SROI: Heart, Mind and Bottom Line

So, what is the ROI on SRI? Can we truly measure SROI?

And, by the way, what the heck are we even talking about?

With SROI, one measures the increasing social effects of an investment; with SRI one measures the increasing financial returns of a socially-oriented investment.

So what's the difference? Is there one?

Namely, we are talking about two different, but related creatures:

1. Social return on investment (SROI): the quantitative and subjective measure of social effects of a program (ex. higher test scores, lower mortality, cleaner neighborhoods, etc.)
   
2. Socially responsible investments (SRI) -- or "doing well by doing good" -- integrates personal and social values into investment decisions.
   

This synthesis of "investment" with "social" ventures is on the rise as more and more investors take responsibility for their own 401(k) and SEP plans.

They begin to think about the effects of that wealth and worry that their investment may be part of the problem, instead of part of the cure. But these investors still want to retire someday and are far from looking at these investments as handouts. Instead, they want to know that the business models of the organizations and the leadership teams have been duly vetted and approved.

It seems quite logical: we worry about what activities our money is going towards funding, in terms of both the activities those investments fuel and the return on that capital.

But what about that Social Return on Investment? As stock market volatility rattles the coffers of large foundations, more boards of non-profits and grantmaking organizations are asking for proof as to the effectiveness of their largesse.

In an interview with Accelerator president Tim Zak on Globeshakers, author David Bornstein, an expert on social enterprise says:

Right now you have companies with big foundations: Companies that give away thirty, forty, fifty, eighty million dollars a year. They have process that is shameful in terms of thinking through how they do it. They hire maybe five people who do minimal due diligence.

In some cases, it is merely word-of-mouth kind of things; they go to a couple of meetings and they give the money away.

It is nothing near the way it would be if they were actually investing seventy million dollars in a business. In that case, they would spend close to a year talking to everyone who has ever dealt with that business.

Towards this end, the skillsets of venture capitalists are being drawn into the social sector to provide such due diligence.

More than 500 "socially responsible investment" professionals gathered in Snowbird Utah last week for the 16th annual SRI in the Rockies conference.

Gil Friend of Worldchanging.com was there to report on the evolution of the field, described in Social Investment, Social Capital and Social Action:

There was some debate in the room over whether, and why, companies care about their SRI rankings. Some maintained that companies could care less; others noted that many public traded companies respond to extensive questionnaires (at 100 hours a pop) from multiple SRI analysts (sometimes dozens) -- the reason OneReport was developed -- while some approach the analysts and rating services (like the DowJones Sustainability Index, FTSE4Good, KLD, Innovest, and others) for advice on what they need to do to move onto the good list. That seems like an indicator of perceived value to me. As does the presence of a former Goldman Sachs CEO at the helm of Al Gore's new firm, Generation Investment Management LLP.
Perception is key to the investment game, of course. The profit opportunity lives in the value gradients between how different people evaluate risk and opportunity, and hence the value of securities. If I think global warming, toxic products and human rights are likely to be big deals, and you don't, we're going to place very different financial bets. Because SRI is a movement as well as an industry, the investors want to move markets -- like LEED has done in the building industry -- as well as profit from them.

One thing is for certain, when companies perceive that their financial well-being is directly tied to the stockholders' idea that their capital is invested in a social investment, then companies will need to make damn sure there is a healthy return.

We're talking SROI investors can take to heart, and ROI they can take to the bank.