How to Calculate Social Return On Investment (SROI)

A lot of people try to get to a number for SROI Ratio and it misses the truth. The point of SROI calculation isn’t necessarily to justify capital investment, it’s to understand value creation through capital allocation. - Jed Emerson

Capitalism has historically been about value creation. And yet, value creation has bent towards delivering value solely to shareholders, generating a collective tunnel vision. What about generating environmental value? And social value? Accounting for such value is difficult; perhaps we do not collectively work such value into our cost-benefit equations.

In this article, we'll explore how to account for social value by exploring how to calculate social return on investment (SROI).

Because in the impact sector, things are different. We must account for social returns for our investment of time and money. Tracking such returns requires diligent impact measurement, an incomplete yet burgeoning science.

And suppose we are ever to blur the lines between “impact-driven” and “corporate-driven” so that all sectors play a positive role in impact creation. In that case, we need to be able to measure social returns in the most-used language of value: finance.

Social Return on Investment (SROI) is a methodology aiming to assign monetary values to change created by an organization's activities (environmental, social, or otherwise).

In addition to briefly examining how to calculate SROI, we'll examine some of the challenges involved in its implementation. In part II of this series, we dive into some solutions to those challenges. For now, let’s break down what SROI offers us.

SROI Calculation

An SROI calculation is a rigorous process. It demands that we understand the impact of what it is. The change that occurred because of our intervention would not have occurred otherwise. It gives us a framework for understanding how much change we “get back” and how much impact value we have created in return for what we put into making that change happen. In short, it puts environmental and social value back into our cost-benefit equations. As per Social Value International,

Social Value Principles 

To give a very simplistic example: the SROI Ratio assigns a monetary value to inputs and outcomes, using that assignment to calculate a ratio. If that SROI Ratio is 5:1, every dollar allocated will generate (or has generated) five-dollar social value.

According to Social Value UK, there are two types of SROI: “Evaluative, which is conducted retrospectively and based on actual outcomes that have already taken place [and] Forecast, which predicts how much social value will be created if the activities meet their intended outcomes.”

The latter (forecast) is best used at the outset of an SROI journey before diving into an evaluative process. An evaluative process requires sound outcomes data. If you don’t have the systems to measure, manage, and report such data, it will be hard to implement a successful evaluative SROI process. On the other hand, forecasting enables you to allocate time and resources to effecting change and create the structures to ensure you can track how well you’re doing in making the change a reality (outcomes!).

To implement an SROI approach, a 6-step process is suggested (and explained in great detail here). The process demands comprehensive and agile data management, from identifying stakeholders to mapping outcomes and eventually calculating and reporting SROI. Something that remains a challenge across sectors, especially in the impact arena.

SROI Formula

The SROI formula is typically used to measure the value of the social, environmental, and economic outcomes created by an activity or an organization. It's expressed as a ratio, indicating how much social value (in terms of benefits to stakeholders) is created for every unit of input (such as money, time, or resources). The basic formula is:

The basic SROI formula is:

Components of the Formula:

1. Social Value Created: This is the total value generated by the activity, including both tangible and intangible benefits. It can be measured through various outcomes, like improved health, increased employment, or environmental benefits.
2. Deadweight: This refers to the portion of the outcome that would have happened anyway, even without the intervention. For instance, if a job training program claims to increase employment, but some participants would have found jobs without the program, that portion is considered deadweight.
3. Attribution: This acknowledges that other organizations or activities might have contributed to the outcome. The value is adjusted to reflect only the portion that can be attributed directly to the intervention in question.
4. Investment: The total resources invested to achieve the outcomes, which can include money, time, equipment, etc.

This formula involves:

1. Identifying Stakeholders: Determining who is affected by the activity.
2. Mapping Outcomes: Identifying and documenting the social, environmental, and economic outcomes.
3. Evidencing Outcomes: Collecting data and evidence to show that these outcomes have occurred.
4. Giving Outcomes a Value: Assigning a monetary value to each outcome.
5. Establishing Impact: Calculating the net social impact by considering what would have happened anyway and the proportion of outcomes caused by other factors.
6. Calculating the SROI Ratio: Dividing the total social value (sum of valued outcomes) by the total investment.

