The Problem with SROI

The Problem with SROI

Excerpt from SVT-On-Impact

Few terms evoke such a passionate response in the impact management field as “social return on investment” or “SROI.” It’s not so much the idea itself that sparks debate, but the varying interpretations of how the term should be translated into practice. Perhaps in part the tension comes from conflating the generic concept of social return with conventional (financial) ROI or with methodologies like “Social Return on Investment Analysis.” But one thing is certain: everybody has their own intepretation of what SROI means.

Many who love the concept of SROI thrill to the vision of a universal performance measure that places human and environmental well-being on par with financial wealth…. Or to the vision that do-gooders might really be able to account for their performance…. Or that philanthropic money might be allocated against more objective criteria…. Or that SROI could be compared directly with financial ROI to reveal a new, sustainable “efficient frontier”…. Or that SROI will reveal the financial returns driven by social investments…. Whichever particular vision it is, they love SROI!

On the other hand, many of those who dislike it can’t stand that it implies that you could sum up all that is of value into a single, quantitative ratio…. Or that it caters to the dangerous tendency of mainstream capital markets to abstract everything to the point that it is no longer anchored in a real source of value.

Many of us, however, see a middle ground: that SROI in practice may provide a coherent underlying architecture on which to build processes and tools that help organizations manage the social returns of their investments in a hands-on way.

The analogy to financial ROI implies that SROI is two things: one, comprehensive, and two, a single ratio. The dilemma, though, is that to arrive at a single ratio, the social value numerator has to be in money terms so that it can be divided by the investment denominator-- but a complete summary of all significant social value simply cannot be represented in exclusively monetary terms. For example, the value of "children not orphaned" simply can't be fully captured in terms of their increased earning potential.

Many, especially in the finance industry, see exciting potential in figuring out how to unify all information about non-financial impact into a single ratio that would be more directly analogous to financial ROI. In concept we think that would be cool too, but it is hard to imagine that it would ever be perfectly analogous to financial ROI, which is the comprehensive sum of all financial value relative to investment.

That presents us with a choice. We can narrow the definition of “return” to refer just to that part of the value that can be reasonably captured in dollar terms; we can expand the definition of what “return on investment” means to include multiple numerators (monetary, quantitative, qualitative and maybe even narrative), relative to investment; or, we can scrap the term entirely.

A lot of us who have participated in the SROI conversation, and put the idea or measuring social returns into practice, have felt like the first option would not really get us anywhere—after all, we were trying to move away from the straightjacket of financial ROI being the sole design criterion for everything, since that was so clearly leading us into the abyss.

So, some took the third option and moved away from the term to chart a course to other concepts that spoke more accurately to the actual steps in the process and to the product.

While others, including ourselves, find the concept represented by the term itself-- with the implication of comprehensiveness, systematization and relevance to capital markets-- to be too powerful a compass point to abandon entirely. But we recognize that for it to be comprehensive requires a more broadened definition of return, so we have settled for annoying the financiers with an interpretation of SROI that results in multiple facets of value relative to investment... and we've either made the best of-- or gone into temporary denial about-- the knotty information design problem presented by multiple types of social value numerators.

Fortunately digital technology and the internet open up the possibility of transmitting videos just as easily as 1s and 0s. What does this look like? Microplace is one example of an organization beginning to put financial returns into their social context systematically, by including information about who, where and how poor are the clients served by a given microfinance organization. E+Co is reporting information quarterly about their quantitative social and environmental outputs, like the number of people with new access to clean energy, on par with financial performance. And Calvert Foundation was an early pioneer of interactive output accounting with its “SROI Calculator.”

The debate over the meaning of SROI is surely a creative one, and hopefully its tension will continue to spur constructive debates that lead to interconnections between the profit-driven and mission-driven worlds. We hope that one connection made will be that more professionals in the finance world will realize that, in isolation from the other kinds of returns that go hand in hand with it, financial ROI is a needlessly imperfect gauge of value.