Social impact and social returns

By Jeremy Nicholls
nef Associate
new economics foundation (nef)

As a society, organisations and individuals are investing in activities to tackle problems that are not being fully addressed through public agencies or private markets. Yet there has been a tendency to measure outputs (e.g., number of clients served) or processes rather than results (e.g., improved health or self-esteem), and there is a profusion of techniques for assessing effectiveness, for managing performance and for evaluating impact.

Both of these are beginning to change. First, funders are becoming more interested in understanding the difference they are making and in managing the impact of their investments and activities. There is a growing demand by funders and investors to invest in organisations that can maximise social and environmental impacts while also achieving a financial return. Second, there is an increasing convergence in how organisations manage and report on these impacts.

The new economics foundation (nef) is redefining the way we understand and measure progress, and has developed a portfolio of tools to define and measure social - as well as financial - returns. nef has recently published the Proving & Improving Toolkit, which describes a variety of methods for evaluating quality and impact, including over 20 evaluation tools for use by companies, voluntary organisations and social enterprises.

Social return on investment (SROI)

One of these tools is Social Return on Investment (SROI), which is a measurement approach, developed from traditional cost-benefit analysis, in which social and environmental benefits - that is, benefits that are not recognised in financial markets - are given financial values. This allows a charitable investment to be assessed against the same measures as a financial investment: the SROI ratio is the discounted, monetised value of the social value that has been created by an organisation, relative to the value of the investment required to achieve that impact.

SROI was pioneered by REDF, a US venture philanthropy fund, and the concept has since evolved into a widely used, global framework, which has been supported and co-developed by nef. In seeking to advance an approach to SROI that is as widely applicable and usable as possible, nef based its framework on Social Accounting principles. SROI is also consistent with other approaches, such as AA1000, as a standard for corporate reporting on sustainability performance, and Keystone, as a developing approach to civil society organisation reporting.

As SROI is derived from Social Accounting principles, it is based on the views of stakeholders - those people who are important to the organisation, who can affect or who are affected by the organisation's work. Stakeholders may include, for example, beneficiaries, staff, partners, funders and investors. SROI is used to understand how the organisation meets stakeholders' objectives and creates change, by identifying indicators of those changes and assigning them financial values. This emphasis on all stakeholders is another difference with financial return, where the return accrues to only one stakeholder, the investor. Because value can accrue to different stakeholders, and because a philanthropic investment is made in effect on behalf of others, social return captures the value generated for all stakeholders.

SROI also borrows another financial tool, the idea of materiality, developed by AccountAbility, to focus on the important, or material, impacts of an organisation - that is, those factors that should be included in order for stakeholders to make decisions based on the SROI analysis. This makes the exercise manageable.

It also requires organisations to accept and estimate that some of the people they are working with would find other ways of achieving their personal objectives - even if the organisation did not exist. That is, 'something would have happened anyway', and this, called 'deadweight', should be estimated and deducted to arrive at the impact of the organisation, a measure of the value created.

As in the financial markets, however, the investment decision is not made on the basis of the expected return alone, but also reflects accompanying assessments of risk, management and other operational factors. SROI is a story in which the return provides a hook for the analysis. It does, however, attempt to bring a quantitative approach - providing a 'voice' for values which we would all recognise but find difficult to express in financial terms - allowing us to compare the impacts of an organisation to the investment being made.

SROI case study: Getting Out to Work

Getting Out to Work (GOTW) is a Tomorrow's People programme in Merseyside that helps young ex-offenders into long-term, sustainable employment through intensive, one-to-one job coaching and personal support. Although the investment - in this case grant funding for one year - does not generate a financial return, it does produce social returns, some of which can be monetised (i.e., they can be assigned a financial value). For example, as GOTW clients gain work, they begin to pay taxes to the government while ceasing to claim welfare benefits. Furthermore, they are no longer re-offending, thus saving costs to the criminal justice system.

nef's SROI analysis demonstrated, in financial terms, the impacts the programme was having on society. In its first twelve months, GOTW exceeded both funder objectives and regional targets for employment, while reporting client re-offending rates that were 15-20 per cent lower than national averages. These outcomes translated into economic impact on a scale of 10.5:1. That is, for every £1 invested in the programme, it generated a return of £10.50. Furthermore, the analysis projected that the funder would 'recover' its investment with only 13 clients placed into sustainable employment in the year.

Jeremy Nicholls is a consultant whose work covers a range of areas relating to value creation and accountability. He leads the SROI work for the new economics foundation (nef). Jeremy is a founder and director of the Beta Model, which reports on trends and dynamics in business size and numbers in the UK; the Cat's Pyjamas, which runs programmes that help people manage a double-bottom line in their organisations; and Urban Strategy Associates, a consultancy that advises on CSR for small businesses. He also is the Chair of the Institute of Social and Ethical Accountability.

nef (the new economics foundation) is an independent 'think-and-do' tank which aims to improve quality of life by promoting innovative solutions that challenge mainstream thinking on economic, environment and social issues: www.neweconomics.org. The Measurement & Evaluation team can be contacted at +44 (0)207 820 6300. More on SROI and nef's Proving and Improving Toolkit can be found at www.proveandimprove.org. For an online SROI Primer developed by nef and London Business School, please also visit http://sroi.london.edu.