Social Value Example

Introduction to Social Value

Social value refers to the broader non-financial impacts of programs, organizations, or actions, particularly on the well-being of individuals, communities, and the environment. These impacts can be both positive and negative, but the focus is often on how to maximize positive contributions to society.

Community Gardening as a Social Value Example

Community gardening serves as an excellent example of social value in action. These gardens provide more than just an opportunity to grow fresh produce; they foster community engagement, improve mental health, and contribute to environmental sustainability.

1. Community Engagement and Inclusion: Community gardens bring people together from diverse backgrounds. They become platforms for social interaction, learning, and mutual support. This inclusivity strengthens community bonds and promotes a sense of belonging.
2. Mental Health Benefits: The act of gardening itself is therapeutic. It reduces stress, improves mood, and enhances psychological well-being. Participants of community gardens often report feeling a sense of accomplishment and connection to nature, which are crucial for mental health.
3. Environmental Impact: These gardens contribute positively to the environment by promoting biodiversity, fostering the growth of local flora and fauna, and improving air and soil quality. They also educate community members about sustainable practices and the importance of environmental stewardship.
4. Economic Benefits: Community gardens can provide fresh produce at a lower cost, which is particularly beneficial for low-income families. They can also stimulate local economies by creating jobs and supporting local businesses related to gardening supplies and produce.
5. Educational Opportunities: They serve as outdoor classrooms where people of all ages can learn about agriculture, nutrition, and environmental science. This educational aspect is especially valuable for urban areas where access to natural spaces and practical gardening experience might be limited.

Example Calculation:

Imagine a community health program designed to improve local health outcomes. Let's assume the following:

• Total Investment: $100,000
• Total Measured Health Improvements (Quantified in monetary terms): $400,000
• Deadweight (Portion of health improvements that would have occurred without the program): 20%
• Attribution (Other factors contributing to the health improvements): 10%

First, adjust the total measured impact for deadweight and attribution:

• Deadweight Adjustment: $400,000 * 20% = $80,000
• Attribution Adjustment: $400,000 * 10% = $40,000
• Adjusted Social Value Created = Total Measured Health Improvements - (Deadweight + Attribution)= $400,000 - ($80,000 + $40,000)= $280,000

Now, calculate the SROI:

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So, the SROI ratio is 2.8:1, meaning that for every dollar invested in the program, $2.80 in social value is created.

SROI - Impact Justification vs Impact Improvement

In the realm of Social Return on Investment (SROI), two critical concepts emerge: Impact Justification and Impact Improvement. These concepts, while intertwined, serve distinct roles in enhancing the effectiveness and efficiency of social programs.

Impact Justification refers to the process of quantifying and communicating the value of social outcomes. This involves meticulously measuring the social, environmental, and economic impacts of an initiative and then translating these impacts into a monetary value. The primary goal here is to justify the resources invested in a program by showcasing its benefits. This aspect is crucial for gaining stakeholder trust, securing funding, and demonstrating accountability.

However, Impact Improvement takes a step further. As advocated by Sopact, continuous learning and improvement are pivotal for escalating SROI. This approach involves regularly collecting and analyzing data to understand the effectiveness of social initiatives. It's not just about proving the value of a program but enhancing it. By identifying areas of strength and weakness, organizations can adapt and optimize their strategies, leading to more meaningful and sustained social impacts.

In essence, while Impact Justification provides a snapshot of the value created, Impact Improvement is a dynamic process, focusing on the ongoing enhancement of social value. It's a journey of perpetual learning, adapting, and evolving, ensuring that every resource invested yields the highest possible social return. This philosophy of continuous improvement underpins a more responsive, impactful, and sustainable approach to social investment, aligning with Sopact's belief in the power of learning to maximize social impact.

Let's hear a short history of SROI, Social Value Principles, Benefits of SROI, Challenges of SROI, and How to improve the SROI approach.

SROI Examples

Practical examples of SROI for Impact Fund Due Diligence, Portfolio Additionality and Maturity, and Enterprise 

SROI in Impact Fund - Practical Case Study  

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Challenges to SROI Calculation Mastery

With the need for rigor comes a healthy amount of other needs for any organization wishing to execute an SROI approach. Most organizations do not have adequate systems to make the adjustments needed to implement an SROI strategy. Here’s what is needed and what often limits the capacity of organizations to dive into an SROI strategy.

