Imagine. You’re the owner of a company that manufactures and sells green energy products. They’re a bit more expensive than the competition, but that’s the cost of ecology. You could rightly be described as a business making a positive impact on society. Your priority is turning a profit – it has to be – but you’re also in it for the environment. Traditionally, it’s your customers who are seen as doing the good here. They’re the ones making the choice to pay more to protect the environment. But what if you also put a percentage of your profits into R&D towards making even more energy-efficient products? And what about the indirect effects? Does social value really begin and end at the energy saved by the customer’s purchase?

Your business has a positive impact beyond your bottom line. Beyond your customers’ role in choosing your product. But how do you demonstrate that? How do you tell the world you’ve made it a better place – so people know that when they support you, they’re supporting themselves and everyone around them as well? We’ve been working with enterprises like these to measure their Social Return on Investment (SROI). So that they have a concrete, quantifiable metric to testify to the positive impact they have on society. Because social value deserves the same footing as commercial value. How do we do it?

Social return on investment (SROI) explained

You’re familiar with return on investment (ROI). You invested £100 and made £20. You have an ROI of 20 per cent. Easy to calculate. Easy to express. You may be less familiar with social return on investment (SROI). It’s a method of quantifying the social benefit your organisation does. Increasingly, it’s used by charities, NGOs and government agencies to demonstrate the impact of their work. It enables people to say things like “our back-to-work scheme saved the government £10 million in jobseeker’s allowance and associated benefits”.

You spend £2 million on coaching long-term unemployed people through job hunting, CV writing and interview techniques. People who otherwise would have stayed on benefits for the foreseeable future. You calculate how much each person would have cost the welfare state, and you’re looking at a healthy saving of over £10 million.

It’s more difficult when it’s wrapped in a commercial transaction. The money you invested generated a financial return. Any social value lies with the customer. But that’s not always the whole story, is it?

Unpicking SROI from ROI

Let’s go back to the green energy example. What if your products didn’t cost more than the less-environmentally-friendly competition? What if you sold them at the same price, carbon savings thrown in? We call this an ‘enhancement’. It’s the same as your competitors’. But better. Enhanced. It’s a part of your product or service that you’re effectively giving away for free. And what about that percentage set aside for research? That’s an investment you needn’t make to get paid. You could continue to make the same energy saving light bulb and people would keep buying it. But you want to make a better light bulb. Even more energy efficient. Even better for the environment. Unpicking the social value in your enterprise begins with identifying the S in SROI. The bit you do because it’s the right thing to do. Not because it’s necessary to survive a crowded marketplace.

Quantifying social impact

Having identified the benefit to society, how do we measure the return? First, we must choose what to measure. Your work might have any number of effects on society. Your energy saving light bulbs don’t just cut carbon emissions. They also cut air pollution. Because they use less energy, less coal is burned. Air quality is improved. Fewer children have asthma. Measuring everything would be a Sisyphean task. We must narrow it down. There are two factors to consider: 1) your priorities, and 2) measurability.

What you decide to measure should reflect what’s most important to you. Do you want to focus on the carbon savings? What about the air pollution? Perhaps you want to shout about how much plastic your minimal packaging doesn’t use. Measure what counts the most. Whatever you choose to measure, it must be measurable. Something we can collect data on. Ideally, something we can regularly collect data on, so we can track progress over time. To do so, there must be identifiable beneficiaries. Returning to the air pollution example, we could define the people who benefit as children with asthma, and adults with other respiratory diseases affected by air quality. By extension, the NHS needn’t spend so much caring for them. Then, we must identify the mechanism. Lower air pollution means fewer children with asthma, which means £x lower NHS spending on prescription subsidies for inhalers.

What SROI can do for you

We said it at the outset: we understand, you run a business, and that means prioritising profit. As much as you’d like to focus on making the world a better place, commercial value must take precedent. There’s no sense investing in social impact now just to go bankrupt next year. But that’s the point. SROI isn’t charity. There is a return. Giving social effects a concrete value can be tremendously powerful. It can guide decisions, re-define your USP, and crucially, differentiate you from the competition. People may gravitate towards you because of the social value you create.

Your SROI creates a commercial advantage, which permits you to further fund the work you do to benefit society. Because it’s about measuring the social value embedded in your daily work, rather than corporate social responsibility (CSR) or charity spending bolted on to your core activities. We’ve only been using the example of environmentally friendly light bulbs because it’s a neat illustration. The real power is in demonstrating the social value created by less obviously ethical enterprises, and SROI is the tool to prove it.

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Notes:

  • This blog post gives the views of its author, not the position of LSE Business Review or the London School of Economics.
  • Featured image by George Hodan, Public domain
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Nick Woolley is a manager at Frontier Economics and has a wealth of experience in the healthcare sector, managing projects covering policy, evaluation, regulation, pricing and market design. Nick has advised a range of public and private sector clients, including NHS England, the Department of Health and Social Care, NHS Improvement, Bupa and Nuffield Health.