Ecotone Analytics GBC · Follow
--
Written by Will Nielsen & Lucie McCallum
In an age of heightened awareness about the interconnectedness of business, society, and the environment, many organizations are seeking to prove to their customers, investors, and more that their work supports sustainable practices and promotes social welfare.
As such, the concept of Social Return on Investment has risen to prominence as a powerful framework that seeks to measure the broader social and environmental impacts generated by investments, allowing for improved understanding and communication of impact beyond traditional financial metrics.
Social Return on Investment (SROI) is an adaptation of the traditional financial Return on Investment (ROI) metric, used to measure social, environmental and economic gains as a result of an investment. It accomplishes this by placing financial value on the social, environmental and economic gains identified, such as increased educational attainment and improved health. It does not include non-monetizable impacts that may be unable to be assigned a robust estimate of monetary value.
Though future development in the field may isolate a single definition, there are currently two primary definitions of SROI used in the field of impact accounting:
1) A benefit-cost ratio: This is the dollar value generated for every dollar invested. This is the definition used by Ecotone Analytics to communicate value creation. It is calculated as:
SROI = (Social + Environmental + Economic Benefits) / (Investment)
2) A percent return, similar to a typical financial return. When calculating the return as a percentage, the size of the investment is subtracted from the benefits generated so as to isolate the net benefit from the investment.
The calculation of the SROI in this case is:
SROI = (( Social + Environmental + Economic Benefits) – Investment) / (Investment) * 100%
as compared to the traditional calculation for return on investment:
ROI = (Financial Gain from Investment – Investment) / (Investment) * 100%
Calculating social return on investment entails a multi-step process, which may include the following:
1. Define the Scope and Objective
This initial step provides the foundation for an SROI analysis by clearly defining what program, project, initiative or other investment is being evaluated. Equally important is establishing specific objectives for the analysis, such as measuring social impact, informing decision-making, securing funding, or achieving other specific outcomes.
2. Stakeholder Identification
It is critical to identify key stakeholders who have an interest in the SROI analysis. Stakeholders can include beneficiaries, funders, partners, customers, community members, and others. Stakeholder analysis can be conducted to prioritize and assess the influence and interest of each group, guiding the overall strategy for the SROI. Stakeholders can be engaged early on, and throughout the process to ensure that their perspectives and expectations are considered.
3. Develop a Logic Model
The logic model acts as a visual roadmap for the SROI (see our article here for an overview). It outlines the inputs (resources), activities, outputs (immediate results), outcomes (long-term changes), and impacts (broader effects) of the program.
Within this framework, anticipated and unanticipated outcomes are identified, spanning social, environmental, and economic dimensions. Additionally, inputs or resources invested in the initiative, such as financial resources, human capital, equipment, and others, should be documented.
4. Data Collection and KPI Identification
Data collection forms the core of the SROI analysis. Key Performance Indicators (KPIs) are developed to align with the logic model and scope of the project. These KPIs serve as quantitative measures to assess outcomes and impacts. A systematic data collection and evidence-gathering process is implemented, often combining methods like surveys, interviews, academic research and data analysis. Data collection should be comprehensive, reliable, and thorough to support valuation.
5. Valuation Methods and Research
Concurrently, appropriate valuation methods are chosen for both inputs and outcomes, accomplished by leveraging research to assign them monetary values and avoid double-counting. Different projects may require different valuation methods, and it is essential to use methods and values consistent with industry standards and best practices.
6. Calculate the SROI Ratio
The product of an SROI analysis is formed by calculating the SROI ratio, as described above. This ratio provides a numerical measure of the initiative’s social impact relative to its cost.
7. Sensitivity Analysis
To ensure the robustness of SROI findings, a sensitivity analysis can be conducted. This process tests different assumptions and scenarios to understand their impact on results. Sensitivity analysis helps account for uncertainties in data and assumptions, offering a more comprehensive view of potential SROI variations.
8. Reporting and Communication
In this phase, SROI analysis findings are presented to stakeholders. Ecotone Analytics’ proprietary Impact Value Map utilizes a Sankey diagram to visualize the flow of inputs to outputs and outcomes. The diagram provides a clear and intuitive way for stakeholders to grasp complex relationships in the analysis. See our Sankey diagram for client General Mills’ regenerative agriculture SROI here.
Reports should include a comprehensive description of the methodology, findings, SROI ratio, and takeaways from the analysis. Communication can be tailored to different stakeholder groups, ensuring transparency and clarity in conveying results and their implications.
9. Use Findings for Decision-Making
SROI findings should guide meaningful actions. The insights gained from the analysis inform decision-making within the organization or project, whether it’s refining strategies, securing funding, or improving reputation. SROIs can also be monitored and updated to track the progress and impact of the initiative over time.
- Gain a Comprehensive Understanding of Impact:
SROI provides a holistic view of an organization’s impact, highlighting social, environmental, and economic outcomes that may not have previously been identified.
2. Informed Decision-Making:
SROI equips decision-makers with data-driven insights, aiding in resource allocation and prioritization for more effective initiatives.
3. Improved Accountability and Transparency:
SROI promotes accountability and transparency, enhancing an organization’s credibility and trustworthiness.
4. Enhanced Stakeholder Engagement and Attractiveness:
Engaging stakeholders in the SROI process fosters collaboration, inclusivity, and a deeper understanding of their needs and expectations. Proving and communicating sustainable and ethical practices can attract funding, customers, community support and more.
For examples of the use case of SROI, see our interviews with clients 3M and Forward Service Corporation on their takeaways from working with Ecotone Analytics to conduct SROI projects.
- Data Collection and Valuation Complexity:
Access to reliable and comprehensive data, especially for non-financial outcomes, can be limited, making it difficult to conduct a robust SROI analysis.
2. Subjectivity and Assumptions:
SROI analysis is sensitive to the assumptions made, particularly in valuing intangible outcomes. Small changes in assumptions can lead to significant variations in SROI results. This is why sensitivity analysis is often included in the SROI estimation process.
3. Resource Intensiveness:
Conducting an SROI analysis requires time, expertise, and resources, which can be a barrier for certain organizations.
Balancing these advantages and challenges is crucial for organizations considering the adoption of SROI analysis as a tool for measuring and communicating their social impact. For more information on how SROI could benefit your organization, contact us here.
What is Ecotone Analytics?
Ecotone Analytics is an impact strategy consultancy that leverages expert knowledge, data analytics, and evidence-based insights to empower clients with resources that quantify and visualize their impact. Find out more about us at our website.
