Lets talk about social return on investment
Grantmakers, donors and philanthropists want nothing else, but to make an impact with their investments. So do companies, foundations and trusts. And – if you are a more commercially inclined social investor – there is still massive return on investment to be made from doing good.
However, social return on investment it is a concept not talked about a lot amongst the social investment community. At least, not openly. As advisors to social investors – we have come to understand that impact and return on investment is two side of the same coin. Yet, social investors are not clear on what they get in return from their investments aimed at solving social and environmental challenges. The issue is – whilst it is easy to measure financial return on investment, non-financial returns are not easy to identify, and therefore very few investors are able to either quantitively or qualitatively proof how they benefitted from their investments.
However, this inability to identify indicators or performance metrics to measure social return on investment should not deter investors to at least try. The reasons for doing so is paramount.
Developing a methodology to measure return on investment
When Next Generation set out to develop our impact measurement methodology – the Investment Impact Index™ – we wanted to apply the same rigour to measuring return on investment as we do to measuring impact.
For most people – philanthropists, donors, grantmakers and social investors give money away. But smart investors know that doing good is also good for business. As a rule, the return on investment for social investors is not just about financial metrics. Which is why the term social return on investment is often used to describe the value generated or benefit gained by the social investor.
Terms like shared value or blended value are growing in popularity. Generally, the concepts are interpreted to mean – creating value for both the investor and the recipients or beneficiaries of the investment is shared. And this value created has become a big discussion point in both social and impact investment circles.
This article is not about market related financial returns – but is specifically aimed at measuring direct value social investors can measure. To cite a few examples:
- Social investors generally share their stories of impact – and in this way there is a link established between the brand and market awareness of the funder. Generating goodwill and leveraging customers emotions and passions about specific brand characteristics have proven very valuable for big brand owners. In fact, it is so valuable that it gave rise to a whole new category – cause related marketing. Therefore, if social investors can measure how much their good deeds are contributing to the increased value of their brands, this could be regarded as an indicator of measurement of return on investment generated by social investments.
- Social investors generally invest in environments where their operations are – and in this way there is a link established between the local customers, communities, government and the funder. Being part of the community where their employees come from, contributing to the assets of that community, also serve as some form of protection when things are not going well. Therefore, if social investors measure how much their investments protect them from strikes, riots, violence, picketing, vandalism – and they are able to quantify the money saved from these actions, then this could be regarded as an indicator of measurement of return on investment generated by their social investments.
- Social investors have numerous strategies, targets and objectives to ensure their future sustainability – and these aspects of sustainability generally include specific plans for their value chains to secure future supply, plans to build their future labour force, plans to reduce resource consumption, and of course, plans to contribute meaningfully to the society in which they operate. Social investment is therefore part of several investments and leveraging these different investments – means that future sustainability can be better addressed if the plans, resources and investments are integrated. Therefore – if social investments contribute and leverages and deliver value – the strategic return on investment can be regarded as an indicator of measurement of return on investment.
- Social investors also recognise that their operations don’t only have positive impact on society or the environment. Using social investment to mitigate some operational risks and negative impacts means that the value generated by social investments can be measured. Whilst it does not mean they offset good vs bad behaviour, it simply means that the risk and negative impact is mitigated, and this can be qualified and measured.
In addition to the four cases mentioned above, through the impact (and return on investment) assessments we have conducted, Next Generation were able to identify specific aspects of return on investment that can be measured to quantify and qualify the value it generates for the investor.
Some of these include:
- Compliance value: Many social investors operate in a country or sector, where they are expected to commit to certain targets. For instance, to obtain a mining licence, commitments must be made for health and safety, labour, community investment, housing, water usage, rehabilitation, etc. Utilising social investment to leverage existing and committed resources by providing infrastructure in communities such as housing, roads, schools and clinics, these investments is used to contribute to a licence to operate. The cost of not having or obtaining a licence is easily quantifiable, therefore the metric to measure the return on investment becomes evident.
- Stakeholder value: Many social investors have a whole range of stakeholders – and they are classified according to importance. Government are particularly important stakeholders – and therefore, support given to government partnerships does a lot to create more equitable environments to operate within. And government is looking increasingly to social investors to assist with service delivery. In this regard, the value of good government relations, can be quantified – as it can be argued, what would have happened if government were not providing conditions required to operate fairly.
- Research and development: Social investors are keen to fund programs, interventions and organisations that can bring about change at scale. Funding technology to achieve increased impact has provided many social investors with opportunities to future proof their business. For instance, social investors in the financial sector are harnessing their resources to develop applications and technologies that will drive and ensure financial inclusivity. Of course, the benefit of a more inclusive society will also have value for the investor. Therefore, to use social investment that drives future growth, economic sustainability, increased market share has immense value, and this value can also be quantified across several levels. Not only as far as market share, value creation, value protection, profitability is concerned, but also increased competitiveness, new products and services, and client activations can be measured. As such, social investment not only contributes to the future sustainability of investors, but also drives profit.
Evidence of return on investment
So far, Next Generation have identified more than 25 dimensions of return on investment with our product the Investment Impact Index™. It is for this reason that we have validated proof that social investment is good for investees, but also the investor. And this value – can be measured.
By measuring the impact achieved of social investments, as well as the value achieved by the investor, we have been able to determine both tangible and intangible costs avoided, or benefits gained.
We determine return on investment in part by testing the perceptions and experiences of stakeholders and recipients of social investments. We also identify indicators that will reflect the impact and return and where possible, use monetary values for these indicators.
However, because social investment is based on philanthropic/altruistic values and principles i.e. to do good, very few social investors have given a lot of time and thought to measuring the return on investment achieved from their investments.
But the fact that our clients have started identifying indicators to measure their social return on investment means we are on the right track.
We have accepted that there will be some benefits that are important to stakeholders, but which cannot be monetised. And we accept that, being able to proof the value social investments generate for the investor – has already led to greater resource allocation. This means that social investment is not siloed, or seen as something investors must do, simply because it is legislated or expected. By showing the social value created and being able to proof the value – our clients show transparency and accountability towards the responsibility of the resources entrusted to them.
There is still some way to go with determining and confirming social value from social investments, but we are proud of how far we have already come. And we thank our clients, for being willing to learn with us.
If you are interested in discussing your impact and return on investment, why not contact us.