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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 financialaccounts) 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 ofinvestments.

A network was formed in 2008 to facilitate the continued evolution of the method. Over 570practitioners 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 marketvalues. 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 resourceallocation decisions.

Some SROI users employ a version of the method that does not require that all impacts beassigned 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 thesocial sector. Foundation staff have often thought of themselves as the venture capitalists ofthe nonprofit worldinvesting in high risk ideas and programs that might then be taken to scaleby public sector funders. While in some ways true, there are others ways in which mainstreamphilanthropic 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 whatis required for real success. Additionally, lacking any formal structure or process for graduatingcapital support from seed to secondary to mainstream funders, the Nonprofit CapitalMarket has often functioned with significant inefficiencies. In many ways the practice oftraditional philanthropy has, over numerous years, become Transitive hilanthropy.6TransactivePhilanthropy is philanthropy concerned primarily with making grants and engaging infundraising. Success is defined as the amount of ones perceived value created in the sector.Success is measured by the number of grants given and by the size of ones assets. There isoften no real connection made between the dollars one provides nonprofit organizations and thesocial value generated from that support. The focus of activity comes to rest upon thetransaction rather than measuring the value generated through the course of those transactions.INVESTMENT 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 philanthropicinvestments are the measure of an investments success. The critical challenge in InvestmentPhilanthropy is to compare the money invested with the value it creates. Historically,foundations have been reluctant to invest in sophisticated evaluation systems since thesesystems have often been viewed as simply additional forms of overhead. Other foundationshave evaluated an individual program for its perceived effectiveness over time, making use ofcontrol groups and statistical analysis to measure certain outcomes. Investment philanthropy,

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however, is less interested in evaluating programs than in creating social managementinformation systems by which the long-term value created and activities of the investee madepossible by particular philanthropic investments may be tracked in order to improve the entirenonprofit organizations performance. Other REDF documents7 have explored the challenge ofdesigning such as system. This paper approaches the question of value creation from theinvestors perspective. Namely, how does one create and apply a framework capable of tracking

the social return of ones philanthropic investments? How does one think of the creation ofsocial equity8 in this context? And, finally, what are the primary challenges of documenting thevalue of philanthropy with such a framework? This paper attempts to address each of thesequestions. We begin with an exploration of the nature of value, and the role of social value indetermining philanthropic social return on investment.

CONCEPTS OF VALUE9

For social entrepreneurs managing social purpose enterprises, value creation occurssimultaneously 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 discussionon socio-economic value creation, the arena in which both economic and social value areconsidered. It is this combined value creation process that an SROI analysisattempts to measure.

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

social valueSocial value is created when resources, inputs, processes or policies are combined to generateimprovements in the lives of individuals or society as a whole. It is in this arena that mostnonprofits justify their existence, and unfortunately it is at this level that one has the mostdifficulty measuring the true value created. Social value can be found in a wide variety ofactivities from anti-racism efforts, community organizing, environmental protection and artssupport efforts, to a family moving from welfare to work. The psychological impact on anindividual whose family has moved from welfare to work may be significant but hard tomonetize. These activities have intrinsic value, but it can be difficult to agree upon or quantifythe actual value created.

socio-economic valueMeasures of economic value are standardized and support the basis for most financial activity inthe world. In the social value arena there are factors that are beyond measurement, yet clearlyare 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 economicvalue measurement by quantifying and monetizing certain elements of social value, andincorporating those monetized values with the measures of economic value created. A nonprofitorganization or program creates socio-economic value by making use of resources, inputs, or

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processes; by increasing the value of these inputs; and then by generating cost savings and/orrevenues for the public sector. These cost savings and revenues may be realized in decreasedpublic dollar expenditures and in increased revenues to the public sector through additionaltaxes paid. Examples of community economic development activities, in addition to socialpurpose enterprises, that generate socio-economic value include supported employmentprograms for the disabled or homeless, job training programs, and other initiatives. These

activities are all involved in providing employment for those presently receiving public supportand 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 tomean that nonprofit and for profit corporations create social value. However, there have beenlimited efforts to date to quantify and monetize the socio-economic value created by theseorganizations We at REDF believe SROI can be calculated in a set of metrics that quantify andmonetize the economic and socio-economic value of social purpose enterprises, but that itshould also be viewed in a broader context. Returns realized on a social investment will alwaysinclude social impacts that are impossible to monetize, or difficult to even quantify. Over theyears, REDF has invested significant time and resources to create the SROI Framework toidentify direct, demonstrable cost savings and revenue contributions that are associated with anindividuals employment in a social purpose enterprise and measure the societal benefit createdby a social purpose enterprise. REDFs SROI Framework focuses on determining a set of sixSROI metrics: Enterprise Value, Social Purpose Value, Blended Value, Enterprise Index ofReturn, Social Purpose Index of Return, and Blended Index of Return. However, we alsoacknowledge 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 theirtarget, 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 askedare: How do we measure the success of such efforts? For each dollar invested, what is theresulting benefit to individuals and society? How can both investor and investee be assured thateach dollar is, in fact, maximizing its value creating potential? How can we calculate the socialreturn on our investments? In 1996, The Roberts Enterprise Development Fund (REDF)published a retrospective social return on investment (SROI) analysis of two social purposeenterprises.2 In 1997, REDF began an effort to track and analyze the impact of seven SanFrancisco Bay Area nonprofit organizations and their twenty-three social purpose enterprises.Employing individuals with a range of disadvantages, the enterprises serve a dual purpose: toprovide market-driven goods and services to customers, and to provide a supportive trainingand work environment for individuals who wish to improve their lives. This paper presents adiscussion of REDFs methodology and actual experience in applying the theory of SROIanalysis to the practice of assessing its own value creation efforts through investments in socialpurpose enterprises. The paper begins with a discussion of the basic concepts of value. Valuecreation is presented as a continuum ranging from social, to socio-economic, to economic valuecreation. REDFs SROI Framework, which focuses on economic and socio-economic valuemeasurement, is presented. The paper presents this SROI Framework, which uses a iscountedcash flow analysis in an effort to monetize the economic value of social impacts achieved by thesocial purpose enterprises in the REDF Portfolio. This monetized social value is thenconsolidated with the economic value created by the same social purpose enterprises.Following this presentation of the basic theoretical SROI Framework, the six stages of REDFsSROI analysis are described in detail.

