INVESTING IN SOCIAL VALUE-MAXIMIZING SOCIAL RETURNS

Social value creation is the basis of justifying any activity. In Business, measuring the value or return of investment is relatively straightforward; dividing the revenues by the costs of operations provides the return on investment. Over the last two decades, the importance of measuring social value and impact has gained importance.

Do the business's social or environmental social values matter?

The short answer is, Yes. Funders want to invest in the projects creating maximum social impact, while social enterprises want to demonstrate impact to their funders and stakeholders. It is, however, not as straightforward to account for social value, and probably due to this, we do not express such values in cost-benefit equations.

In this article, we will see how to measure Social Return on Investment (SROI), the challenges involved in the process, and discuss a better way to measure and understand the social impact of our investments.

Social Return on Investment

The concept of Social Return on Investment was first introduced in the 1990s by Roberts Enterprise Development Fund. They developed the SROI tool to evaluate their investments from a social lens.?They wanted to make informed investment decisions with a target to maximize social returns. The work they started was later taken up by Social Value International, a global network of practitioners and policymakers, focussed upon social impact and social value. They have developed systematic principles and frameworks for the calculation of social return on investment.

What is Social Return on Investment?

The concept of Social Return on Investment was first introduced in the 1990s by Roberts Enterprise Development Fund. They developed the SROI tool to evaluate their investments from a social lens. They wanted to make informed investment decisions with a target to maximize social returns. The work they started was later taken up by Social Value International, a global network of practitioners and policymakers, focussed upon social impact and social value. They have developed systematic principles and frameworks for the calculation of social return on investment.

It is a framework for understanding the amount of change we ‘get back in return for what we ‘put into' making that change occur. It is a rigorous process based on seven foundational principles.

Social Value Principles

According to the Social Value International UK, the seven principles of calculating Social Return on Investment are

1. ?Involve Stakeholders
2. Understand what changes
3. Value the things that matter
4. Only include what is material
5. Do not over-claim
6. Be transparent
7. Verify the result

Calculating Social Return on Investments

A 6-step process is recommended to implement the SROI approach. The first step is defining the primary stakeholders' scope and identification, followed by mapping the outcomes and assigning monetary value to those outcomes. It is a rigorous process that requires agile and well-planned data management.?SROI approach is explained in great detail here.

SROI helps investors and investees to understand the value created and provides for strategic decision-making

SROI monetizes social impact to asses value. Monetization helps enterprises, investors, and funds to formulate overall stances on strategy, funding, and critical decision-making. Hence, at a macro level, SROI helps understand how meaningful the work of a particular investor, fund, or enterprise is by examining its economic and other impacts on society.

Benefits of the SROI approach

• Numbers are easy to understand and communicate
• Financial terms resonate with investors
• The SROI ratio allows comparison between projects with different outcomes, geographies, stakeholders, etc.?

Challenges of the SROI approach

• Several assumptions that go into the calculation of value introduce uncertainty that makes SROI potentially problematic. It also needs a significant amount of time, resources, and expertise for proper execution. Unfortunately, many organizations do not have the necessary resources and systems required to implement an SROI strategy. According to a?report?by consultancy Angier Griffin, SROI is one of the most resource-intensive tools to measure social impact.?
• A?study?published by NEF in 2010 studied seven different enterprises using the SROI approach to measure social impact. Few enterprises were able to spare the personnel required to carry out the tasks required. Most had to assign the functions to third-party organizations in return for substantial consultancy charges.?
• While large organizations have resources for rigorous execution,-heavy requirements of SROI limit smaller organizations from executing it effectively.
• The key challenges of implementing SROI are
• Defining financial proxies can be expensive, time-consuming, and resource-heavy.
• It has some subjectivity.
• Little room for qualitative feedback.
• Do not consider the context.
• Long timeline to see results: Evaluation / Forecast?

