Social Return on Investment

Social Return on Investment, or SROI is an attempt to measure the social and financial value created by a non profit, NGO or business. It has not been proven to drive increased investment, but it is popular with academics and some consultancies. A number of services are now looking at analysing the 'investment' in charities as yielding a social return on investment. An example is Development Ratings which helps private donors evaluate and research charities that work in the developing countries.

SROI is an approach to understanding and managing the impacts of a project, an organisation or a policy. It is based on stakeholders and puts financial values on the important impacts identified by stakeholders which do not 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.

Development

The methodology for calculating social return on investment was first documented by REDF (formerly the Roberts Enterprise Development Fund), a San Francisco-based philanthropic fund that invests in organisations working for social benefit. Since then the approach has been developed to take into account developments in corporate sustainability reporting as well as ways developed 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 organisation to determine whether their investment or grant is economically efficient.

In 2003, New Economics Foundation 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.

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.

The monetisation principle

The question of how individuals and societies value one thing compared with another continues to absorb philosophers, psychologists, social scientists and economists. But all of us live in the real world and, having to get on with life, we make do. 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 are 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.

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.

References

Scholten, Nicholls, Olsen, Galimidi (2006). SROI A Guide to Social Return on Investment. Lenthe Publishers. ISBN 90-75458282
Nicholls, Mackenzie, Somers (2007). Measuring real value: A DIY guide to Social Return on Investment. new economics foundation.

External links

[http://cmr.berkeley.edu/search/articleDetail.aspx?article=5344 Guidelines for Social Return on Investment]
[http://www.http://www.proveandimprove.org/new/tools/sroi.php Alternative summary of SROI]
[http://www.neweconomics.org/gen/z_sys_PublicationDetail.aspx?PID=241 Measuring real value: A DIY guide to Social Return on Investment]
[http://www.redf.org/ REDF (Formerly Roberts Enterprise Development Fund)]
[http://www.catfund.com Catalyst Fund Management and Research]
[http://www.socialinvestments.com Socialinvestments.com]
[http://www.svtgroup.net SVT Group]