Module 7: Social Investing and Social Return on Investment
What is Social Investment?
According to Social Economy Scotland, social investment is a form of investment that is “focused on the social return rather than the financial return. It is a relatively new term but is gaining common currency describing the type of investment organizations are looking for as they move away from grant aid.”(1)
The Challenge: Procuring Social Investment
Because a social investor has to sacrifice financial return in favor of social return, the social investor arguably takes on more financial risk compared to the traditional investor. According to Brian Trelstad of Acumen Fund, a social investor is “someone who takes a double (or in some cases triple) bottom line approach to their capital, and attributes real value to the social or environmental return in their investment decision-making. They will often, but not always, be willing to exchange a lower economic return for potential social or environmental impact.” (2) So a fundamental challenge facing social entrepreneurs is to persuade investors, who normally invest in profit-oriented businesses, to invest in social ventures that not only do not promise significant returns, but are normally also highly susceptible to failure.
At the moment, there are no ready answers to this problem. In fact, there are many more challenges to come in terms of attracting investment into the social sector. Though the number of social investors continue to grow, it is unlikely to achieve a size large enough to meet all future social investment needs.(3) Moreover, continued dependence on donor funding only leads to increased competition with other traditional nonprofits. Some have also suggested improving the profitability of social ventures by expanding their clientele to include the middle and upper classes,(4) but this would arguably detract from the integrity of social entrepreneurship, which is supposed to serve the disadvantaged. Yet, without sufficient investment, a social venture’s impact is limited because it cannot achieve significant scale. (5)
Social Return on Investment (SROI) & Its Importance
According to Social Economy Scotland, “SROI measures an organisation’s added value by calculating the social, environmental and economic benefits it creates and by attributing a financial value to them. It is based on standard accounting principles and investment appraisal techniques.”(6) It is a way of quantifying value creation. Like other investors, social investors, too, want to know if their investments are actually generating social returns. After all, just as economic profits justify the existence of businesses, so social returns justify the existence of nonprofits and social entrepreneurs. (7)
But unlike other investors, social investors often have difficulty coming up with a precise, numerical value that can accurately represent the amount of social return produced. According to Sean Stannard-Stockton, the director of a wealth management firm,
“But what about the Social Return on Investment? If a donor makes a gift to a nonprofit, what is the “return” on that gift? How much “good” was achieved? The dollar amount given is easy, but “calculating” the “good” done is tough. First because knowing what “good” means is hard, secondly because relating “good” to dollars is like translating a symphony into organic chemistry, and third because identifying cause and effect is tough (did your grant create more jobs, or did the economy just happen to get better?)…I don’t think we’ll ever be able to honestly make statements like “My $10,000 donation achieved a 9.2% SROI”. That would be like calculating that The Great Gatsby was a better investment of your time than Freakonomics.”(8)
Calculating the Social Return on Investment
Some entrepreneurs have provided technical guidelines in an attempt to measure the social return on investment. Jed Emerson, Jay Wachowicz and Suzi Chun from Harvard Business School propose an SROI analysis using the following methodology:
"Examines a social service activity over a given time frame (usually five to 10 years); calculates the amount of "investment" required to support that activity and analyzes the capital structure of the non-profit that is in place to support that activity; identifies the various cost savings, reductions in spending and related benefits that accrue as a result of that social service activity; monetizes those cost savings and related benefits (that is to say, calculates the economic value of those costs in real dollar terms);discounts those savings back to the beginning of the investment timeframe (referred to as "Time Zero") using a net present value and/or discounted cash flow analysis; and then presents the Socio-Economic Value created during the investment time frame, expressing that value in terms of net present value and Social Return on Investment rates and ratios.”(9)
In presenting the above methodology, the authors also give a disclaimer: “The core SROI analysis, as presented by REDF, does not attempt to definitively quantify and capture all aspects of the benefits and value that accrue as a result of a successful program, but rather to identify direct, demonstrable cost savings or revenue contributions that result from that intervention.”(10) In other words, this is just one of many possible ways to calculate social return on investment, one based on cost savings and revenue contributions.
The Calvert Foundation has designed its own Social Return on Investment Calculator, based on the number of jobs created by the social venture. The diversity of methods of value appraisal attest to the difficulty of providing a standard, consistent way of Social Return on Investment analysis.
(1) "Glossary." Social Economy Scotland. 2007. 22 Jun 2009.
(2) Lee, Moses. "Social Investing Part 1:Risks, Returns, and Me." Next Billion. 04 Jun 2009. 22 Jun 2009.
(6) "Glossary." Social Economy Scotland. 2007. 22 Jun 2009
(7) Emerson, Jed, Jay Wachowicz, and Suzi Chun. "Social Return on Investment (SROI):Exploring Aspects of Value Creation." 21 Jan 2001 Web.22 Jun 2009.
(8) Stannard-Stockton, Sean. "Social Return on Investment." [Weblog Tactical Philanthropy: Chronicling the Second Great Wave of Philanthropy] Web.22 Jun 2009.
(9) Emerson, Jed, Jay Wachowicz, and Suzi Chun. "Social Return on Investment (SROI):Exploring Aspects of Value Creation." 21 Jan 2001 Web.22 Jun 2009.