The traditional ROI calculations are tied directly to specifics like net profit and revenue growth. Measuring the return of investments in social programs is more challenging but just as important to identifying impacts.
— By Andrew Hale
Businesses are making large investments in corporate social responsibility programs for purposes of environmental sustainability and social impact. It is easier to measure environmental impacts in terms of factors like increased use of renewable energy sources or reduction in water usage. Social impacts are not as clear cut. How does a business measure climate change improvements or financial stability, for example? It is easier to make some generic claims rather than calculating the true impact on people and communities as a result of investments in social sustainability.
It is crucial to measure and analyze the ROI on social program investments to ensure efforts maintain alignment with the organization’s mission and performance meets objectives. Organizations can produce a variety of outcomes metrics that measure the actual impacts, but they are also used to improve transparency and accountability, minimize the risks of unintended consequences, and increase public awareness.
Outputs vs. Outcomes vs. Impacts
The World Economic Forum defined impact investing “as investment approach that intentionally seeks to create both financial return and positive social or environmental impact that is actively measured.” Measurement frameworks have already been developed.
The Global Impact Investing Network’s IRIS+, for example, is a generally accepted system for measuring, managing and optimizing impact. It is a free, publicly available resource, but it is also a bit overwhelming with its 400+ indicators. So one of the first actions an organization should take to move toward social impact measurement is deciding what specifically needs to be measured and what the results will be measured against.
There is a difference between outputs, outcomes and impacts.
Outputs are tangible goods and services produced. It is the lowest layer of social impact because producing goods is not transforming nor has long-term effects. For example, people go to work in a factory, produce products and go home.
Outcomes refer to the changes people experience, but those changes are not necessarily creating a lasting impact.
Impacts are long-term effects the program has had on people’s lives. Using these definitions, the only way to know for sure if impacts are achieved is through metrics. For example, for a FinTech company, an impact metric might be how many more microentrepreneurs there are now compared to a year ago, and what has been the impact on financial stability in the community.
Continuous Cycle of Measurement Objectives
Sopact offers a SaaS platform for data collection, strategy development, measurement, reporting, and management framework for social metrics. The platform is built on the belief that one of the most important characteristics of impact measurement is that it provides a continuous cycle of measurement objectives. The continuous cycle is designed so that objectives feed into one another; estimating impact (due diligence) feeds into strategy planning feeds into monitoring impact feeds into evaluating impact to prove social value and the cycle begins again.
There are different ways to approach the cycle. For example, social ROI (SROI) is used for calculating expected returns, monitoring impact, and evaluating impact. Other models include the logic model, mission alignment model (scorecards), and quasi-experimental or experimental models. SROI is the model that applies to the largest number of steps in the continuous cycle. Each model has advantages and disadvantages.
The SROI process is focused on identifying the value created by the investment, just like any investment.
The first step is collecting benchmark data for comparing a social sustainability program to other organizations in the industry or a population as a whole. For example, a corporate program may want to make a significant positive impact in employment in a disadvantaged community by reaching the employment national average in the country. Baseline data is the data collected at the start of a program to establish the current status of the targeted population. Data is collected, compiled and analyzed.
The SROI process is focused on identifying the value created by the investment, just like any investment. Some businesses choose to use key performance indicators (KPIs) on scorecards, focusing on their strategy and goals. Alternative investment options should be evaluated to determine the one that fits best.
Measuring Net Value or Progress Toward Defined Outcomes
The SROI Network created the SROI as a framework based on social generally accepted accounting principles (SGAAP) to help decipher outcomes and produce measures that can be compared. It puts a monetary value on social benefits and compares benefits generated to costs, leading to a social return ration and SROI rate similar to a traditional ROI. Net business income is added to net social benefit to get a total SROI.
This is not the only way to measure social benefits though. Another option is measuring changes that occur from actions and tracking the progress toward specific impacts. The impacts measured are things like the change occurring in communities or the effects on a target population. A business may decide it will invest in improving health outcomes in a low-income workforce population, such as lowering the rates of high blood pressure or diabetes. Goals are set and a process is put in place to track the impacts of each activity.
It is also possible to use balanced scorecards with KPIs. There are multiple perspectives on the focus of KPIs, but this approach is beneficial for keeping the investment in alignment with the mission. KPIs can reflect things like workforce learning and growth, how well the social program is meeting the needs of the targeted population, or financial performance of the social program investment (SROI). Scorecards can be used to help the organization quantify its efforts by linking outputs to impact.
Developing metrics and a strategy for tracking performance has been challenging because businesses often start with the financial investment in terms of maximum dollars to spend. For example, a program is developed that is focused on improving the workforce skills in an international community of operation. The company decides to spend $1 million on technical training programs without really knowing if $1 million will have an impact. The only way to accurately measure the outcomes is to first set a goal, devise a strategy, and develop baseline metrics. Then establish a reporting and accountability structure.
Getting Down to Specifics
The SROI process defines the scope of the analysis which includes identifying stakeholders, mapping relationships between inputs and activities, and identifying relevant outcomes leading to true impacts.
A business can use the indicators to measure the inputs, activities and outcomes. One step is to quantify the impacts attributable to the social investment, excluding impacts that would have happened without the program. Next, a business should assign monetary value to the actual outcomes which makes it easier for business leaders to manage because they understand ROI in the financial arena. Business leaders can then calculate the SROI (impacts divided by inputs) in order to determine if investments are making the desired impacts.