thinking, and Resilience Theory and strength-based approaches such as Appreciative Inquiry and asset-based community development to create a framework for the planning and costing of adaptation to climate change in agricultural systems ^[10] PSROI thus represents the convergence of two theoretical tracks: Adaptation prioritization, planning and selection, and the economics of adaptation. The main divergence, then, between SROI and PSROI is that while SROI typically analyzes pre-defined interventions, PSROI involves a participatory intervention prioritization process that is antecedent to SROI-style economic analyses.

Potential limitations

Benefits that cannot be monetised: There will be some benefits that are important to stakeholders but which cannot be monetised.^[11] An SROI analysis should not be restricted to one number, but seen as a framework for exploring an organisation’s social impact, in which monetisation plays an important but not an exclusive role.
Focus on monetisation: One of the dangers of SROI is that people may focus on monetisation without following the rest of the process, which is crucial to proving and improving.^[12] Moreover, an organisation must be clear about its mission and values and understand how its activities change the world – not only what it does but also what difference it makes. This clarity informs stakeholder engagement. Therefore, if an organisation seeks to monetise its impact without having considered its mission and stakeholders, then it risks choosing inappropriate indicators; and as a result the SROI calculations can be of limited use or even misconstrued.
Needs considerable capacity: SROI is time- and resource-intensive.^[13]^[14] It is most easily used when an organisation is already measuring the direct and longer-term results of its work with people, groups, or the environment.
Some outcomes not easily associated with monetary value: Some outcomes and impacts (for example, increased self-esteem, improved family relationships) cannot be easily associated with a monetary value. In order to incorporate these benefits into the SROI ratio proxies for these values would be required. SROI analysis is a developing area^[15] and as SROI evolves it is possible that methods of monetising more outcomes will become available and that there will be increasing numbers of people using the same proxies.

References

↑ Millar; Hall (2012). "Social Return on Investment (SROI) and Performance Measurement". Public Management Review. 15: 923–941. doi:10.1080/14719037.2012.698857.
↑ The Social Value UK website
↑ The website of Sinzer, online platform for measuring impact
↑ Social Asset Measurements Inc.
↑ IRIS: Impact Reporting and Investment Standards
↑ Millar; Hall (2012). "Social Return on Investment (SROI) and Performance Measurement.". Public Management Review. 15: 923–941. doi:10.1080/14719037.2012.698857.
↑ How Has SROI Helped Me?
↑ A Guide to Social Return on Investment, Society Media (2009) p. 9
↑ Social Return on Investment Position Paper, New Philanthropy Capital (2010) p. 2
↑ Sova C, Chaudhury A, Helfgott A, Corner-Dolloff C (2012). "Community-based adaptation costing: An integrated framework for the participatory costing of community-based adaptations to climate change in agriculture", Working Paper No. 16., CGIAR Research Program on Climate Change,http://link.springer.com/article/10.1007/s11027-014-9600-5==Further applications== Agriculture and Food Security (CCAFS): Cali, Colombia.
↑ Social Return on Investment Position Paper, New Philanthropy Capital (2010) p. 6
↑ Arvidson et al (2010) The Ambitions and Challenges of SROI. TSRC Working Paper 49, pp. 9-10
↑ SROI Act II: A Call to Action for Next Generation SROI. Gair, C (2009) REDF pp. 6-7.
↑ Millar & Hall (2012) Social Return on Investment (SROI) and Performance Measurement. In Public Management Review, DOI:10.1080/14719037.2012.698857, p.12
↑ Arvidson et al (2010) The Ambitions and Challenges of SROI. TSRC Working Paper 49, p. 3

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