What are Social Returns on Investment?

How can companies determine the effectiveness of their social and environmental investments? Social returns on investment hold the key. Read on the see how.

Besides taking part in economic activities, organizations have been involved in different social and environmental activities for the community and planet for decades.

Measuring the economic impact of any company is pretty straightforward. It simply consists of analyzing the money gained or lost compared to the funds invested.

But, how do you measure the social returns on investment?

Social returns on investment (SROI) are principles that evaluate the value of companies’ social, economic, and environmental activities not conventionally reflected in the typical financial analysis. 

Different entities use this SROI principle to measure their impact and determine if they effectively use their capital and other resources to create value for the community.

Also, the principle helps identify where they need to improve or enhance the performance of their investments.

SROI offers information about actual and planned changes, quantitative, qualitative, and financial information on which to base social service decisions.

A consistent quantitative approach has been developed to help understand and manage the organization’s impacts, projects, business, organization, policy, or fund.

Types of SROI Analysis

Here are the two types of SROI analysis:

• Evaluative analysis – This is based on actual outputs and outcomes that have already occurred or are ongoing.
• Forecast analysis – predicts how much social value (monetary) an organization will create if their activities meet their intended outcomes.

How Social Returns on Investment Works

SROI accounts for the stakeholders ‘view of impact’ and places financial ‘proxy’ values on those impacts that stakeholders identify that in typical cases do not have market values. The purpose of SROI is to include ‘people values’ that are often left out from the financial statements to help in resource allocation decisions.

Corporations use social returns on investment to evaluate, plan, and improve the management of different social and environmental programs.

When they understand the social returns on investments, the stakeholders can communicate better the effect the corporation is making to the community both internally and externally.

That means the venture capitalists, foundations, philanthropists, and other non-profit can understand their social impact on financial values.

Social Return on Investment Model

In simple terms, the SROI process involves:

• Communicating with stakeholders to find out what social value means to them
• Placing “financial proxies” on the identified indicators 
• Coming up with suitable indicators or techniques of knowing that changes have occurred
• Recognizing how that value come about through a set of activities
• Making a comparison of the social impact ‘financial value’ created versus the cost (financial) incurred to produce those changes.

A Guide to Social Return on Investment: SROI Principles

SROI work within these seven principles:

1. Stakeholders must get involved – Everyone who has any form of interest must get involved. Therefore, they must be aware of what gets measured and how it was measured and valued in an account of social value.
2. Understand what changes (for the stakeholders) – Express how change comes about and examine this through evidence-based reports, recognizing both negative and positive changes and those intended or not deliberate.
3. Value what matters, also called the monetization principle – Stakeholders’ values matter when deciding how to allocate resources between different options. That value is the relative significance of varying outcomes informed by what stakeholders prefer.
4.  Include what is material only– Decide the evidence or information that must appear in the accounts to produce an accurate and fair picture so that the stakeholders can come up with reasonable conclusions about the impact created.
5. Avoid over-claiming- Only claim the actual value that the activities resulted in.
6. Stay transparent – Establish the basis on which the analysis may be deemed honest and accurate and show how it’ll be reported and deliberated by stakeholders.
7. Verify the result –Confirm and make an appropriate independent guarantee of the impact.

How to Calculate Social Return on Investment

Calculating social returns on investment is a rigorous process that demands one to understand the impact of what it is.

Unlike monetary return on investment (ROI) that most are familiar with, SROI does not refer to a single ratio.

It’s more of a way of reporting value creation. The value is assessed in part on stakeholders’ perception and experience, the indicator changes & how the changes occurred, using monetary values to accompany these indicators.

How do you measure social returns on investment?

In essence, to calculate SROI, we must understand:

• The amount of change that occurred thanks to the organizations’ intervention and wouldn’t have occurred if it didn’t intervene.
• How much impact value was created and how much change it ‘recouped’ in return for what is put into making that change happen.

In short, the social rate of return on investment is a ratio that involves a cost-to-benefit situation. This is because it compares the benefit values to the cost (intervention plus financial investment) of achieving those benefits. So, for instance, a ratio of 3:1 indicates that an investment of $1 delivers $3 in social value.

