Social Return on Investment (SROI) is a principles-based method for measuring extra-financial value (i.e.

, environmental and social value not currently reflected in conventional financial accounts) relative to resources invested. It can be used by any entity to evaluate impact on stakeholders, identify ways to improve performance, and enhance the performance of investments. A network was formed in 2008 to facilitate the continued evolution of the method. Over 570 practitioners globally are members of the SROI Network. The SROI method as it has been standardized by the SROI Network provides a consistent quantitative approach to understanding and managing the impacts of a project, business, organization, fund or policy. It accounts for stakeholders' views of impact, and puts financial 'proxy' values on all those impacts identified by stakeholders which do not typically have market values. The aim is to include the values of people that are often excluded from markets in the same terms as used in markets, that is money, in order to give people a voice in resource allocation decisions. Some SROI users employ a version of the method that does not require that all impacts be assigned a financial proxy. Instead the "numerator" includes monetized, quantitative but not monetized, qualitative, and narrative types of information about value.
Some people claim that philanthropy has always been about investing in the good work of the social sector. Foundation staff have often thought of themselves as the ³venture capitalists´ of the nonprofit world²investing in high risk ideas and programs that might then be taken to scale by public sector funders. While in some ways true, there are others ways in which mainstream philanthropic practice has not fulfilled its potential for investing in significant social change. Grants are often made on a strictly annual basis. Financial support given is often less than what is required for real success. Additionally, lacking any formal structure or process for ³graduating ³capital support from seed to secondary to mainstream funders, the Nonprofit Capital Market has often functioned with significant inefficiencies. In many ways the practice of traditional philanthropy has, over numerous years, become Transitive hilanthropy.6Transactive Philanthropy is philanthropy concerned primarily with making grants and engaging in fundraising. Success is defined as the amount of one¶s perceived value created in the sector. Success is measured by the number of grants given and by the size of one¶s assets. There is often no real connection made between the dollars one provides nonprofit organizations and the social value generated from that support. The focus of activity comes to rest upon the transaction rather than measuring the value generated through the course of those transactions.
I NVESTMENT PHILANTHROPY

Investment Philanthropy, by contrast, is philanthropy as the result of charitable investments. Within this perspective, social returns (that is, benefits to society) generated by philanthropic investments are the measure of an investments¶ success. The critical challenge in Investment Philanthropy is to compare the money invested with the value it creates. Historically, foundations have been reluctant to invest in sophisticated evaluation systems since these systems have often been viewed as simply additional forms of overhead. Other foundations have evaluated an individual program for its perceived effectiveness over time, making use of control groups and statistical analysis to measure certain outcomes. Investment philanthropy,

to socioeconomic. resulting in a host of econometrics. Namely. Social value can be found in a wide variety of activities from anti-racism efforts. finally. and incorporating those monetized values with the measures of economic value created. In the social value arena there are factors that are beyond measurement. These activities have intrinsic value. ranging from purely economic. to social: Economic---.however. yet clearly are of value and worth affirming. In between these two poles of value creation lies socioeconomic value. socio-economic value Measures of economic value are standardized and support the basis for most financial activity in the world. Other REDF documents7 have explored the challenge of designing such as system.Socio-Economic---. environmental protection and arts support efforts. debt/equity ratios. Examples of economic value creation may be seen in the activities of most for profit corporations. processes or policies are combined to generate improvements in the lives of individuals or society as a whole. It is this combined value creation process that an SROI analysis attempts to measure. and the role of ³social value´ in determining philanthropic social return on investment. economic value Economic value is created when there is a financial return on an investment. inputs. A nonprofit organization or program creates socio-economic value by making use of resources. and unfortunately it is at this level that one has the most difficulty measuring the true value created. social value Social value is created when resources. to a family moving from welfare to work. These measures form the basis for analyzing much of modern economic activity. Socio-economic value measurement builds on the foundation of economic value measurement by quantifying and monetizing certain elements of social value. the arena in which both economic and social value are considered. what are the primary challenges of documenting the value of philanthropy with such a framework? This paper attempts to address each of these questions. It is in this arena that most nonprofits justify their existence. This paper approaches the question of value creation from the investor¶s perspective.Social We will first briefly discuss the two extremes of this continuum. but it can be difficult to agree upon or quantify the actual value created. CONCEPTS OF VALUE9 For social entrepreneurs managing social purpose enterprises. We begin with an exploration of the nature of value. but focus most of our discussion on socio-economic value creation. including return on investment. community organizing. inputs. Measures of economic value creation have been refined over centuries. or . The psychological impact on an individual whose family has moved from welfare to work may be significant but hard to monetize. value creation occurs simultaneously in three ways along a continuum. is less interested in evaluating programs than in creating social management information systems by which the long-term value created and activities of the investee made possible by particular philanthropic investments may be tracked in order to improve the entire nonprofit organizations¶ performance. how does one create and apply a framework capable of tracking the social return of one¶s philanthropic investments? How does one think of the creation of ³social equity´8 in this context? And. price/earnings ratios and numerous others.