Maximizing Social Return on Investments

Organizations and impact investors need integrated solutions to their impact data management needs. The accounting and valuation of Social Return on Investment require a streamlined data management approach to ensure accurate evaluation.?

This section will aim to explain a better way to maximize social returns on investments based on years of experience of SoPact in understanding and solving the pain points of enterprises, investors and funds. We will also give you examples of how you can use this approach in different scenarios.

It is an evidence-based approach designed to focus on key outcomes an enterprise or investor wants to achieve. Based on the key outcomes identified, few metrics are developed to collect stakeholder data on the?five dimensions of Impact?(Who, What, How much, Contribution and Risk). These five dimensions are based on?Impact Management Project (IMP)?framework, and you can read about them?here.

Based on the analysis of the stakeholder data, the organization understands the current state of the impact and then sets targets that seek to improve social impact performance over time. The approach focuses upon making the stakeholders an active party to the?impact measurement?process. Continuous data collection through repeated touchpoints with the ultimate stakeholders will help the organization understand the change the stakeholders are experiencing. And enable the organization to make changes to the program, activity, or product accordingly to meet the needs of the stakeholders and ultimately achieve the outcomes that the organization had set forth to achieve.?

The continuous data collection approach facilitates real-time tracking and course correction enabling dynamic program design and faster outcome realization.

We can use this approach for different areas such as;

• Impact-oriented Due Diligence
• Impact Maturity
• Stakeholder data collection processes
• Continuous tracking
• Evidence-based decisions
• Maximizing social impact

Impact Due Diligence

If you are a fund manager, who wants to curate a basket of investments to maximize the social impact of your portfolio, then you would want to conduct due diligence of organizations to understand the social impact they will be creating. But it is a challenging task as most organizations work on different themes across various geographies and cater to other stakeholder groups.

A good starting point would be defining the outcomes or impact areas important for you to achieve. The next step would be defining the right set of questions and aligning them to the five dimensions of impact. This would be followed by collecting baseline data from the intended stakeholder groups to understand their current situation.

Analyzing the collected data will help you prioritize the thematic areas you want to fund and finalize geographies and stakeholder groups of interest. This will eventually lead to selecting those organizations whose thematic areas of focus and geographies of work align with yours.?

Impact Maturity

Asset managers and social impact accelerators can also use this approach to measure the maturity of their portfolios and enterprises. The best way for asset managers to measure social impact is not by aggregating what their investments are doing but assessing what they are doing for their investees. For example, analyzing the maturity level of their portfolio organizations by understanding if they are mature from the financial perspective, whether they are hiring new employees, and sustaining hired employees.

A good way to start for accelerators would be to define those targets and outcomes and collect initial data from the incubated enterprises to understand their growth trajectory. Continuously monitoring the growth of enterprises on predefined indicators will allow the accelerator to maximize impact by providing timely support to incubators. The ultimate goal is to?maximize the social impact?of investees, which will ultimately lead to a greater social return on investment for the asset manager's portfolio.?

This approach can continuously track stakeholder sentiments about the activity, program, or product delivered for an enterprise. This continuous feedback loop will help the enterprise constantly improve its program design based on inputs from the ultimate beneficiaries.

Advantages over traditional SROI

• You will be delivering the highest impact possible for the investment.
• It is easier to find expertise and tools on Impact Management than traditional SROI.
• There is no subjectivity added to the results; the outcome is what it is.
• The process doesn't overlook qualitative data, stakeholder feedback, and context.
• You don't have to wait for a whole year to find out the result.

Please feel free to ask questions and post comments, below or in private.

Unmesh Sheth?is the founder of?SoPact?a social enterprise in the impact measurement and management space. With over 30+ years of experience in the software industry, He began this journey as a software architect at Silicon Valley’s leading startup, where he designed the first enterprise software adapter that gave rise to a large enterprise integration solution. After working with the bottom of pyramid segments in India, He decided to build SoPact to help streamline and provide a better and faster understanding of the social impact of products and services to stakeholders.