A social return on investment is a methodology that businesses, organizations, and high net-worth individuals can use to account for the value they generate that can’t be accurately displayed with financial statements, which includes environmental and social value. By using the SROI measurement method, companies have the ability to identify how effectively they are using their resources to produce value for the surrounding community.
It’s important to understand the SROI of your investments or the projects you’re funding because this information will allow you to maximize the returns on your initial investment. When companies know how to calculate the SROI of various social, economic, and environmental developments, they can improve project management for these creations. Having a clearer understanding of how the business affects the surrounding community will allow the company to more effectively communicate the value of their work to the members of this community. This information can also be relayed to internal or external stakeholders.
This type of measurement is commonly used by venture capitalists, non-profits, and philanthropists to monetize the social impact that they have. If you invest significant amounts of money into social projects and developments, you may want to use the SROI methodology to determine what effect you are having on the greater community. When you’re looking to expand your social return on investment, there are seven principles that you should consider following if you want to arrive at an accurate measurement of the social change that you have created. The following will provide a closer look at what a social return on investment is and why you should consider using it.
What is Social Return on Investment?
A social return on investment is a kind of methodology that allows businesses and individuals to determine how much social change has occurred because of their investment or similar activity. If the brunt of your investments go into philanthropic institutions or are used to develop programs and projects that are aimed at helping the greater community, it can be difficult to know whether or not you’re making a difference. The SROI methodology provides you with the ability to measure how much your investment affected the outcome.
If you find that your investments aren’t as impactful as you hoped that they would be, you can use this information to make better decisions in the future that should improve your overall impact. If you want to communicate with the stakeholders involved in your investment, an SROI will allow you to do so with tangible information. Before you start using the SROI methodology, you should know that there are two separate SROI types, which include a forecast SROI and an evaluative SROI. No matter which SROI type you use, there are seven guiding principles that comprise an SROI. These principles include:
- Involve stakeholders
- Understand what changes
- Value the things that matter
- Only include what is material
- Do not overclaim
- Be transparent
- Verify the result
1. Involve Stakeholders
The stakeholders in this situation are individuals or groups that are directly affected by the activity or program that you’re currently implementing. The economic, social, or environmental changes that you or your company are creating will affect a stakeholder. When you’re looking to use the SROI methodology, it’s important that you properly identify any stakeholders and consider them to be active participants throughout the entirety of the SROI process.
2. Understand What Changes
In order for the SROI methodology to work as intended, you will need to understand more about the changes that have occurred and whether they were negative or positive. Regardless of whether you expected these changes or didn’t even consider them, knowing what changes have occurred from your investment will allow you to better understand what the return on your investment is.
3. Value the Things That Matter
This principle involves placing monetary value on the outcomes that have resulted from the change you’ve generated. By assigning monetary value to the social, economic, or environmental changes that you’ve influenced, you can more effectively identify how much return has been generated from your initial investment.
4. Only Include What is Material
It’s important that the information you include when performing your SROI methodology is relevant to the interests of the stakeholders. For instance, you should include the outcomes of a specific activity as well as the parties involved in affecting change or being the recipient of this change.
5. Do Not Overclaim
While you’ll want your investments to enact significant social, economic, or environmental change, it’s essential that you don’t overclaim by making it appear as though you created more positive change than you actually did. The SROI accounting process involves asking questions about what would have occurred without your activities, how much your activities contributed to the eventual outcomes, and how much other entities may have contributed to the generated outcomes. Answering these questions allows you to provide your stakeholders with a wholly accurate representation of the value you provided.
6. Be Transparent
Every facet of the SROI methodology calls for transparency, which involves everything from conducting an analysis on your activities to communicating with your stakeholders about the results of your SROI. Your transparency can play a significant role in how your stakeholders react.
7. Verify the Result
Once you’ve completed your SROI analysis, you should verify the results via an extensive process known as independent assurance. By performing an external validation of your SROI results, your stakeholders can more accurately measure the outcomes of the change that you’ve created.
Forecast SROI vs. Evaluative SROI
A forecast SROI is one that you can use before the activity or program has occurred. This form of analysis is beneficial when you want to gauge and predict how an investment by yourself or your company will perform in regards to social change in the surrounding community. If you’re getting ready to fund a project that you expect will result in a certain amount of social, environmental, or economic change, a forecast SROI is a great way to determine if you’re making a sound investment.
Along with being able to predict the amount of social value that a project will have, a forecast SROI is also a great way for organizations and individuals to implement the infrastructure that’s necessary for precisely measuring change. This infrastructure includes data collection processes and relevant indicators. With this infrastructure in place, you can continue to perform SROI analyses with ease throughout the duration of the project. Obtaining an SROI analysis before the project occurs should also help you leverage your capital for the highest impact.
An evaluative SROI is designed to be held once an activity or program has had a reasonable amount of time to properly affect change. While a forecast SROI may not always be precise because of how it relies on predictive information, an evaluative SROI is only used when there are already some outcomes that can be measured with this methodology.
You should consider using an evaluative SROI in situations where you’re already tracking data related to the outcomes of the activity or project. You need this data in order to perform an evaluative SROI. If the program that you invested in involved donations of money and time, an evaluative SROI can be performed as long as you measure the amount of time and money that’s being donated. With the results that you obtain, you should be able to determine if your initial investment provided you with the results you wanted.
How Can SROI Help You?
There are a myriad of benefits that are provided to you when you perform an SROI, the primary of which is that this analysis allows you to know if you’re actually making a difference. Unless your investment is a one-time deal, an SROI can also provide many additional benefits. If you perform a forecast SROI, you should be able to identify how much social change your investment or project will cause. If the analysis doesn’t provide you with the results you wanted, the information from this SROI can be used to make better investment decisions in the future. If you want to make sound investment decisions that make an economic, environmental, or social difference, an SROI should provide you with a useful calculation.
Along with using an SROI to plan your investments and help you determine what to spend your money on, you might also want to perform an SROI to better communicate the social impact of your investment to your stakeholders. Without conducting an SROI, it’s practically impossible to provide concrete data about how you or your company is affecting the community around you. When you perform an SROI, you will be generating value for your stakeholders, obtaining the information needed to improve the social impact of your investments, and increasing your overall transparency with stakeholders. When your stakeholders are provided with this information, they will be able to hold you accountable while also involving themselves meaningfully in the project at hand.
Resources to Carry Out an SROI Analysis
If you’re ready to carry out an SROI analysis, there are many excellent resources that you can take advantage of. For instance, if you navigate to the Social Value Self-assessment Tool, you will be able to use this tool to determine how well you are currently measuring your social value and reporting on it in accordance with the seven principles of an SROI. Some of the establish calculators in the industry include the Social Impact Calculator, the Inclusionary Housing Calculator, and the Social Value Bank Calculator.
If you’re interested in joining a wider network that aims to improve the way social value is measured, you could become a member of Social Value International. To better understand how outcomes are generated, you can view outcome reports for home ownership, SMEs, vehicles, and women employment. A great guide that can help you measure your SROI can be found at this NEF Consulting page, which offers extensive tools and resources. With these resources in hand, it should be relatively simple for you to accurately measure the social impact of your investments.
*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.