Monitoring Systems

Quantitative data is the lifeblood of SROI, and therefore organizations must be able to collect and manage such data. This goes beyond collecting data on outputs (e.g., how many patients visited a clinic) to zero in on data that indicates a change in the lives of beneficiaries due to the intervention (e.g., increased employment).

Investment needs to be made in the appropriate processes to effectively execute such tracking and achieve significant buy-in from the stakeholders involved (from employees to the beneficiaries themselves).

Mapping Indicators and Outcomes

Unlike mapping inputs and outputs, which is a fairly straightforward process of identifying elements of an organization’s flow of activities, adding impact outcomes into the equation demands a well-developed theory of change model – and a process of interpretation.

Stakeholders up and down the change process may have different ideas about which outcomes capture the intervention’s ability to effect change or which outcomes are most important to beneficiaries. Then there’s also the question of which outcomes are most feasibly measured given the context of the impact market and organizational resources and expertise. All this makes for a daunting mapping task. Without the right tools to ensure relevant and feasible mapping of outcomes, it is pretty challenging to implement an SROI approach successfully.

Owning the cost

According to the resource-intensive report by consultancy Angier Griffin, while SROI is one of the most comprehensive tools, it is also one of the most resource-intensive.

Complementary research by NEF, in which they report on their SROI work with seven different social enterprises, indicates “few participants can spare the staff to carry out the tasks required” and that “Third-sector organizations must be provided with adequate funding by social investors to cover the staff and resource costs associated with SROI analysis.” Larger organizations may have resources for such execution, but the resource-heavy implications remain a significant limitation for smaller organizations.

This resource-intensive approach is compounded by the fact that the market still doesn't offer many tools to help facilitate the SROI methodology. Instead, organizations shell out money to consultants with the expertise and experience to accurately calculate the financial proxies for impact returns. Thus, whether an organization opts to implement the SROI execution themselves or pay consultants to execute the process, the resources needed remain costly (often out of reach).

Authentic Reporting

One major critique of SROI falls on the tail end of the process when it’s time to communicate the results and share with the world what ratios have been identified (remember, the 5:1 ratio discussed before). On an internal level, organizations may choose indicators that help inflate an eventual ratio. Also, because SROI is often used to attract funding, organizations that end up with poor ratios may be hesitant to report their impact (whether such ratios result from poor SROI execution or simply an intervention that isn’t effective).

Of course, the idea is that SROI helps determine when interventions aren’t creating significant value for the investment. However, in the market of SROI ratios, it can be difficult to make relevant comparisons (5:1 vs. 3:1, for example) because internal processes vary, regions of impact vary, etc. Comparing one ratio to another when determining funds may be unfair to the organizations involved. More transparency and access to the data involved are needed.

Furthermore, the theory for developing financial proxies in the impact sector remains more of an art than a science. In other words, because proxies are so context-dependent -- country, industry, etc. -- it remains immensely complicated for organizations to develop reliable data and, ultimately, ratios. Some use IMPLAN data to calculate economic value, although that resource is also limited in capturing the nuances of each organization's impact journey. 

Calculating SROI Is Extremely Useful Given the Right Context

SROI offers organizations a comprehensive approach to understanding and communicating impact returns internally and to potential funders. Assigning monetary values to social returns provides a shared language to better inform decision-making across the stakeholder ecosystem. This is, of course, the ideal scenario.

The various resource and expertise limitations discussed above make successful SROI execution difficult for many organizations. In addition to training, new tools are needed to facilitate further integration of the SROI methodology across the impact space. In part 2 of this blog, we’ll examine some emerging solutions.

Read the Part 2 of How to Calculate Social Return on Investment

Watch a live conversation: Scaling Social Business With Impact Measurement & Management.

All About Outcomes is a new webinar series to generate dialogue between the leaders and change-makers from the respective fields. We intend to learn about each Sustainable Development Goals theme area's challenges, solutions, and risks.    

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