Examples of community economic development activities. Enterprise Index of Return. to socio-economic. in addition to social purpose enterprises. program expansion. REDF began an effort to track and analyze the impact of seven San Francisco Bay Area nonprofit organizations and their twenty-three social purpose enterprises. The paper begins with a discussion of the basic concepts of value. and other initiatives. However. and Blended Index of Return. and to provide a supportive training and work environment for individuals who wish to improve their lives. These activities are all involved in providing employment for those presently receiving public support and divert individuals away from public systems and toward private markets. there have been limited efforts to date to quantify and monetize the socio-economic value created by these organizations We at REDF believe SROI can be calculated in a set of metrics that quantify and monetize the economic and socio-economic value of social purpose enterprises. However. or social return on investment. what is the resulting benefit to individuals and society? How can both investor and investee be assured that each dollar is. This paper presents a discussion of REDF¶s methodology and actual experience in applying the theory of SROI analysis to the practice of assessing its own value creation efforts through investments in social purpose enterprises. demonstrable cost savings and revenue contributions that are associated with an individual¶s employment in a social purpose enterprise and measure the societal benefit created by a social purpose enterprise. Blended Value. the enterprises serve a dual purpose: to provide market-driven goods and services to customers. has been popularly used in various contexts to mean that nonprofit and for profit corporations create social value.2 In 1997. The paper presents this SROI Framework. larger meaning of SROI. or to execute a particular strategy. REDF¶s SROI Framework focuses on determining a set of six SROI metrics: Enterprise Value. These cost savings and revenues may be realized in decreased public dollar expenditures and in increased revenues to the public sector through additional taxes paid. job training programs. which uses a iscounted cash flow analysis in an effort to monetize the economic value of social impacts achieved by the social purpose enterprises in the REDF Portfolio. that generate socio-economic value include supported employment programs for the disabled or homeless. and then by generating cost savings and/or revenues for the public sector. acquisition of capital. by increasing the value of these inputs. The questions that must be asked are: How do we measure the success of such efforts? For each dollar invested. or difficult to even quantify. Following this presentation of the basic theoretical SROI Framework. but that it should also be viewed in a broader context. The Roberts Enterprise Development Fund (REDF) published a retrospective social return on investment (SROI) analysis of two social purpose enterprises. REDF¶s SROI Framework. to economic value creation. Social Purpose Index of Return. the six stages of REDF¶s SROI analysis are described in detail. Returns realized on a social investment will always include social impacts that are impossible to monetize. Employing individuals with a range of disadvantages. in fact.processes. This monetized social value is then consolidated with the economic value created by the same social purpose enterprises. Over the years. we also acknowledge and affirm this other. DEFINING SOCIAL RETURN ON INVESTMENT (SROI) The term SROI. maximizing its value creating potential? How can we calculate the social return on our investments? In 1996. Value creation is presented as a continuum ranging from social. which focuses on economic and socio-economic value measurement. Social Purpose Value. Whatever their target. . Philanthropic investments in nonprofit organizations may be targeted for capacity building. is presented. REDF has invested significant time and resources to create the SROI Framework ² to identify direct. all investments in the Nonprofit Capital Market1 is directed toward creating social value: addressing needs or improving conditions of communities.

