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.
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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 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.
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 SROI Network, published in the 2009 Guide to SROI.[1]
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[2] 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,[3] 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.
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.[4]
The main principles are that:
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:
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.