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 570 practitioners globally are members of the SROI Network.

The SROI method as it has been standardized by the SROI Network 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 (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

Corporate sustainability

Corporate sustainability is a business approach that creates long-term consumer and employee value by not only creating a "green" strategy aimed towards the natural environment, but taking into consideration every dimension of how a business operates in the social, cultural, and economic environment...

 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

Cost-benefit analysis

Cost–benefit analysis , sometimes called benefit–cost analysis , is a systematic process for calculating and comparing benefits and costs of a project for two purposes: to determine if it is a sound investment , to see how it compares with alternate projects...

, 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.

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

New Economics Foundation

The New Economics Foundation is a British think-tank.NEF was founded in 1986 by the leaders of The Other Economic Summit with the aim of working for a "new model of wealth creation, based on equality, diversity and economic stability"....

 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 SROI Network, published in the 2009 Guide to SROI.

Developments in the UK led to agreement between the Social Accounting and Audit (SAA) Network and the Social Return on Investment (SROI) Network 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.

In 2008, Social Evaluator BV in the Netherlands created a tool that walks users through ten steps in developing an SROI analysis. To date roughly 60 users have generated approximately 500 cases and hundreds of indicators pertaining to different industries and issue areas.

In 2009-2010 proponents affiliated with the SROI Network proposed to establish linkages between SROI analysis and IRIS

Iris

Iris commonly refers to:* Iris , part of the eye* Iris * Iris , a feminine given name* Iris , a Greek goddess* Iris , a genus of flowering plantsIris may also refer to:-Places:...

, 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.

Primary purpose

While in financial management the term ROI refers to a single ratio, SROI analysis refers 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.

The principles

The main principles are that:

• Stakeholders are central;
• An impact map can be used to understand how the organisations create change. An impact map shows the relationship between the resources available to an organisation, its activities and its outputs and the results of the outputs, called outcomes;
• Allowance must be made for attribution (of outcomes to other organisations) and for deadweight and displacement (to take account of what would have happened anyway);
• Only the material impacts will be included in the analysis where materiality is assessed by reference to public policy, best practice, local values, stakeholders and financial resources that are available;
• Financial proxies should be used to ensure that the issues that are relevant to all those affected have been included – this is sometimes called monetisation.

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.

On the pro side, the reasoning is as follows: The question of how individuals and societies value one thing compared with another continues to absorb philosophers, psychologists, social scientists and economists. But having to get on with life, we make do by using prices and we accept that the price of things reveals peoples’ preferences for one thing over another. Price is a proxy for value.

However while price may represent the exchange value – its market price – it doesn’t completely represent all the value to either the seller or the consumer or to others who may be affected. Secondly, 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.

The use of 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.

Potential benefits of SROI

• Communication: By providing both credible numbers and qualitative and narrative value information, and the systematic story to support all of these it can ‘talk’ to stakeholders with different preferences. It can help in communicating information with stakeholders and provide a means of drawing them into conversation.
• More effective decisions: If being used for planning, and not review, the focus on stakeholders can highlight interrelationships and help define activities with stronger synergies and increase planned social value. Monetised indicators can help analysis by management to consider what happens if they change their strategy. It allows them to think about whether their strategy is optimum in generating social returns, or if there may be a better means of using their resources. It can help investors more efficiently select investments that are aligned with their value objectives.
• Focus on the important: By focusing on the critical impacts, an SROI analysis can be completed relatively quickly and is an effective way of defining management information systems necessary to make it quick in future
• Investment mentality: The concept of social return helps people understand that any grant or loan into an organisation can be thought of as an investment rather than as a subsidy. The focus shifts to the creation of value, and away from the risk mentality and opportunity cost of using money here rather than there.
• Clarity on governance: If more accountable organisations are more sustainable, then understanding and explaining these impacts and then responding to them is critical. SROI analysis can help clarify impacts and focus the response. Responding to stakeholder’s means that they can influence the organisation and so the organisation’s governance will be better related to stakeholders requirements.

Potential limitations of SROI

• Benefits that cannot be monetised: There will be some benefits that are important to stakeholders but which cannot be monetised. 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. 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.
• External accreditation: There is no external accreditation, and no brand or mark is available.
• Intensive for the first time: If an organisation does not have an existing social accounting system, SROI will be more time intensive the first time but is designed to focus on the most important areas, 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 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.

Further reading

• Scholten, Nicholls, Olsen, Galimidi. SROI A Guide to Social Return on Investment, Lenthe Publishers, 2006. ISBN 90-75458282
• Nicholls, Mackenzie, Somers. Measuring real value: A DIY guide to Social Return on Investment, New Economics Foundation, 2007.

External links

• Grassroots Business Fund
  Grassroots Business Fund
  The Grassroots Business Fund is a non-profit based in Washington, DC. It has field offices in Ghana, Kenya, and India. Their mission is to build and support high-impact enterprises that provide sustainable economic opportunities to thousands of people at the base of the economic pyramid...
  
  
• http://www.thesroinetwork.org/
• New Philanthropy Benchmarking: Wisdom for the Passionate "Selected Blended ROI & Present Value Model Issues and Responses," p. 269. United University Press (2002).
• J-InterSect Research Review Metrics to Measure Effective Philanthropy Benchmark Highlight: The Roberts Enterprise Development Fund has developed enhanced SROI computing methods, enabling foundations to measure resource productivity and thus increase philanthropic performance.
• Guidelines for Social Return on Investment
• Global Social Venture Competition - free downloadable resources on how to begin measuring impact in the context of a startup company
• Alternative summary of SROI
• Measuring real value: A DIY guide to Social Return on Investment
• REDF (Formerly Roberts Enterprise Development Fund)
• The USA SROI Network
• Catalyst Fund Management and Research
• Socialinvestments.com
• SVT Group - free downloadable resources on how to measure impact and SROI for impact investors, companies, nonprofits
• http://sroi.london.edu/
• http://www.socialevaluator.eu