What it means
Ordinary financial measures capture profit, but they miss benefits that do not show up in a bank account. A programme that helps long-term unemployed people into work, for example, reduces welfare payments, increases tax paid and improves wellbeing.
SROI tries to put a sensible dollar figure on those outcomes so they can be compared with the cost. The process starts by identifying the people affected and what changes for them.
Each outcome is then given a value, often by using a proxy, which is a related cost or price that stands in for something with no market price. The benefits are adjusted for what would have happened anyway and for the share caused by other organisations.
Because benefits often arrive over several years, they are discounted to present value. This uses the same logic as a business investment appraisal, where a dollar received later is worth less than one received today.
The total of discounted benefits is then divided by the investment. SROI is used by charities, social enterprises, public bodies and impact investors.
Funders use it to compare programmes and decide where to direct money, and organisations use it to report to supporters. A ratio above 1 suggests that the programme creates more social value than it costs.
The method has limits. Choices about proxies and assumptions can change the ratio greatly, so two analysts might produce different answers for the same programme.
Good practice is to publish the assumptions, test them by varying the key figures and treat the result as an informed estimate and not an audited fact. Finance teams should not compare SROI ratios across organisations without checking that the same method was used.
A programme with a high ratio but weak evidence may be less convincing than one with a modest ratio backed by solid data. The story behind the number matters as much as the number.
In practice
Real-world examples
Example 1
A housing charity spends $400,000 on helping tenants avoid eviction. Its analyst values the savings to the local council, the stable schooling for children and the improved health of the families. The report shows a ratio of 3 to 1, which the charity uses in a funding bid.
Example 2
A company runs a mentoring scheme for young people from low-income backgrounds. It estimates the extra lifetime earnings of those who find work and compares them with the cost. The board uses the ratio to decide whether to expand the scheme.
Example 3
An impact investor compares two proposals, a clean-water project and a literacy programme. It calculates the ratio for each and also reviews the quality of the evidence. It chooses the programme with the stronger evidence base, even though the ratio is lower.
Think of it
Imagine planting a fruit tree. Traditional finance only counts the cost of the sapling and the market price of the picked fruit. Social Return on Investment also counts the shade it gives your neighbours, the cleaner air it produces, and the habitat it provides for birds.
Formula
Calculation
SROI ratio = present value of social benefits / value of the investment
Suppose a charity invests $150,000 in a skills programme. It expects benefits valued at $110,000, $121,000 and $133,100 in the next three years, discounted at 10% a year. The year-one benefit is worth 110,000 / 1.10 = $100,000 today. The year-two benefit is worth 121,000 / 1.21 = $100,000, and the year-three benefit is worth 133,100 / 1.331 = $100,000, so the total present value is $300,000. SROI = 300,000 / 150,000 = 2.0, meaning $2 of social value for every $1 invested, and a net social return of (300,000 - 150,000) / 150,000 = 100%.Case study
Seen in the real world
Riverbend Community Trust is an illustrative, fictional charity that runs a training kitchen for people leaving long-term unemployment. It spent $250,000 a year and wanted to show funders the value of its work.
The trust interviewed participants, tracked job outcomes and used published figures to value reduced benefit payments and extra tax. After adjusting for people who would have found work anyway, it calculated a present value of $600,000 for each year of operation.
The SROI ratio was 600,000 / 250,000 = 2.4, and the trust published its assumptions in full. A major funder renewed its grant, and the illustrative lesson is that a transparent, cautious ratio is more persuasive than an impressive-looking figure with hidden assumptions.
Watch out
Common mistakes
- Claiming all of an outcome as the project's own work, without adjusting for what would have happened anyway.
- Using generous proxies and unsupported assumptions that inflate the ratio.
- Comparing ratios from different organisations that used different methods.
Questions
People also ask
Is SROI the same as return on investment?
No, ordinary ROI measures financial profit, while SROI includes social and environmental value that may never be paid to the investor.
What is a good SROI ratio?
Any ratio above 1 means the estimated value exceeds the cost, but the strength of the evidence matters more than the size of the number.
Why is discounting used?
Because benefits that arrive in future years are worth less today, and the adjustment keeps the comparison fair against upfront costs.