Impact Investing 2.0: Metrics That Track Social ROI Alongside Profit
In recent years, the focus on achieving social and environmental impact alongside financial returns has increased significantly. This trend, known as impact investing, has gained traction and has been embraced by many investors around the world. The first wave of impact investing mainly focused on measuring the social and environmental outcomes of investments. However, with the rise of impact investing 2.0, investors are now looking for ways to track and measure the social return on investment (ROI) alongside financial profit. In this article, we will delve into impact investing 2.0 and explore the metrics that can help investors track social ROI alongside profit. 
Understanding Impact Investing 2.0
Impact investing 2.0 is an advanced version of traditional impact investing, where the focus is not only on generating financial returns but also on creating positive social and environmental impact. It goes beyond the typical methods of measuring financial success, such as return on investment (ROI) or internal rate of return (IRR), and delves deeper into social and environmental impact measurement. The concept of impact investing 2.0 is based on the belief that businesses have a greater responsibility and a bigger role to play in creating a more equitable and sustainable world.
Measuring Social ROI Alongside Profit
Traditionally, investors focused solely on the financial returns of an investment. However, with the rise of impact investing, investors are now looking for ways to measure and track the social and environmental impact of their investments. This is where social ROI comes in – it is a way to measure the social impact of an investment by looking at the change it has created in society. Social ROI is measured through metrics that consider the social outcomes of an investment, such as poverty reduction, job creation, and improved education and healthcare.
Metrics for Measuring Social ROI
There are several metrics that can be used to measure social ROI. These include but are not limited to:
1. Social Return on Investment (SROI)
SROI is a widely used method for measuring social ROI. It calculates the social value that a company creates for every monetary unit invested. SROI considers both the social outcomes and inputs to determine a ratio of social value created to investment. This metric not only measures the impact of an investment but also provides a clear understanding of how that impact was achieved.
2. Impact Alpha
Impact Alpha measures the return on investment in terms of social outcomes. It compares the social outcomes of two companies with similar financial returns and determines which one has a higher impact. This metric is useful for investors who are looking to support companies that are creating more significant social impact.
3. Benefit Cost Ratio (BCR)
BCR is a simple yet effective metric for measuring social ROI. It compares the cost of an investment to the benefits it generates in monetary terms. A BCR value greater than one indicates that the investment has a positive impact, while a value less than one means that the investment may not be profitable in terms of social outcomes.
4. Social Impact Quotient (SIQ)
SIQ measures the social impact of an investment by looking at the social outcomes and assessing them on a 100-point scale. It considers different dimensions of social impact, such as livelihood, health, education, and the environment, to provide a holistic understanding of a company’s social impact.
The Importance of Measuring Social ROI Alongside Profit
The inclusion of social ROI measurement in impact investing 2.0 is crucial for several reasons. Firstly, it helps investors make more informed decisions. By looking at the social and environmental impact of an investment, investors can gauge whether the investment aligns with their values and goals. Secondly, tracking social ROI can help companies identify areas where they can improve their impact and work towards creating a more significant social and environmental footprint. Lastly, it encourages transparency and accountability in businesses, as they are held accountable not only for financial performance but also for their social and environmental impact.
In Conclusion
Impact investing 2.0 is gaining momentum as investors recognize the need to look beyond financial returns. By measuring social ROI alongside profit, investors can make a positive impact while achieving financial success. With the right metrics in place, impact investing 2.0 has the potential to create a more equitable and sustainable future for all.
