Beyond profits: Calculating Social Return on Investment (SROI)

For investors seeking to make a meaningful impact beyond financial returns, understanding the essence and impact of the Social dimension within the ESG framework is vital. In this first instalment of our blog series on Environmental, Social, and Governance (ESG) investing, we delve into the crucial “S” component and the principles to calculating Social Return on Investment (SROI), particularly in relation to social housing.

The rise of ESG investments

In the dynamic landscape of global finance, the emergence of ESG investing has marked a significant shift, highlighting the interconnection between financial markets and broader societal concerns.

The early 2000s were pivotal, prompting policymakers to critically evaluate the role of public services and government actions in fostering public value. This period laid the groundwork for the concept of social value, which was eventually encapsulated in the UK Public Services (Social Value) Act of 2012. This shift aligned with global efforts, such as the UN Sustainable Development Goals, emphasising the need to balance societal well-being with economic progress.

The global pandemic further propelled ESG investing into a new era. As COVID-19 spread across the world, it exposed deep-seated inequalities and vulnerabilities in healthcare systems, labour markets, and community support networks. This unprecedented crisis highlighted the urgent need for resilient social infrastructures that can withstand such shocks and protect the most vulnerable populations.

Investors began to recognise that social factors, such as employee health and safety, equitable access to services, and robust community support, are not only ethical considerations but also critical to long-term financial performance. This shift brought the ‘S’ in ESG into sharper focus, underscoring the fragility and importance of societal structures.

The SROI Framework

Measuring the components of ESG can be challenging and complex. While the environmental and governance aspects are relatively straightforward, with quantifiable metrics such as carbon emissions and company policies, the social pillar is often more difficult to quantify. It encompasses a wide range of factors, including labour practices, community engagement, human rights, and customer satisfaction. Some aspects, like employee turnover rates or diversity metrics, can be measured quantitatively, but evaluating community impact remains qualitative and subjective.

The SROI framework is particularly valuable for calculating the social return on ESG investments. It offers more transparency and accountability, enabling investors to gauge the success of their investments in terms of social outcomes and encouraging further investment.

SROI Principles and practice

Assessing the SROI of a project involves adhering to eight key principles outlined by Social Value UK. These principles guide a comprehensive process, offering deeper insights into social impact beyond traditional financial metrics.

  • Principle 1: Involve stakeholders
    Involving stakeholders means engaging with all relevant parties to ensure diverse perspectives are considered. For example, developers might hold community meetings to gather input from local residents, while also consulting with housing associations, government agencies, and potential tenants. This inclusive approach helps to align the project with the needs and priorities of those it will impact.

  • Principle 2: Understand what changes
    Identifying the social impacts of a social housing project involves evaluating various outcomes. For instance, providing affordable housing could lead to improved health and well-being due to better living conditions, higher educational success among children as a result of a stable home environment, and stronger community bonds through communal spaces and activities. It’s important to track and measure these changes, acknowledging both positive outcomes and any potential negative effects, such as displacement of current residents.

  • Principle 3: Value the things that matter
    Valuing the things that matter requires understanding what stakeholders prioritise. This might involve conducting surveys to determine what residents value most—whether it’s safety, access to public transportation, green spaces, or community services. By integrating these values into decision-making, developers ensure that the project not only meets economic goals but also enhances the quality of life for residents.

  • Principle 4: Only include what is material
    Focusing on material information requires prioritising the most significant impacts. Factors such as the improvement in residents’ health due to better living conditions and access to healthcare services would be considered material. These impacts are likely to influence stakeholders’ decisions significantly, whereas less critical outcomes might be excluded from the primary analysis.

  • Principle 5: Do not overclaim
    To avoid overclaiming, the project should only report on the social benefits directly attributable to the housing initiative. For instance, if the provision of affordable housing leads to a reduction in stress-related illnesses among tenants, this can be claimed as a direct benefit. However, broader societal improvements, like overall economic growth, should not be attributed solely to the housing project without clear evidence.

  • Principle 6: Be transparent
    Transparency involves sharing detailed information about the project’s goals, methods, and outcomes. This could include publishing reports on how data was collected and analysed, and openly discussing both successes and areas for improvement. Engaging stakeholders through regular updates and feedback sessions helps build trust and ensures that the project’s impact is accurately understood and communicated.

  • Principle 7: Verify the result
    Verifying SROI results involves seeking independent assurance from third parties. This might mean having external auditors review the project’s impact assessment to confirm the accuracy of the reported outcomes. Independent verification adds credibility to the claims and assures stakeholders that the findings are reliable.

  • Principle 8: Be responsive
    Being responsive means adapting to feedback and changing circumstances to maximise positive social impact. In social housing, this could involve regularly revising project plans based on tenant feedback or new policy developments. Implementing this Impact Management Approach ensures that strategic, tactical, and operational decisions are aligned with stakeholders’ evolving needs and priorities, allowing the project to remain effective and relevant.

Conclusion

By embracing the SROI framework and its principles, investors can navigate the complexities of social value creation, making informed decisions that align profits with purpose. This contributes to a more sustainable and equitable future, demonstrating that investment can and should go hand in hand with social responsibility. The journey through the ‘S’ in ESG represents a fundamental shift towards a more conscientious investment landscape.

Useful resources