Philanthropy Impact

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Social return on investment

 

By Jeremy Nicholls
, Director, SROI UK

Highlights:

  • SROI is a principles based framework to account for the social environmental and economic value created or destroyed by an activity
  • SROI principles can be applied flexibly for different purposes in different sizes of organisations.
  • Disparity in how organisations define outcomes and impact remains a barrier to impact measurement.
  • Decisions are based on the SROI ratio but also on the analysis of value that allows a ratio to be calculated.
Read more about 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 the second and third editions of the Guide (2005 and 2008), 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.

There is more progress but there are still differences in how organisations both funders and funded, define words like outcomes and impact. There are more initiatives to establish common outcomes and indicators but these are often led by funders.

Social return on investment (SROI)

Social Return on Investment (SROI) is a measurement approach that draws on cost-benefit analysis, sustainability reporting and financial accounting. It identifies material outcomes resulting from an investment and combines qualitative, quantitative and aggregated measures (through financial proxies) of those outcomes. The aim is to increase equality and reduce environmental degradation by giving a voice to people who are affected by an organisations activities but who are unable to ensure that that voice is taken account of in making investment decisions.

SROI is a framework for telling a story about change that is built 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.

The outcomes and indicators depend on the context and the stakeholders. As a result SROI Network support an open source database of values, outcomes and indicators which can be added to by anyone – www.wikivois.org

SROI was pioneered by REDF, a US venture philanthropy fund, and the concept has since evolved into a widely used, global framework. The international SROI Network is a membership body that provides a forum for both development and consistent use of SROI principles within different settings (www.thesroinetwork.org).

The first principle is value is created through positive or negative change experienced by groups of people. The second principle is that stakeholders, those affected, must be involved in determining material positive and negative outcomes. The third principle is that only the material outcomes should be included. The fourth is that the outcomes should be valued, using financial proxies, as part of determining materiality and then to ensure stakeholder value is taken account of in making decisions. The fifth principle is that only the outcomes that result from an activity should be included which may result in attributing a share of outcomes to others or in widening the activity to include other influencers.

The final two principles reflect the fact that as with all socially constructed information judgements are required and so the resulting information should be made transparent to users and should be appropriately verified.

These principles mean 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. Whatever the audience and purpose all the principles should be considered.

The resulting analysis can be presented in a number of ways. One of which is a measure of effectiveness in turning investment into value as the SROI ratio. Another would be to show the benefit and the cost creating a surplus or deficit.

As in the financial markets, however, decisions are not made on the basis of the expected return alone, but 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.

The SROI Network provides an assurance process to test the appropriate application of principles.

Case Study

FRC Group is a leading social business, running commercial businesses that produce financial profits and create a social dividend by giving people in poverty and unemployment the opportunity to change their lives.

The businesses within the FRC Group, Furniture Resource Centre and Bulky Bobs, create an impact by getting quality furniture to low-income households, and by creating training opportunities for long-term unemployed people to develop the skills, experience and qualifications needed to gain employment.

FRC Group has been publishing quantitative and qualitative data and analysis of its social, environmental and economic impacts since 2001. The group began to explore using social return on investment in partnership with Adam Richards of Liverpool John Moores University. To date, four areas of FRC Group activity have been the subjects of social return on investment analyses. These have shown ratios of return between 1:1.52 and 1:2.19.

As a result of starting to use SROI in 2005, FRC Group has gained a greater understanding of the relationships between the different elements of its businesses and training programmes and how they produce the impacts against a triple- bottom line of economic, social and environmental dividends. FRC Group has plans to increase the role SROI plays in understanding and reporting on our impacts and also in the strategic planning process for existing businesses and new developing businesses and projects.

Verity Timmins, impact manager at FRC Group, says: "For FRC Group using SROI has been a fascinating process which has fine tuned our understanding of the impacts that are achieved as we improve our performance, and exposed areas in which we can do more."

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About the author

Jeremy Nicholls is the chief executive of the Social Return on Investment (SROI) Network, He is a director of FairPensions, a director of the FRC Group (a social business based in Liverpool UK), the Chair of the Social Impact Analysts Association, a director of Social Evaluator (an online platform for the analysis of social returns) and a member of the IRIS advisory committee. He lectures at several Universities including the Said Business School at Oxford University and Hult International Business School.

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