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 “venture capitalists” of the nonprofit
world—investing 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 “graduating “capital 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, however, 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. Other REDF documents 7 have explored the challenge of designing such as
system. This paper approaches the question of value creation from the investor’s perspective. Namely,
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 “social equity” 8 in this context? And, finally, what are
the primary challenges of documenting the value of philanthropy with such a framework? This paper
attempts to address each of these questions. We begin with an exploration of the nature of value, and the
role of “social value” in determining philanthropic social return on investment.

CONCEPTS OF VALUE9

For social entrepreneurs managing social purpose enterprises, value creation occurs simultaneously in
three ways along a continuum, ranging from purely economic, to socio-economic, to social:
Economic---- Socio-Economic---- Social
We will first briefly discuss the two extremes of this continuum, but focus most of our discussion
on socio-economic value creation, the arena in which both economic and social value are considered. It is
this combined value creation process that an SROI analysis
attempts to measure.

economic value
Economic value is created when there is a financial return on an investment. Examples of economic value
creation may be seen in the activities of most for profit corporations. Measures of economic value
creation have been refined over centuries, resulting in a host of econometrics, including return on
investment, debt/equity ratios, price/earnings ratios and numerous others. These measures form the basis
for analyzing much of modern economic activity.

social value
Social value is created when resources, inputs, processes or policies are combined to generate
improvements in the lives of individuals or society as a whole. It is in this arena that most nonprofits
justify their existence, and unfortunately it is at this level that one has the most difficulty measuring the
true value created. Social value can be found in a wide variety of activities from anti-racism efforts,
community organizing, environmental protection and arts support efforts, to a family moving from
welfare to work. The psychological impact on an individual whose family has moved from welfare to
work may be significant but hard to monetize. These activities have intrinsic value, but it can be difficult
to agree upon or quantify the actual value created.

socio-economic value
Measures of economic value are standardized and support the basis for most financial activity in the
world. In the social value arena there are factors that are beyond measurement, yet clearly are of value
and worth affirming. In between these two poles of value creation lies socio- economic value. Socio-
economic value measurement builds on the foundation of economic value measurement by quantifying
and monetizing certain elements of social value, and incorporating those monetized values with the
measures of economic value created. A nonprofit organization or program creates socio-economic value
by making use of resources, inputs, or
processes; by increasing the value of these inputs; and then by generating cost savings and/or
revenues for the public sector. 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.
Examples of community economic development activities, in addition to social purpose enterprises, that
generate socio-economic value include supported employment programs for the disabled or homeless, job
training programs, and other initiatives. 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.

DEFINING SOCIAL RETURN ON INVESTMENT (SROI)

The term SROI, or social return on investment, has been popularly used in various contexts to mean that
nonprofit and for profit corporations create social value. However, 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, but that it should also be viewed in a broader context. Returns realized
on a social investment will always
include social impacts that are impossible to monetize, or difficult to even quantify. Over the years,
REDF has invested significant time and resources to create the SROI Framework — to identify direct,
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.
REDF’s SROI Framework focuses on determining a set of six SROI metrics: Enterprise Value, Social
Purpose Value, Blended Value, Enterprise Index of Return, Social Purpose Index of Return, and Blended
Index of Return. However, we also acknowledge and affirm this other, larger meaning of SROI.

Philanthropic investments in nonprofit organizations may be targeted for capacity building, acquisition of
capital, program expansion, or to execute a particular strategy. Whatever their target, all investments in
the Nonprofit Capital Market1 is directed toward creating social value: addressing needs or improving
conditions of communities. The questions that must be asked are: How do we measure the success of such
efforts? For each dollar invested, what is the resulting benefit to individuals and society? How can both
investor and investee be assured that each dollar is, in fact, maximizing its value creating potential? How
can we calculate the social return on our investments? In 1996, The Roberts Enterprise Development
Fund (REDF) published a retrospective social return on investment (SROI) analysis of two social purpose
enterprises.2 In 1997, 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. Employing individuals
with a range of disadvantages, the enterprises serve a dual purpose: to provide market-driven goods and
services to customers, and to provide a supportive training and work environment for individuals who
wish to improve their lives. 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. The paper begins with a discussion of the basic
concepts of value. Value creation is presented as a continuum ranging from social, to socio-economic, to
economic value
creation. REDF’s SROI Framework, which focuses on economic and socio-economic value measurement,
is presented. The paper presents this SROI Framework, 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. This monetized social value is then consolidated with the economic value created by the
same social purpose enterprises.
Following this presentation of the basic theoretical SROI Framework, the six stages of REDF’s SROI
analysis are described in detail.

