Social enterprises are increasingly recognised as powerful agents for positive change, addressing pressing social and environmental challenges through innovative solutions. They operate as hybrids, balancing a social mission with financial viability, in industries and sectors from agriculture to healthcare to information technology.
The World Economic Forum in collaboration with the Schwab Foundation and the Global Alliance for Social Entrepreneurship estimate that in 2024 about 10 million social enterprises globally generated about $2 trillion in annual revenue and created 200 million jobs.
While charities, nongovernmental organisations (NGOs), government-sponsored enterprises in the US, and governments have historically led social initiatives, the emergence of social enterprises represents a new paradigm of commercially focused enterprises aimed at solving social problems.
A UK example of a social enterprise is Warm Wales, established by the National Grid, the UK’s largest electricity distribution network, to tackle fuel poverty in Wales and South-West England through community projects and partnerships. Warm Wales used the SROI framework to quantify the benefits the Flintshire community in North Wales derived between April 2023 to March 2024 from its advice service.
One Acre Fund is a Kenya-based social enterprise that helps small farmers in nine countries in Eastern and Southern Africa with financing and training. One Acre Fund has used SROI to measure the profit a new farmer creates for every dollar invested.
The growing economic significance of social enterprises highlights the need for finance professionals to understand the unique dynamics, because their dual focus demands a unique mindset and skillset from finance professionals accustomed to traditional for-profit models.
Challenges for finance professionals
Finance professionals’ conventional training tends to prioritise profit maximisation, and their exposure to social causes is typically limited to budgeting for corporate social responsibility initiatives.
The rising importance of environmental, social, and governance (ESG) and sustainability reporting means there is considerable training available to finance professionals. But they require further support to effectively balance the organisation’s social impact goals with sustainable financial performance, particularly in investment decision-making.
Traditional financial ROI decision tools, such as net present value, internal rate of return, and payback period, largely focus on profitability and exclude social impact considerations. This presents a limitation for finance professionals in social enterprises who must incorporate the broader social value in decision-making.
Social enterprises’ dual mission requires a delicate balancing act. However, the absence of integrated frameworks, which can effectively bridge the gap between financial performance and social mission, presents a challenge in providing these organisations with relevant guidance.
This lack of direction often leads to mission drift, identity loss, and ultimately organisational failure.
However, while integrated frameworks specifically designed for these hybrid organisations are still emerging, finance professionals can use complementary tools to assess and navigate their unique needs and complexities.
Steps that can be taken
The social return on investment (SROI) framework, which was initially developed by the Roberts Enterprise Development Fund in the US in the mid-1990s, is a valuable way for social enterprises to complement traditional financial tools.
Implementing SROI presents challenges, including subjectivity, uncertainty in predicting long-term social outcomes, and the difficulty in obtaining reliable data. Mitigating these challenges requires careful consideration of limitations, the use of conservative estimates, and robust stakeholder engagement to ensure the analysis aligns with the values of the organisation and its stakeholders.
SROI is, though, currently one of the more comprehensive and well-known approaches to impact measurement. It has received significant attention professionally and in academia. Other tools include multi-criteria decision analysis and cost/benefit analysis that considers social costs.
SROI has its roots in the traditional cost/benefit analysis framework that focuses primarily on economic value and financial returns. The SROI framework expands on this by explicitly incorporating social value creation, recognising that value is generated not just financially but also when resources and processes combine to improve society.
Despite growing interest in SROI, there is still limited academic and professional literature specifically addressing its use in pre-investment decisions. Most publications focus on evaluating social impact after a project is completed.
The UK Cabinet Office’s A Guide to Social Return on Investment identified two distinct applications:
- Evaluative SROI, carried out retrospectively for past outcomes, and
- Forecast SROI, for predicting future social value.
The principles of this framework can be extended or applied beyond their usual context for measuring impact to predict the potential social impact of decisions before they are made. This is especially critical with the growing prominence of impact investing and green finance, which demand a comprehensive assessment of both financial returns and social and environmental returns.
SROI steps for forecasting and decision-making
Forecast SROI is a forward-looking approach that considers the intended outcomes and estimates their likely social impact. This allows stakeholders to make informed decisions by weighing potential social value alongside cost and financial returns.
Finance and accounting professionals in social enterprises can follow these seven steps to evaluate investment decisions using the SROI framework:
- Set out the theory of change for investment: Essentially, it’s a road map that explains how the investment will lead to the desired social or environmental outcomes.
- Establish scope and identify key stakeholders: Define the boundaries of analysis and determine which stakeholders will be involved and how you will engage them.
- Develop an impact map for each stakeholder: Identify and assign a value to inputs, clarify outputs, and describe the intended and potential unintended outcomes for each stakeholder.
- Forecast social impact: Estimate the potential social impact of the investment for each identified stakeholder based on available data, case studies, and expert opinions. Eliminate from consideration those aspects of change that would have happened anyway or are a result of other factors.
- Calculate the SROI: Add up all the forecasted benefits or value net of negative or unintended impacts and compare the result to the investment. In addition, a sensitivity analysis will be useful to assess how changes in assumptions about social impact and costs could affect the SROI. This helps in understanding the risks and uncertainties associated with the investment.
- Prioritise investments for social impact: Use SROI analysis to forecast the long-term social value of different investment options. This allows prioritisation of investments with the highest potential for positive change by comparing their potential social return. It is important to still involve stakeholders at this point for their input and adjust the strategy as needed before implementing the investment decision.
- Track SROI: To maximise your social enterprise’s impact, track progress by defining measurable KPIs aligned with your social mission. These KPIs should be quantifiable, reflecting the change you aim to create. For instance, if your goal is to improve employment opportunities for people with disabilities, focus on KPIs such as the number of individuals securing quality jobs or discontinuing reliance on social benefit or grants. Integrate these KPIs into an SROI analysis to measure the social value generated relative to your investment.
Social enterprises’ investment decisions should balance financial returns with social impact. Rejecting investments that fail to achieve this equilibrium is crucial to maintain credibility, preserve identity, and ensure the long-term financial sustainability of social enterprises.
Tariro Mutizwa, ACMA, CGMA, MBA, is regional vice-president–Africa at the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Oliver Rowe at Oliver.Rowe@aicpa-cima.com.
