Unearthing Social Value: An Insight into Social Return on Investment (SROI)
As long-term environmental and social outcomes are fast becoming central to development projects, traditional financial metrics have proved insufficient as measures of project impact. However, even in this changing context, questions of project effectiveness and efficiency remain extremely important for funders, implementing organizations, and policymakers. Social Return on Investment (SROI) has emerged as a powerful tool that accounts for the complexity of socio-environmental outcomes, while also helping quantify project effectiveness and efficiency in monetary terms. In this blog, we explore the strengths and relevance of SROI analyses as well as the limitations and other considerations that evaluators must be mindful of.
SROI as an Impact Assessment Tool
SROI helps evaluators and other stakeholders answer a fundamental question: What is the value of social good generated per dollar/rupee invested by the project? While it is similar to the cost-benefit analysis (CBA) framework, SROI allows for the accounting of a more complex impact than is possible with a classic CBA. Similarly, it allows evaluators to capture even second-degree/indirect impacts of a project by following a systematic process.
First, the evaluator is required to define the scope of the project, as well as the analysis. This includes identifying the social, environmental, and economic outcomes that can be attributed to the project and must be valued. This step is followed by stakeholder identification, mapping out the theory of change and indicators for each outcome and finally, identifying valid and reliable financial proxies for each outcome. At the end of this systematic process, one arrives at an SROI ratio, which indicates if the project is socio-environmentally “profitable” (ratio>1) or not (ratio<1). Given the systematic nature of the SROI framework, evaluators can readily integrate it into traditional program evaluation tools, such as the theory of change and the logical framework.
To ensure robustness and transparency, an SROI analysis must ensure stakeholder involvement—to the extent possible—in each step of the process. Similarly, efforts must be made to ensure that the financial proxies assigned for valuation are conservative estimates. This ensures that the analysis does not overclaim project impact and errs on the side of caution. Finally, an SROI analysis must be complemented by sensitivity analyses that test the effect of a change in assumptions and financial proxies for each of the outcomes.
Understanding SROI: More than just numbers
There are two ways to go about the SROI analysis- retrospective SROI and prospective SROI. Retrospective SROI, as the name suggests, evaluates past projects on the basis of their actual outcomes, and has its own set of pros and cons. While it provides a reliable estimate of the project’s actual impact to decide or justify continued funding, it requires the availability of historical data and particularly baseline data points, without which attributing the entire impact to the program or intervention will not be possible. Further, since it may also involve stakeholder interactions, there is a possibility of recall bias in qualitative assessments. On the other hand, prospective SROI is adopted in cases where the projects are still ongoing and predicts a potential social return. It is more helpful for program teams in planning intervention rollout, cash flows, and resource allocation. Having said that, since it includes a great deal of assumptions, financial proxies, and guestimates, it brings a high level of uncertainty and warrants updating the real-time data during implementation.
Although both approaches have their own merit and challenges, but when combined together, it paves way for robust impact evaluations and offers the stakeholders to deliver material change through their investments, right from the beginning to the end.
Applying SROI in disaster resilience: A case of flood-prone region in India
Imagine a large-scale flood resilience project in Bihar, funded by a multilateral development organization. The project takes a multi-pronged approach at building community resilience by strengthening embankments, putting early warning systems (EWS) in place, improving connectivity and enhancing livelihood support for vulnerable and affected communities. While any conventional evaluation or assessment would call the project successful by measuring the reduction in economic losses, a robust SROI analysis will add value by bringing in a more holistic and broader perspective.
Strengthening of embankments will help in reducing destruction to life and property, reduce displacement, and safeguard life; EWS will help lower fatalities and minimize health related expenditure; and livelihoods- related intervention will help reduce migration and promote local economic development. By making valid assumptions and assigning financial proxies to such outcomes, SROI will help quantify the social and economic value created by the project.
Key components of SROI analysis
When calculating SROI, a significant aspect is accounting for deadweight (the impact that would have been there anyway), attribution (separating the project’s distinct contribution), displacement (the amount of the effect on the cost of others), and drop-off (decline of the result after the intervention has been in place). There is no definitive guidance on how to quantify these four factors, but attribution and deadweight are the most important to calculate. There are three major methods to estimate deadweight to impute: (a) Ask individuals what would have happened regardless (the counterfactual) that results in an estimation of deadweight; (b) Compare the outcome with others or against benchmark groups like the national average rate of the outcome; (c) Difference-in-difference (DiD) method: Compare trends in the outcome before and after the treatment for the affected stakeholders with respect to the trends for a contrast group. These estimates are based on assumptions that are likely to be imprecise, context-specific, or subject to subjective opinion, resulting in possible misstatement of impact. Without standardized methods, differences in estimation methodologies can further contribute to comparability and consistency being eroded between evaluations, which raises doubts about the reliability of SROI outcomes.
For example, in the flood prevention initiative, the construction of embankments to limit flood risks and avoid large-scale displacement of communities. In an SROI analysis, deadweight would capture how much the natural patterns of flooding may have changed in the absence of the embankment. Attribution would capture how much of the loss of flood impact is attributable to the embankment in comparison to other flood management measures, such as upgraded drainage or local disaster preparedness efforts. Displacement would capture whether the intervention had the effect of only moving flood risks downstream rather than removing them. A sensitivity analysis, in this context, would study the impact on the final SROI ratio produced by changes in assumptions, like changes in the flood frequency data or economic costs saved, to obtain a more nuanced and accurate estimation of impact.
For increasing credibility for SROI, and to make SROI stronger, sensitivity analysis holds significance. Sensitivity analysis assesses the impact of variation in important assumptions like indicator values, the assigned financial proxies, the assigned deadweight and attribution measures, etc., on the final SROI ratio, thus checking the resilience of the ratio and its likelihood to vary under these changes. Sensitivity analysis, through an identification of the most significant variables and testing of various scenarios, enables practitioners to comprehend the level of uncertainty involved in SROI calculations. This not only improves transparency but also facilitates better-informed decision-making by bringing into focus the assumptions that have the greatest impact on outcomes.
Critiques and challenges to consider
SROI analysis, although becoming more popular, is also critiqued by development practitioners. A major issue concerns the subjectivity in placing monetary proxies on social outcomes. Monetizing such benefits as enhanced well-being or social cohesion can be too simplistic a representation of complicated social dynamics and may boil down complicated human experiences into one financial value. This monetization process also depends on the utilization of a range of financial proxy values from various sources, which may not necessarily agree with one another. Browsing through a large number of data sources can also be a question of feasibility. In addition, SROI calculation is data-demanding, requiring extensive access to data and specialist skills. Apart from resource demands, there’s also a likelihood of exaggerating positive effects or ignoring unforeseen negative effects.
Should you conduct an SROI analysis for your impact project?
To those involved in impact-driven projects, be it in disaster resilience, climate adaptation, or social development, SROI offers a powerful lens to evaluate success. If your project involves multiple stakeholders, generates long-term social or environmental benefits, and requires justification for scaling or more funding with evidence, SROI can provide crucial insights into its true value. However, if data constraints are significant or if the primary goal is a short-term financial analysis, alternative evaluation methods may be more appropriate. The success depends on balancing the advantages of SROI versus its complexity and making sure that methodology fits the goal of the project.
Atish Padhy – Deputy Research Manager, Sambodhi
Manmeet Kaur – Research Manager, Sambodhi
Prakhar Bisht – Research Manager, Sambodhi