an initiative to create a common set of terms and definitions .[1] Developments in the UK led to agreement between the Social Accounting and Audit (SAA) Network and the Social Return on Investment (SROI) Network on core principles. Canada. ‡ Only include what is material. and the need for these metrics to focus on outcomes over outputs.REDF approach to SROI While the term SROI exists in cost benefit analysis. This resulted in another formal revision to the method. ‡ Understand what changes. ‡ Do not over-claim. In 2009-2010 proponents affiliated with the SROI Network proposed to establish linkages between SROI analysis and IRIS[3]. ‡ Value the things that matter. In 2008. UK and Netherlands who had been implementing SROI analyses together to draft an update to the methodology. it is different in that it is explicitly designed to inform the practical decision-making of enterprise managers and investors focused on optimizing their social and environmental impacts. Interest has been fuelled by the increasing recognition of the importance of metrics to manage impacts that are not included in traditional profit and loss accounts. The UK government's Office of the Third Sector and the Scottish Government commissioned a project beginning in 2007 that continues to develop guidelines that allow social businesses seeking government grants to account for their impact using a consistent. New Economics Foundation in the UK began exploring ways in which SROI could be tested and developed in a UK context. Since then the approach has evolved to take into account developments in corporate sustainability reporting as well as development in the field of accounting for social and environmental impact. To date roughly 60 users have generated approximately 500 cases and hundreds of indicators pertaining to different industries and issue areas. 'Value the things that matter' includes the use of financial proxies and monetization of value and is unique to the SROI approach. publishing a DIY Guide to Social Return on Investment in 2007. the Hewlett Foundation's Blended Value Project brought a group of practitioners from the US. As of 2009 all but one of the seven identified principles are now common to the two frameworks. produced by a consortium led by the SROI Network. A larger group met again in 2006 to do another revision which was published in 2006 in the book Social Return on Investment: a Guide to SROI. While SROI builds upon the logic of cost-benefit analysis. By contrast. costbenefit analysis is a technique rooted in social science that is most often used by funders outside an organization to determine whether their investment or grant is economically efficient. In 2003. verifiable method. Social Evaluator BV[2] in the Netherlands created a tool that walks users through ten steps in developing an SROI analysis. These are: ‡ Involve stakeholders. published in the 2009 Guide to SROI. a San Francisco-based philanthropic fund that makes long-term grants to organizations that run businesses for social benefit. ‡ Verify the result. ‡ Be transparent. a methodology for calculating social return on investment in the context of social enterprise was first documented in 2000 by REDF (formerly the Roberts Enterprise Development Fund).

It bases the assessment of value in part on the perception and experience of stakeholders. Only the material impacts will be included in the analysis where materiality is assessed by reference to public policy. psychologists.for describing the social and environmental performance of an organization. Financial proxies should be used to ensure that the issues that are relevant to all those affected have been included ± this is sometimes called monetization Monetization principle The translation of extra-financial value into monetary terms is considered an important part of SROI analysis by some practitioners. But having to get on with life. the approach distinguishes between "SROI" and "SROI Analysis. uses monetary values for these indicators. the reasoning is as follows: The question of how individuals and societies value one thing compared with another continues to absorb philosophers. its activities and its outputs and the results of the outputs. we make do by using prices and we . On the pro side. where possible. The principles The main principles are that: Stakeholders are central. best practice. Therefore. b) context information to enable accurate interpretation of the number itself. stakeholders and financial resources that are available. and problematic when it is made a universal requirement by others." The latter implies: a) a specific process by which the number was calculated. and c) additional nonmonetized social value and information about the number¶s substance and context. An impact map shows the relationship between the resources available to an organization. finds indicators of what has changed and tells the story of this change and. social scientists and economists. SROI analysis refers not to one single ratio but more to a way of reporting on value creation. Allowance must be made for attribution (of outcomes to other organizations) and for deadweight and displacement (to take account of what would have happened anyway). local values. An impact map can be used to understand how the organizations create change. Primary purpose While in financial management the term ROI refers to a single ratio. called outcomes. It is an emerging management discipline: a skill set for the measurement and communication of non-financial value. Discussions about how best to do this are ongoing.

