What are Social Return on Investment (SROI) and Social Impact Assessment (SIA)?
While Social Return on Investment (SROI) and Social Impact Assessment (SIA) are often used interchangeably, they are not exactly identical. SIA typically refers to the framework for designing, measuring, monitoring and managing the social value of a project. SROI is ONE of the commonly used assessment techniques within the SIA framework.
Why should we do SROI?
A. Types of SROI
(1) Evaluative: conducted retrospectively and based on actual outcomes that have already taken place.
(2) Forecast: predicts how much social value will be created if the initiative meets its intended outcomes.
B. Major functions of SROI study
(1) Communication: a single metric that aims to sum up the social impact, which is easier to interpret and to compare.
(2) Resource allocation: translates social outcomes and cost into monetary values for rational decision making on resource allocation.
(3) Learning: a learning process to understand where value is created, with the objective of performance improvement.
How to perform SROI study？
In Hong Kong, the Social Impact Measurement (SIM) is becoming increasingly popular among funders, NGOs, and stakeholders. While there is no uncontested rule in determining the relevant performance indicators for social project, SIM provides a stage-by-stage approach in leading through brainstorming exercises on the reasonableness of the social project from inception to completion. More information could be found here.
One widely cited implementation model for SROI study is the six-stage model published by the Office of the Third Sector of the Cabinet Office of the UK government. The six stages are
(1) Establishing scope and identifying key stakeholders,
(2) Mapping outcomes,
(3) Evidencing outcomes and giving them a value,
(4) Establishing Impact,
(5) Calculating the SROI, and
(6) Reporting, using and embedding.
Details of the six-stage model can be found in this report.
Some reports also highlighted the major consideration in designing and performing SROI study. For instance, the guideline published by the Office of the Third Sector of the Cabinet Office of the UK government spelled out SEVEN principles for SROI study (see p.96-98 in the report). Also, Academic Institute in the US also proposed TEN guidelines for conducting SROI study (see p.120 for the guidelines).
What is “social value”?
In contrast with “business value” that focuses on profitability, “social value” typically refers to the value created by an initiative (or an organisation) with regard to the social, psychological and economical well-being of citizens, as well as environmental benefits to the society.
What are the existing approaches on using financial proxy?
The process of monetising “social value” typically requires the practitioners to attach monetary values, also referred as “financial proxies”, to the social outcomes. In general, there are two approaches in monetising social values.
The Opportunity Cost approach
Opportunity Cost is “the value of scarce resources that are used in pursuing a particular activity” or “the value of scarce resources saved”. In this approach, the set of “financial proxies” used would be conceptualised as the opportunity cost that a society would need to forego (e.g., implementing a service) in order to create the values for the beneficiaries, or opportunity cost that a society would have been saved because of the social values created.
The Willingness-to-pay (WTP) approach
For the WTP approach, financial proxy of a social outcome is conceptualised as the average financial resource an individual would be willing to pay (or receive) for some social goods and services. This approach is developed from the concepts of “compensating surplus” and “equivalent surplus” in welfare economics, which delineating the average amount a person would willingly pay (or receive) for the change in one’s welfare utility.
What are the key concepts for SROI calculation?
Net Present Value (NPV)
Social Value is something good that we want it earlier than later. Therefore, a social value that can be received earlier by the beneficiaries worth a bigger value. NPV is technique to convert a social value of future into present time, this technique is called discounting and is widely used in economic studies.
Deadweight, Displacement, Attribution & Drop-off
Deadweight: the value of the social outcome that would have happened anyway without the intervention of the project.
Displacement: how much of other social value is being displaced by the project.
Attribution: how much of the social value was caused by the contribution of other projects.
Drop-off: it measures the percentage change from period to period (e.g. a 5% drop per annum) in social value of the project over time.
How to calculate SROI?
Putting all the above concepts together, we can compute the total social value created by the project as of today’s value, by discounting the future social benefits that we expected to receive in future.
Every project needs a funding to kick off, however, we would expect the overall social value created will be greater than the initial funding, i.e., the SROI shall be greater than one.
For the SROI calculation, the equation will look like the following:
where st denotes a kind of monetised social return of the program within a given period of time (t), and St represents the entire set of monetized social return within a given period of t. Theoretically, the relationship between st and St may not necessarily be addable but the majority of the existing SROI studies use a simple summative approach. In equation 1, dw, dp, at represent the deadweight, displacement, and attribution of each st and they are all expressed in percentage.
Equation 2 calculates the present value (PV) of St and d is the discount rate. The discount rate can be defined as the opportunity cost of the investment employed in the program. The choice of discount rate is often context-specific. Recommendation of Roberts Enterprise Development Foundation (REDF) in the US, a discount rate should be based on the Weighted Average Cost of Capital (WACC), referring to the calculation of a firm’s cost of capital in which each category of capital is proportionately weighted. In the recommendation of the UK Treasury in the Green Book (HM Treasury 2003) suggested 3.5%. In addition, the discount should also take into account the treatment of inflation.
Equation 3 calculates the NPV of SROI within a given period of t. It denotes the investment of the program and this equation is quite straight forward.
How to interpret SROI?
SROI typically presents in a ratio. For example, a ratio of 1:4 suggests that an investment of $1 delivers $4 of social value.
SROI larger than one (i.e., often referred as the bottom-line) essentially means the monetised social return of an intervention is larger than the funds invested.
SROI studies in Hong Kong?
Below are some policy and program initiatives that have employed SROI to measure their social impact. Check out the links for more details.
Arvidson, M., Lyon, F., McKay, S., & Moro, D. (2013). Valuing the social? The nature and controversies of measuring social return on investment (SROI). Voluntary sector review, 4(1), p.6.
Cordes, J. J. (2017). Using cost-benefit analysis and social return on investment to evaluate the impact of social enterprise: Promises, implementation, and limitations. Evaluation and Program Planning, 64, 98-104.
Emerson, J., & Cabaj, M. (2000). Social return on investment.
Maier, F., Schober, C., Simsa, R., & Millner, R. (2015). SROI as a method for evaluation research: Understanding merits and limitations. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 26(5), 1805-1830.
Millar, R., & Hall, K. (2013). Social return on investment (SROI) and performance measurement: The opportunities and barriers for social enterprises in health and social care. Public Management Review, 15(6), 923-941.
Nicholls, A. (2009). ‘We do good things, don’t we?’:‘Blended Value Accounting’in social entrepreneurship. Accounting, organizations and society, 34(6-7), 755-769.
Nicholls, J., Lawlor, E., Neitzert E., & Good-speed, T. (2012). A guide to Social Return on Investment. SROI Network. Retrieved from http://socialvalueuk.org/publications/publicati-ons/cat_view/29-the-guide-to-social-return-on-investment/223-the-guide-in-english-2012-edition
Pathak, P., & Dattani, P. (2014). Social return on investment: three technical challenges. Social Enterprise Journal.
Ryan, P. W., & Lyne, I. (2008). Social enterprise and the measurement of social value: methodological issues with the calculation and application of the social return on investment. Education, Knowledge & Economy, 2(3), 223-237.
Scholten, P., Nicholls, J., Olsen, S., & Galimidi, B. (2006). Social return on investment. A Guide to SROI Analysis (1. ed.). Amstelveen: Lenthe Publishers.