Social return on investment

Inequality - and a critical aspect of inequality, levels of social mobility – does not seem to be improving despite increasing levels of public and private investment and expenditure. In part the problem is the extent to which investments are made against expected outcomes, such as a measurable change in inequality or in specific aspects of inequality, as opposed to a continued reliance on outputs, which is merely a quantified summary of activity.

In the second edition of the Guide (2005), I argued that this was beginning to change – that funders were becoming more interested in understanding the difference they are making and in managing the impact of their investments and activities – and that there was an increasing convergence in how organisations manage and report on these impacts.

This is still true today, three years on, but it is also the case that these changes still have not become widespread, and there is still much disparity in how organisations,  both funders and funded, define words like outcomes and impact. 

Social return on investment (SROI)

Social Return on Investment (SROI) is a measurement approach developed from traditional cost-benefit analysis, in which the social and environmental impacts of an investment are given financial values.  Often the change created by the investment is not recognised in financial markets, especially when it relates to those who are excluded and on low incomes.

SROI is a framework for telling a story about change that builds on a set of key principles. The principles are critical because it is easier for organisations and investors to converge around a set of principles, or perhaps around a specific application of those principles.

SROI was pioneered by REDF, a US venture philanthropy fund, and the concept has since evolved into a widely used, global framework. European and UK SROI networks have been working on a set of principles.

The first principle is that stakeholders’ perceptions of the change or impact, both positive and negative, are central, which means that there may be different changes for different stakeholders. Second, for each of these changes, the role of the organisation or the investment in creating the change needs to be explained in what is often called a ‘theory of change’ which links the investment through activities, outputs, outcomes and impact. The theory of change also may be different for each stakeholder.

It is important to keep the story focused, and aspects of change relevant to both the organisation and its stakeholders.  This means making use of the idea of materiality, as developed by AccountAbility. This principle means focusing on the changes created by an organisation that should be included in order for stakeholders to make decisions based on the analysis.

This principle allows organisations to set the scope of analysis to a level which is appropriate for them, providing that there is transparency about how that scope has been determined and what information has not been included. This means that SROI can be used by all sizes of organisations at different stages of development, helping people to build management systems, governance structures, and products and services which achieve the objectives of their stakeholders.

Another principle is that not all the change may be a result of the activities of one organisation, but may involve other people or organisations, and that even without this group some stakeholders will achieve the changes they want through other means. Therefore attribution and ‘deadweight’, or ‘what would have happened anyway’, benchmarking are required. For each of the material changes an indicator is needed so that change can be measured.

SROI then calculates both the cost of the change and assigns financial proxies to the indicators of change. For some stakeholders, for example where the public sector is a funder, financial proxies can be used by reference to the savings made from the change. For other stakeholders such as beneficiaries, it may be necessary to involve stakeholders in understanding the financial value they would give to a change.

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 – thereby allowing us to compare the impacts of an organisation to the investment being made.

Growing interest in this area has meant that there needs to be some quality assurance of SROI analysis and use within organisations. In the UK, SROI UK has been set up to develop assurance of SROI work against process and principle, arguing that this will be an important basis for the consistency that investors and funders will require.

At the same time developments in SROI have being focusing on ensuring that it is cost effective for users and that there are tangible benefits for how organisations manage and report on the changes that they were set up to achieve.

Recommended resources

• UK">SROI UK
• European SROI Network
• SiMPACT Strategy Group
• Venture Competition">Global Social Venture Competition
• economics foundation">New Economics Foundation
• primer">The SROI Primer

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