accept that the price of things reveals peoples¶ preferences for one thing over another. and not review. Secondly.a comparison which would be an apples to oranges comparison in nearly every case Potential benefits of SROI y y y y Communication: By providing both credible numbers and qualitative and narrative value information. it aids communication with internal stakeholders. However while price may represent the exchange value ± its market price ± it doesn¶t completely represent all the value to either the seller or the consumer or to others who may be affected. Despite these benefits. the focus on stakeholders can highlight interrelationships and help define activities with stronger synergies and increase planned social value. and with those who prefer quantitative to qualitative ways of learning. it induces transparency since it precipitates the clarification of which values have been included and which have not been included. it helps identify the critical sources of value and so streamlines performance management. . Monetized indicators can help analysis by management to consider what happens if they change their strategy. More effective decisions: If being used for planning. Price is a proxy for value. prices will depend in part on the distribution of income and wealth: different distributions result in different prices which result in different proxies for value. and the systematic story to support all of these it can µtalk¶ to stakeholders with different preferences. or if there may be a better means of using their resources. The use of monetary proxies for social. It can help investors more efficiently select investments that are aligned with their value objectives. especially those responsible for finances and resource allocation. Focus on the important: By focusing on the critical impacts. economic and environmental value offers several practical benefits: y y y y y it makes it easier to align and integrate performance management systems with financial management systems. on the con side there is concern that monetization lets the consumer of SROI analysis off the hook by too easily allowing comparison of the end number at the expense of understanding the actual method by which it was arrived at-. it permits sensitivity analysis to show which assumptions are more important in that the result is more affected by changes in some assumptions than others. an SROI analysis can be completed relatively quickly and is an effective way of defining management information systems necessary to make it quick in future Investment mentality: The concept of social return helps people understand that any grant or loan into an organization can be thought of as an investment rather than as a subsidy. It can help in communicating information with stakeholders and provide a means of drawing them into conversation. It allows them to think about whether their strategy is optimum in generating social returns.

Intensive for the first time: If an organization does not have an existing social accounting system. There is increasing interest in SROI as a way to demonstrate or measure the social value of investment. In order to incorporate these benefits into the SROI ratio proxies for these values would be required. Moreover. an organization must be clear about its mission and values and understand how its activities change the world ± not only what it does but also what difference it makes. commissioners and lenders. then understanding and explaining these impacts and then responding to them is critical. but seen as a framework for exploring an organization¶s social impact. if an organization seeks to monetize its impact without having considered its mission and stakeholders. or the environment. SROI analysis can help clarify impacts and focus the response. Focus on monetization: One of the dangers of SROI is that people may focus on monetization without following the rest of the process. then it risks choosing inappropriate indicators. beyond the standard financial measurement. and no brand or mark is available. increased self-esteem. groups. SROI will be more time intensive the first time but is designed to focus on the most important areas. It is most easily used when an organization is already measuring the direct and longer-term results of its work with people. Some outcomes not easily associated with monetary value: Some outcomes and impacts (for example. External accreditation: There is no external accreditation. SROI may be helpful in showing potential customers (for example. and as a result the SROI calculations can be of limited use or even misconstrued. which is widely understood by investors. and away from the risk mentality and opportunity cost of using money here rather than there. improved family relationships) cannot be easily associated with a monetary value. This clarity informs stakeholder engagement. as well as allow them to evaluate the suitability of that strategy to generating social returns. Therefore. The monetized indicators can help management analyze what might happen if they change their strategy. An SROI analysis should not be restricted to one number. or whether there may be better means of using their resources Potential limitations of SROI y y y y y Benefits that cannot be monetized: There will be some benefits that are important to stakeholders but which cannot be monetized. in which monetization plays an important but not an exclusive role. SROI analysis is a developing area and . which is crucial to proving and improving. Clarity on governance: If more accountable organizations are more sustainable.The focus shifts to the creation of value. by taking account of social and environmental impacts SROI can also be used in strategic management. Responding to stakeholder¶s means that they can influence the organization and so the organization¶s governance will be better related to stakeholders requirements SROI puts social impact into the language of 'return on investment¶. Where it is not being used already. public bodies or other large purchasers) that they can develop new ways to define what they want out of contracts.

