Social return on investment (SROI) is a metric adapted from the traditional return on investment (ROI) and is used to measure social, environmental and economic gains that result from an investment. It’s measured by assigning financial value to those gains that aren’t purely financial. For example the monetary value of increased educational attainment or improved health are outcomes of an investment that may not be an immediate monetary return, but are accounted for as a monetary return as part of the SROI to communicate value created. The SROI does not include impacts that are not able to be monetized, for example the value of increased self esteem.
There are two primary ways SROI is defined in the impact accounting field. As the field of impact accounting grows it will most likely land on a single definition, but for now these are the two that are used.
- Benefit-cost ratio – (this is what Ecotone uses in our impact analysis) This is the value (social, environmental,economic) generated per dollar invested. It’s calculated by: (social + environmental + economic benefits) / investment
- A Percent Return – This means that the SROI is communicated as a percentage, similar to how a lot of financial metrics are communicated. The calculation for this is: (((social + environmental + economic benefits) – investment) / investment) x 100.
How is this different from ROI?
ROI only measures the purely financial return of an investment (so only actual monetary return) and not any other value that is created such as environmental and social value.
What is a good SROI?
When working with clients a common question we get asked is what is a good SROI?
The short answer – It’s complicated
The long answer – It differs based on factors like sector, how readily monetizable outcomes are and how long or short term an intervention is. With that said, there are ways to assess it. The first way is as simple as asking the question “Is the return greater than the investment”. Since SROI is in terms of the return of a single dollar, this just means is the SROI more than $1. It’s also difficult to compare SROI across sectors, because each sector will have a different SROI associated with it. For example comparing an SROI from a workforce development organization and the SROI from an early childhood program is like comparing apples and oranges. It makes more sense to compare the SROIs of similar types of programs, because it will give a better view of how they compare.
Some investors use a $2.50 SROI as a benchmark to measure investments against, but this doesn’t mean that it’s bad to have an SROI under $2.50. SROI can be a useful way to communicate impact and evaluate potential investments because it offers a unit people generally understand — a dollar.
Why is SROI important?
SROI is an important measure because it helps to quantify measures that otherwise are not directly quantified, but add value, and it creates a better, more rounded idea of what returns are being created by an investment.
It can be used as both an internal and external tool. Externally, it can be a measure used to communicate the social and environmental impact of a program or product. Internally, it can be used to understand and manage organizational impact.