REDF approach to SROI

While the term SROI exists in cost benefit analysis, 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), a San Francisco-based philanthropic fund
that makes long-term grants to organizations that run businesses for social benefit. 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. 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, and the need for these metrics to focus on
outcomes over outputs. While SROI builds upon the logic of cost-benefit analysis, 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. By contrast, cost-
benefit 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, the Hewlett Foundation's Blended Value Project brought a group of practitioners from
the US, Canada, UK and Netherlands who had been implementing SROI analyses together to
draft an update to the methodology. 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. New
Economics Foundation in the UK began exploring ways in which SROI could be tested and
developed in a UK context, publishing a DIY Guide to Social Return on Investment in 2007.

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, verifiable method. This
resulted in another formal revision to the method, produced by a consortium led by the SROI
Network, published in the 2009 Guide to SROI.[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. As of 2009 all
but one of the seven identified principles are now common to the two frameworks. These are: •
Involve stakeholders. • Understand what changes. • Value the things that matter. • Only include
what is material. • Do not over-claim. • Be transparent. • Verify the result.

'Value the things that matter' includes the use of financial proxies and monetization of value and
is unique to the SROI approach.

In 2008, Social Evaluator BV[2] in the Netherlands created a tool that walks users through ten
steps in developing an SROI analysis. To date roughly 60 users have generated approximately
500 cases and hundreds of indicators pertaining to different industries and issue areas.

In 2009-2010 proponents affiliated with the SROI Network proposed to establish linkages
between SROI analysis and IRIS[3], an initiative to create a common set of terms and definitions
for describing the social and environmental performance of an organization. Discussions about
how best to do this are ongoing.

Primary purpose
While in financial management the term ROI refers to a single ratio, SROI analysis refers not to
one single ratio but more to a way of reporting on value creation. It bases the assessment of value
in part on the perception and experience of stakeholders, finds indicators of what has changed
and tells the story of this change and, where possible, uses monetary values for these indicators.
It is an emerging management discipline: a skill set for the measurement and communication of
non-financial value. Therefore, the approach distinguishes between "SROI" and "SROI
Analysis." The latter implies: a) a specific process by which the number was calculated, b)
context information to enable accurate interpretation of the number itself, and c) additional non-
monetized social value and information about the number’s substance and context.

The principles
The main principles are that:

Stakeholders are central;

An impact map can be used to understand how the organizations create change. An impact map
shows the relationship between the resources available to an organization, its activities and its
outputs and the results of the outputs, called outcomes;

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);

Only the material impacts will be included in the analysis where materiality is assessed by
reference to public policy, best practice, local values, stakeholders and financial resources that
are available;

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, and problematic when it is made a universal requirement
by others.

On the pro side, the reasoning is as follows: The question of how individuals and societies value
one thing compared with another continues to absorb philosophers, psychologists, social
scientists and economists. But having to get on with life, we make do by using prices and we
accept that the price of things reveals peoples’ preferences for one thing over another. Price is a
proxy for value.

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.
Secondly, 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.

The use of monetary proxies for social, economic and environmental value offers several
practical benefits:
  it makes it easier to align and integrate performance management systems with financial
management systems;
 it aids communication with internal stakeholders, especially those responsible for
finances and resource allocation, 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 permits sensitivity analysis to show which assumptions are more important in that the
result is more affected by changes in some assumptions than others;
 it helps identify the critical sources of value and so streamlines performance
management.

Despite these benefits, 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-- a comparison which would be an
apples to oranges comparison in nearly every case
Potential benefits of SROI
 Communication: By providing both credible numbers and qualitative and narrative value
information, and the systematic story to support all of these it can ‘talk’ to stakeholders
with different preferences. It can help in communicating information with stakeholders
and provide a means of drawing them into conversation.
 More effective decisions: If being used for planning, and not review, the focus on
stakeholders can highlight interrelationships and help define activities with stronger
synergies and increase planned social value. Monetized indicators can help analysis by
management to consider what happens if they change their strategy. It allows them to
think about whether their strategy is optimum in generating social returns, or if there may
be a better means of using their resources. It can help investors more efficiently select
investments that are aligned with their value objectives.
 Focus on the important: By focusing on the critical impacts, 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.
The focus shifts to the creation of value, and away from the risk mentality and
opportunity cost of using money here rather than there.