but it is a significant effort to raise the bar of practice to a new level. Introduction The Roberts Enterprise Development Fund (REDF) operates under the basic premise that all funds4 provided to players in the nonprofit sector represent investments. and on our supporting website (www. we provide a description of our approach to this work. Understanding how to capture and quantify the value created by the nonprofit sector¶s work has been. These SROI metrics are then presented in the larger context of social return on investment in REDF¶s SROI Reports. We present our approach to analyzing social return on investment (SROI) as a balanced and effective way to understand the connection between the funds provided to investee nonprofit organizations and the results those organizations achieve.org). in our publication of individual SROI Reports. it is not definitive or complete. The SROI Reports feature the SROI metrics along with business data. the SROI metrics have limited application. toward creating social value. key challenges REDF encountered. nonprofit.´ In addition. a major challenge. These investments may be targeted to building infrastructure. the Appendix includes a glossary of key terms. The paper concludes by discussing the potential impact an SROI Framework may have on the field of philanthropy. the implications for the field of philanthropy. what is the resulting benefit to individuals and to society? Historically. The paper¶s Appendix includes detail of significant changes made to REDF¶s earlier SROI approaches3. Whatever their use. social purpose enterprises to derive six key SROI metrics. Special attention is given to the application of traditional. and analyses of each of these areas.redf. It is only a start. REDF Steps for SROI STAGE 1: CALCULATE ENTERPRISE VALUE STAGE 2: CALCULATE SOCIAL PURPOSE VALUE STAGE 3: CALCULATE BLENDED VALUE STAGE 4: CALCULATE ENTERPRISE INDEX OF RETURN STAGE 5: CALCULATE SOCIAL PURPOSE INDEX OF RETURN STAGE 6: CALCULATE BLENDED INDEX OF RETURN The paper then describes the types of data necessary for conducting an SROI analysis. The authors reflect upon the lessons learned during the past year¶s effort to apply this SROI Framework to social purpose enterprises.as SROI evolves it is possible that methods of monetizing more outcomes will become available and that there will be increasing numbers of people using the same proxies. including the decision to abandon efforts to apply the concept of a ³Social Beta. and will continue to be. the Nonprofit Capital Market has been hard pressed to develop metrics appropriate to its work. as well as a description of . The paper posits that without this broader context of social return on investment found in the SROI Reports. program execution or covering overhead. qualitative information about the social purpose enterprise. In the pages that follow. for profit financial metrics to non-traditional. and the approaches REDF finally adopted. social impact data. But how do we measure the success of our efforts? For each dollar invested. and which aspects of the SROI Framework call for more thought and exploration. we presume all investments in the Nonprofit Capital Market are directed toward addressing needs or improving conditions of communities. A sample Baseline Survey can also be found here.

A user-friendly version of this financial model is also available for download from the REDF website.the framework we have developed for calculating SROI. Framework for SROI Evaluation of Mission and vision statement Define Objective accordingly GAP 1 Need for Value creation YES NO Introspection of societies need and requirement GAP2 Evaluation of Actual need Venture capitalism/Fundi ng from outside Evaluation of Strength and competitivene Evaluation/available /possible way of SROI Approach Self Funding Resource Acquistion (finance ) Creation of MIS for decision making Strategic Penetration for socio-economic Value Creation Preparation of report Cost benefit analysis .

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