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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 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 2006 to facilitate the continued evolution of the method. Over 700 globally are members of this network called Social Value UK (formerly the SROI Network).
The SROI method as it has been standardized by the Social Value UK provides a consistent quantitative approach to understanding and managing the impacts of a project, business, organisation, 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.
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, although economic efficiency also encompasses social and environmental considerations.
In 2002, the Hewlett Foundation's Blended was brought forward by 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 Social Value UK, published in the 2009 Guide to SROI.
Developments in the UK led to agreement between the Social Value International and the Social Value UK on core principles. As of 2009 all but one of the seven identified principles are now common to the two frameworks. These are:
'Value the things that matter' includes the use of financial proxies and monetisation of value and is unique to the SROI approach.
Since 2008 Social E-valuator from The Netherlands have been working on solutions for impact measurement. In 2013 Social E-valuator built a brand new online software platform for measuring impact and late 2014 they have launched an inclusive impact measurement platform called Sinzer. This enables people to map impact, collect data in an efficient way and analyze the results. The online tool from Sinzer is created in such a way that organizations can make better decisions, improve impact and be accountable to stakeholders.
More recently, Social Asset Measurements Inc., a Canadian software and consulting company, developed the Social Return Intelligence Suite, which is made up of two interlinked software products: The Ira Impact Reporting & Management Suite (IIRM) and the Sabita Indicator & Financial Proxy Database Service (SDS). Sabita was created with funding from the National Research Council of Canada and houses over 500 indicators and financial proxies, which are adjusted for inflation and graded according to the SAM Factor – a proprietary algorithm that provides a grading from 0-10 based on the quality of the sources used in creating the financial proxy. Ira allows non-SROI practitioners to report within the SROI framework, creating monetized and non-monetized impact reports, as well as outcome and output reports.
In 2009–2010 proponents affiliated with the Social Value UK proposed to establish linkages between SROI analysis and IRIS, 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.
While in financial management the term ROI refers to a single ratio, unlike Social Earnings Ratio (S/E Ratio), SROI analysis does not refer 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 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. Essentially, the monetisation principle assumes that price is a proxy for value.
While prices represent exchange value – the market price at which demand equals supply – they do not completely represent all the value to either the seller or the consumer. In other words, they do not capture economic surplus (consumer or producer surplus). They also do not include the positive or negative value (i.e., externalities) for others who may be affected by an exchange. Moreover, 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. Hence market prices do not always accurately reflect what people value.
Proponents of SROI argue that using monetary proxies (market prices or other monetary proxies) for social, economic and environmental value offers several practical benefits:
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.
The SROI methodology has been further adapted for use in planning and prioritization of climate change adaptation and development interventions. For example, the Participatory Social Return on Investment (PSROI) framework builds on the economic principles of SROI and CBA and integrates them with the theoretical and methodological foundations of Participatory Action Research (PAR), Critical systems thinking, and Resilience Theory and strength-based approaches such as Appreciative Inquiry and asset-based community development to create a framework for the planning and costing of adaptation to climate change in agricultural systems  PSROI thus represents the convergence of two theoretical tracks: Adaptation prioritization, planning and selection, and the economics of adaptation. The main divergence, then, between SROI and PSROI is that while SROI typically analyzes pre-defined interventions, PSROI involves a participatory intervention prioritization process that is antecedent to SROI-style economic analyses.