UNO November 2013

Measurement of the social impact with the SROI method



At the beginning of the XX century, a group of economists in both sides of the Atlantic tried to find a new point of view for one of the business paradigms which had always been considered immutable. This paradigm was that the business value only consisted on the economic-financial value and the only objective of companies is benefit. However, the abovementioned economists started to think that companies not only create (or destroy) economic-financial value but also create (and destroy) social and environmental values since they act and interact in the outside world. Thus, companies create social value when they interact with different interest groups such as clients, employees, the State, or even neighborhood associations. The environmental value is reflected in the way the company acts when using natural resources.

The economic-financial value is measured through financial accounting, which is a game with rules more or less accepted by all economic agents and which has been used for centuries. We can say for example that a company has a value of “x thousand euros” or that the value of its investment has y or z volume.

The SROI method can be very helpful when measuring the contribution to society of a certain project

Even though from an abstract point of view this paradigm seems easy to formulate, it is not that simple when deciding which value will be given to social and which one to environment. Although we have already seen that rules of economic-financial valuation are more or less fixed it does not happen the same with the social and environmental value (in this article we will only focus on the social one). It can be clearly seen that a business project creates a social value for example, by creating employment in an area with high rates of unemployment. But there is not a specific tool such as financial accounting to measure what is the economic-financial value of this social value.

The care of social issues is already a strategic part of any company seeking for benefits

The economists we have mentioned before led by Jed Emerson in the USA and then by Jeremy Nicholls in the UK, created a method to approach the concept of social value. This method is based on the analysis of cost-benefit. The difference is that it is not only used by external agents seeking to know if a certain investment is viable or not but also by project managers and investors who need to make decisions based on the social and environmental impacts of the project. This method is called SROI (Social Return on Investment) and it describes how a business project creates social value and reflects the outcome regarding social benefits and the needed investment to achieve them. So, for example we can say that a business project has a SROI ratio of 3:1 when every Euro invested creates 3 of social benefit. One of the main advantages of this method is the possibility to overcome the qualitative measure which many evaluating methods for social projects praise, and explore quantitative aspects.

06The main pillar of a SROI analysis is the analysis of the interest groups (stakeholders). The question we need to answer in such a study is: how have the living conditions of our stakeholders changed as a consequence of our activity?

Countries like the UK, USA, Netherlands and Australia have successfully implemented this method over the past years. In our country we have some examples of traditional companies, social companies and also in providing state services.

The SROI method can be very helpful when measuring the contribution to society of a certain project. It is especially important taking into account the current situation where, due to financing problems in the financial markets, many of the state social services are being reconsidered. Just think about the importance of adding a social value to a project when a company goes to a public contest to offer a specific service. Or even the advantages it could represent when trying to get funding if they can prove the social value of their project.

This method has also its own limitations like the evaluation of intangibles. But this fact should not discourage companies to still try to overcome the old paradigm and adapt to the new situation in which the care of social issues is already a strategic part of any company seeking for benefits.

Hugo Narrillos
Director of Treasury and Liquidity of Bankia
He is Director of Treasury and Liquidity of Bankia and Coordinator of the SROI Network International in Spain. Although he is specialized in Investment Banking and he was worked in several financial institutions in London, Brussels, Valencia and Madrid, he has talked to several media and advocated for a change on the way business is valued. He has written a book titled Economía Social. Valoración y medición de la inversión social (método SROI) (Social Economy. Value and Measure of the social investment -SROI method-). and is also the author of several articles about the measurement of the social business value. He is a Professor of Finances in the Jaime I University of Castellón. He has a PhD in economics from Complutense University of Madrid and has a degree on Business from the École Supérieure de Commerce of Montpellier. @HugoNarrillosRx

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