This is the general formula of social return on investment:

SROI = Net present value of benefits/ net current value of the investment

See Related: Ways to Start Investing in Small Business

Benefits of SROI Principle

Those that propose the use of monetary proxies for social, economic, and environmental value maintain that it has numerous benefits, including:

• The principle helps communicate the impact value of activities to internal stakeholders, especially those responsible for raising finances and those in the resource allocation department – both that prefer quantitative and qualitative approaches.
• SROI simplifies the alignment and integration of financial management systems with performance management systems.
•  It enables sensitivity analysis indicating the areas where assumptions matter in that the result is more affected by alterations of some assumptions than others.
• When the principle is applied, there is more transparency since it helps clarify the values that have been included and those that have been not.
• With SROI, the organization can identify the crucial sources of value and therefore streamline performance management.

Potential Limitations

Regardless of the numerous benefits, some limitations come the with monetization principle:

• Most focus on monetization and downplay the rest of the process equally crucial to prove and improve. Furthermore, organizations should have a distinct mission and values and understand how their actions impact the world. With those indicators being clear from the word go, it allows the stakeholders to engage without doubts.
• Some outcomes cannot be linked to any monetary value- SROI is a developing subject. Apparently, it does not associate all the impact with economic values. For instance, improved family bonds, boosted self-esteem, increased literacy, and more cannot be financially estimated. Therefore, there is a need to incorporate such benefits into the SROI ratio proxies to be fully inclusive.
• Requires considerable capacity – SROI is both time and resource-intensive.  It comes in handy when an organization is already evaluating the direct and long-lasting impacts of its activities on the environment, people, and groups.
• Organizations cannot put some benefits of SROI in monetary paybacks- That’s because one cannot monetize every benefit significant to the stakeholders. Therefore, the SROI shouldn’t be limited only to one number. Instead, it should remain a framework for scrutinizing the social impact of an organization through which monetization plays a crucial but not exclusive role.
• Results Exaggeration- This is a significant drawback of the SROI principle. Participants expect a 100% impact value which may lead to misrepresentation of information in most cases. This is especially if the project involves a lot of stakeholders.

Today, most companies are using environmental impact or green marketing to sell their brands. And indeed, sustainable products are selling more than non-sustainable ones. 

What is Green Marketing?

Green marketing, sometimes called, eco-marketing involves creating marketing campaigns to create a ‘green image’ for its customers. Brands use this to promote a particular eco-friendly product, promote a concrete initiative, and draw attention to a time-sensitive issue.

However, some brands are using a low environmental impact as their unique selling points. This involves promoting a specific product or service that is eco-conscious.

However, if the brands’ overall strategy is not sustainable, it creates a backlash from consumers. Therefore, a brand needs to adopt a holistic approach when it comes to sustainability.

When customers think you are misleading them with your marketing practices, it creates an adverse reaction that will reduce their brand trust and loyalty. It leads to greenwashing.

What is Greenwashing?

Greenwashing is when a company conveys a false impression or provides misleading information about how its products or services are environmental-friendly.

This is a term that Jay Westerfield coined in 1983 after he exposed the hotels’ hypocrisy in creating ads to encourage guests to reuse towels while neglecting other sustainability elements in their everyday business activities. But unfortunately, this was not an accurate representation of the hotel’s green efforts.

The practice of greenwashing continued through advertisements campaigns that were people deemed as misleading. 

How to Avoid Greenwashing as a Sustainable Brand

While many companies have introduced eco-conscious and ethical practices in their strategy to reduce carbon print and climate change, they need to be wary of greenwashing. Most companies are not fully transparent in their marketing regarding their level of sustainability which misleads consumers.

Greenwashing can severely ruin a company’s reputation. If you market a brand as green without enough evidence to back up your claims, then you may end up doing more harm than good. Moreover, consumers won’t hang around for long if they discover your advertising is misleading.

So, how can you ensure you’re doing green marketing right? Avoid using big words like ‘all-natural, ‘eco-friendly,’ ‘vegan,’ ‘ethical,’ ‘recyclable,’ and’ non-toxic’ if you cannot back up your claims. Customers can spot greenwashing from miles away. 