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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 fundthat 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 aswell 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 thatare 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 differentin 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 todraft 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. NewEconomics Foundation in the UK began exploring ways in which SROI could be tested and

developed in a UK context, publishing aDIY Guide to Social Return on Investmentin 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 SROINetwork, 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 tensteps 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 linkagesbetween SROI analysis and IRIS

[3], an initiative to create a common set of terms and definitions

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for describing the social and environmental performance of an organization. Discussions abouthow best to do this are ongoing.

Primary purpose

While in financial management the term ROI refers to a single ratio, SROI analysis refers not toone 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 changedand 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 ofnon-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 numbers substance and context.

The principlesThe main principles are that:

Stakeholders are central;

An impact map can be used to understand how the organizations create change. An impact mapshows 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 thatare available;

Financial proxies should be used to ensure that the issues that are relevant to all those affectedhave been included this is sometimes called monetization

Monetization principle

The translation of extra-financial value into monetary terms is considered an important part ofSROI analysis by some practitioners, and problematic when it is made a universal requirementby 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, socialscientists and economists. But having to get on with life, we make do by using prices and we

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accept that the price of things reveals peoples preferences for one thing over another. Price is aproxy for value.

However while price may represent the exchange value its market price it doesnt 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: differentdistributions result in different prices which result in different proxies for value.

The use of monetary proxies for social, economic and environmental value offers severalpractical benefits:

y it makes it easier to align and integrate performance management systems with financialmanagement systems;

y it aids communication with internal stakeholders, especially those responsible forfinances and resource allocation, and with those who prefer quantitative to qualitative

ways of learning;y

it induces transparency since it precipitates the clarification of which values have beenincluded and which have not been included;y 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;y 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 ofSROI 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 anapples to oranges comparison in nearly every case

Potential benefits of SROIy 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 stakeholderswith different preferences. It can help in communicating information with stakeholders

and provide a means of drawing them into conversation.y More effective decisions: If being used for planning, and not review, the focus on

stakeholders can highlight interrelationships and help define activities with strongersynergies and increase planned social value. Monetized indicators can help analysis by

management to consider what happens if they change their strategy. It allows them tothink 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 selectinvestments that are aligned with their value objectives.

y Focus on the important: By focusing on the critical impacts, an SROI analysis can becompleted relatively quickly and is an effective way of defining management information

systems necessary to make it quick in futurey 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.

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as SROI evolves it is possible that methods of monetizing more outcomes will becomeavailable 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, keychallenges 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 thenpresented in the larger context of social return on investment in REDFs SROI Reports. TheSROI Reports feature the SROI metrics along with business data, social impact data, qualitativeinformation about the social purpose enterprise, and analyses of each of these areas. Thepaper posits that without this broader context of social return on investment found in the SROIReports, the SROI metrics have limited application. The paper concludes by discussing thepotential impact an SROI Framework may have on the field of philanthropy. The authors reflectupon the lessons learned during the past years effort to apply this SROI Framework to socialpurpose enterprises, the implications for the field of philanthropy, and which aspects of theSROI Framework call for more thought and exploration. The papers Appendix includes detail ofsignificant changes made to REDFs earlier SROI approaches3, including the decision to

abandon efforts to apply the concept of a Social Beta. In addition, the Appendix includes aglossary of key terms. A sample Baseline Survey can also be found here.

IntroductionThe Roberts Enterprise Development Fund (REDF) operates under the basic premise that allfunds4 provided to players in the nonprofit sector represent investments. These investmentsmay be targeted to building infrastructure, program execution or covering overhead. Whatevertheir use, we presume all investments in the Nonprofit Capital Market are directed towardaddressing needs or improving conditions of communities, toward creating social value. But howdo we measure the success of our efforts? For each dollar invested, what is the resulting benefitto individuals and to society? Historically, the Nonprofit Capital Market has been hard pressed todevelop metrics appropriate to its work. Understanding how to capture and quantify the valuecreated by the nonprofit sectors work has been, and will continue to be, a major challenge. Wepresent our approach to analyzing social return on investment (SROI) as a balanced andeffective way to understand the connection between the funds provided to investee nonprofitorganizations and the results those organizations achieve. It is only a start, it is not definitive orcomplete, but it is a significant effort to raise the bar of practice to a new level. In the pages thatfollow, 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

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the framework we have developed for calculating SROI. A user-friendly version of this financialmodel is also available for download from the REDF website.

Framework for SROI

Evaluation of Missionand vision statement

Define Objective

accordingly

Need for Value

creation

Evaluation of

Actual needIntrospection of

societies need and

requirement

Evaluation/available

/possible way of SROI

A roach

Venture

capitalism/Fundi

ng from outside

Self Funding

Evaluation ofStrength and

com etitiven

Resource

Acquistion

(finance )

Creation of MIS for decision making

Strategic Penetration for socio-economic Value Creation

YES

NO

Cost benefit analysisPreparation

of report

GAP 1

GAP2