MEASUREMENT OF SOCIAL RETURNS

A Brief

 1    INTRODUCTION


Measurement of social impact and social returns is not straightforward. The definition of “social impact” is not clear-cut; it depends on context and it is difficult to prove actual extent or depth of the impact. An impact can have many social and economic multipliers, which again are difficult to define and measure. A social project or enterprise can generate both positive and negative impact and the same problems are encountered when attempting to measure both.


Several social and academic organizations have developed different methodologies, which are still being fine-tuned and none has gained industry-wide acceptance as yet. Nevertheless, it is useful to measure, no matter how inexact or tentative. Besides enabling us to progressively learn and improve the measurement methodology, the process helps us to understand the social project or enterprise better, appreciating what works, what doesn’t and why.


The measurements, no matter how primitive, act as communication tools among funders, practitioners and beneficiaries to gain some common understanding of the objectives and potential outcomes of the social project or enterprise. These in turn help the parties concerned to evaluate the impact, to find ways to improve performance and to enhance benefits derived.


This paper introduces various current methodologies for measurement of social returns as well as emerging social investment approaches.



 2    SOCIAL RETURN ON INVESTMENT1


Social Return On Investment (SROI) was introduced in 2000 by REDF (formerly Roberts Enterprise Development Fund) of San Francisco and is now a well-regarded methodology, although not widely adopted yet. Basically the method uses financial proxies to monetize social value. This enables ease of understanding of the values and facilitates numerical analysis. It also allows comparisons of differing social projects and outcomes in monetary terms, although criticisms remain on the validity of comparing apples and oranges.


As a simple example for the purpose of illustration, if a nursing home expansion project caters to 50 elderly persons whose support costs the state $4,000 a year per person, the social impact would be $200,000 per year. If $500,000 were required to build the expansion and to support the operations for 5 years, the SROI would be calculated using a cash outflow of $500,000 initially followed by five years of $200,000 per year inflow of benefit. This results in an SROI of 29%.


There are limitations with SROI. There may be important benefits that cannot be monetized. The use of proxies (usually state subsidies or support costs) depends on their availability and similarity to the benefit being evaluated. Even if such data is available in one country, it is not usable in another country (or maybe even another region of the country) due to differences in levels and costs of support.



 3    STANFORD EXPECTED RETURN2


In the Winter 2009 issue of the Stanford Social Innovation Review, it was suggested that the following formula be used to calculate the Expected Return of social programs, investments and strategic plans:


Expected Return = (Outcome x Probability x Contribution) / Cost


where: 

Outcome = the impact of the grant or investment

Probability = the probability of the outcome being achieved

Contribution = the portion of the outcome contributed by the funder

Cost = the cost of the grant or investment, adding administrative costs and deducting any financial repayments.


Actually this formulation is a Cost-Benefit Analysis rather than a returns calculation. The numerator is the benefit generated and the denominator is the net cost. Therefore what is calculated is the Benefit to Cost ratio.


On the other hand, the traditional investment return formulation would be:


Return = (Investment Proceeds – Investment Cost) / Investment Cost


It appears that for the Expected Return formulation, the Cost figure does not appear in the numerator, as it could make the numerator negative.


The difficulties encountered in this methodology lie in the measurement of the Outcome, which is the benefit derived by the beneficiaries of the social project or enterprise. Most of the time, the outcomes are qualitative as they relate to changes in attitude, behavior, condition, status, skill or knowledge of the beneficiaries. Outcome-based evaluation methods use indicators as estimates. Alternatively, outputs instead of outcomes are used as measures of impact, which are not satisfactory.


The usefulness of the Stanford formulation is that by adding the probability and contribution aspects, it prevents exaggerated claims of sole contribution to the benefits generated.



 4    ACUMEN FUND: PATIENT CAPITAL


Founded in 2001, Acumen Fund is one of the leading investors in social enterprises and contributes much to the philosophy and practices in the industry through its papers and reports. It is interesting to note that a Harvard Business School case3 says that for Acumen “The financial returns were viewed as part of a broader set of primary investment criteria explicitly articulated by the organization:


-    Potential for Significant Social Impact

-    Potential for Financial Sustainability

-    Potential to Achieve Scale.”


Thomas Friedman, New York Times columnist and best-selling author was quoted as referring to Acumen Fund: “Patient capital has all the discipline of venture capital – demanding a return, and therefore rigor in how it is deployed – but expecting a return that is more in the 5 to 10 percent range.4



 5    ACUMEN FUND: BEST ALTERNATIVE CHARITABLE OPTION5


In the measurement of social impact, Acumen Fund also uses Cost-Benefit Analysis but it goes a step further by asking whether the Benefit to Cost Ratio of its investment outperforms the Best Alternative Charitable Option (BACO).


Although such comparisons have large margins of error, they help in prompting Acumen’s due diligence to include investigation of and comparison with conventional grant-making alternatives. Acumen’s literature often cite its loan to A to Z Textile Mills in Tanzania to produce long-lasting insecticide-treated bed nets that helped to reduce incidence of malaria.


Using the Stanford formulation (accounting for probability and contribution), Acumen calculated that the return from its loan amounted to 30.8 person years of protection per $1 invested. A comparable charitable project using normal insecticide-treated nets would generate 1.3 person years of protection for $1 donated. Acumen concluded that its investment would be 24 times more cost-effective.


Thus Acumen advances from just using Cost-Benefit Analysis to using Cost-Effective Comparisons as indicators of social returns.