If your brand sustainability budget doesn’t seem like a good percentage, then don’t claim your company is green. Customers value transparency and hate being misled.

According to a 2017 study, over 5000 home products displayed that 95% of them had unfounded green claims. As a result, greenwashing has become fake news in the marketing industry, with even big companies like FIJI Water and McDonald’s being caught in such malpractices.

See related: What is Environmental, Social, and Governance (ESG)?

Brands that Greenwashed Consumers – and Were Discovered

• McDonald’s

McDonald in Europe rebranded its logo to green in 2009, but that wasn’t enough to convince skeptics that they were a sustainable brand.

Unfortunately, according to some people, this brand was still an unhealthy option, and a logo change with empty promises wouldn’t change that.

In 2019, they also attempted to replace their plastic straws with paper straws which quickly became bad publicity.  As it turns out, these paper alternative straws were not even recyclable. Besides, straws only end up being 0.025% of total plastic waste which is negligible.

Well, while this was a small step in the right direction, McDonald failed to show how they will change other business parts and only created a big buzz over a small thing. This became a significant backlash.

Today customers want real impact and not minute environmental commitments created to deceive them. It will be a huge backlash that may cost a big brand its credibility.

• FIJI Water

FIJI Water is another brand that used deceptive marketing by claiming it’s the ‘only carbon-negative bottled water.’ What they meant was that they’d reduce carbon pollution more than they produce it. And yet, they were selling water in plastic bottles that take ages to decompose.

Were these claims an accurate representation of FIJI water?

No. In fact, they were unable to provide any concrete plan on that ambitious goal when a lawsuit was filed against them. Instead, they were getting involved in forward crediting, which backfired on them big time.

The company learned a good lesson from the incident. Therefore today, they avoid using big claims and places concrete, actionable steps every time they make a grand promise.

See Related: How to Build a Socially Responsible Portfolio

4 Tips for a Successful Green Marketing Campaign

1. Connect Sustainability to Brand Equity

The social value associated with your brand or a product is your brand equity. When you participate in sustainability efforts, it shows that your company contributes to the environment positively. This can improve your brand value in the long run.

A perfect example is the Ben & Jerry’s 2019 advert which showcases the company’s sustainability as its core value. Their ice cream is used as a metaphor for our melting planet. This means they are using their platform to create climate change awareness.

2. Total Transparency about your Commitments

If you want to avoid greenwashing, communicate every commitment you’re making clearly without leaving anything out. Deception leads to losing brand loyalty in the process.

An excellent example of a company that communicates its commitments clearly is LEGO. They have been involved in honest green marketing. For instance, in 2015, they announced that they want to become sustainable and committed $150 million on its green efforts in the next 15 years.

Then, they created a separate website that details their actionable steps and their sustainability efforts in a simple and easy-to-understand manner.

3. Make Sustainability a Business-wide Initiative

Sustainability efforts should be holistic, and you should let your customers see your commitment to and engagement with environmental issues on various company levels. A comprehensive green marketing strategy is crucial if you don’t want to destroy your brand with greenwashing practices.

Patagonia is a brand that is doing this right. They disclose everything they do that impacts the environment and even call out those dishonest green claims, the clothing industry’s irresponsible practices, and the culture of overconsumption.

Even though their brand is one of those harmful industries, they do their best to show that they are making efforts through recycling materials, taking care of their workers, and experimenting with organic agriculture.

They make sure that sustainability is ingrained in every part of their business.

4. Collect Credentials for Authenticity

Being transparent and labeling your packages as ‘eco-friendly’ is not enough.  Always ensure that is what they really are. It’s illegal to package your product as sustainable if it isn’t. 

In the US, the Federal Trade Commission’s Green Guide offers specific sustainability credentials. However, in most countries, you can also seek third-party certifications. These credentials are accreditation that shows that authorities have verified that your products are safe and consumers can trust your claims.

Related Resources

• Best Impact Investing Apps | ESG Investing Options
• ESG vs SRI vs Impact Investing: What’s the Difference?
• History of Impact Investing: 8 Things to Know