Clarity on governance: If more accountable organizations are more sustainable, then

understanding and explaining these impacts and then responding to them is critical. SROI
analysis can help clarify impacts and focus the response. 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’, which is widely understood
by investors, commissioners and lenders. There is increasing interest in SROI as a way to
demonstrate or measure the social value of investment, beyond the standard financial
measurement.

Where it is not being used already, SROI may be helpful in showing potential customers (for
example, public bodies or other large purchasers) that they can develop new ways to define what
they want out of contracts, by taking account of social and environmental impacts

SROI can also be used in strategic management. The monetized indicators can help management
analyze what might happen if they change their strategy, as well as allow them to evaluate the
suitability of that strategy to generating social returns, or whether there may be better means of
using their resources
Potential limitations of SROI
 Benefits that cannot be monetized: There will be some benefits that are important to
stakeholders but which cannot be monetized. An SROI analysis should not be restricted
to one number, but seen as a framework for exploring an organization’s social impact, in
which monetization plays an important but not an exclusive role.
 Focus on monetization: One of the dangers of SROI is that people may focus on
monetization without following the rest of the process, which is crucial to proving and
improving. 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. This clarity informs stakeholder engagement. Therefore, if an
organization seeks to monetize its impact without having considered its mission and
stakeholders, then it risks choosing inappropriate indicators; and as a result the SROI
calculations can be of limited use or even misconstrued.
 External accreditation: There is no external accreditation, and no brand or mark is
available.
 Intensive for the first time: If an organization does not have an existing social accounting
system, 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, groups, or the environment.
 Some outcomes not easily associated with monetary value: Some outcomes and impacts
(for example, increased self-esteem, improved family relationships) cannot be easily
associated with a monetary value. In order to incorporate these benefits into the SROI
ratio proxies for these values would be required. SROI analysis is a developing area and
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.

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, key challenges
REDF encountered, and the approaches REDF finally adopted. Special attention is given to the
application of traditional, for profit financial metrics to non-traditional, nonprofit, social purpose
enterprises to derive six key SROI metrics. These SROI metrics are then presented in the larger context of
social return on investment in REDF’s SROI Reports. The SROI Reports feature the SROI metrics along
with business data, social impact data, qualitative information about the social purpose enterprise, and
analyses of each of these areas. The paper posits that without this broader context of social return on
investment found in the SROI Reports, the SROI metrics have limited application. The paper concludes
by discussing the potential impact an SROI Framework may have on the field of philanthropy. The
authors reflect upon the lessons learned during the past year’s effort to apply this SROI Framework to
social purpose enterprises, the implications for the field of philanthropy, and which aspects of the SROI
Framework call for more thought and exploration. The paper’s Appendix includes detail of significant
changes made to REDF’s earlier SROI approaches 3, including the decision to abandon efforts to apply the
concept of a “Social Beta.” In addition, the Appendix includes a glossary of key terms. A sample Baseline
Survey can also be found here.

Introduction
The Roberts Enterprise Development Fund (REDF) operates under the basic premise that all funds 4
provided to players in the nonprofit sector represent investments. These investments may be targeted to
building infrastructure, program execution or covering overhead. Whatever their use, we presume all
investments in the Nonprofit Capital Market are directed toward addressing needs or improving
conditions of communities, toward creating social value. But how do we measure the success of our
efforts? For each dollar invested, what is the resulting benefit to individuals and to society? Historically,
the Nonprofit Capital Market has been hard pressed to develop metrics appropriate to its work.
Understanding how to capture and quantify the value created by the nonprofit sector’s work has been, and
will continue to be, a major challenge. 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. It is only a start, it is not
definitive or complete, but it is a significant effort to raise the bar of practice to a new level. In the pages
that follow, in our publication of individual SROI Reports, and on our supporting website
(www.redf.org), we provide a description of our approach to this work, as well as a description of the
framework we have developed for calculating SROI. A user-friendly version of this financial model is
also available for download from the REDF website.

Framework for SROI

Evaluation of Mission and vision

statement

Define Objective accordingly

GAP