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Production Emissions Efficiency

Production Emissions Efficiency

Assess a company's performance in the industry according to the carbon emissions per dollar spent on production. To also provide industry level insights, according to percentiles, on each company's carbon efficiency with regards to the money they spend on production of their products

Overview

We have combined carbon emission and financial information to create the Production Emissions Efficiency model. It enhances investment due diligence by providing a deep comparative analysis of a company's production process and efficiency in terms of carbon generation.  It conducts company, portfolio or fund level analysis by comparing carbon emissions generated per $ spent in production and compares this ratio with the desired benchmark to calculate Excess Carbon per $ of CGS.

This model aids in the tactical allocation of equity investments. With this model, we identify companies that have an environmental friendly production process as compared to their peer groups.  We have normalized our data, processing it in a manner that removes the effects of scale and allows for precise comparative efficiency analysis among all companies in any given sector. This model holds utmost importance because high level of carbon emissions are generated during the production process.  The model identifies industry leaders and the firms that are exercising best practices during their production process.

The majority of scope 1 carbon emissions are created during the production process. Any company which has an environmental friendly production system will have lower carbon emissions per dollar spent in production

This model will incorporate a comparative analysis. You will be able to look at different companies in the same sector and identify which one has the most environmentally friendly production process.

Intuition and Interpretation

As a company grows, the more the units sold,  greater the cost of goods sold (CGS), higher the carbon emissions.. There is a direct relation between carbon and CGS, as the company is growing. So the even if CGS and Carbon are increasing and decrease together, the emission per $CGS will always show the efficiency of the production process in terms of carbon

Even if sustainable measures are being implemented in production for reducing carbon, the carbon emission goes down while the CGS is increasing, the Emissions per dollar spent will decrease, which reflects this positive change in the company's behavior. Therefore such insights can help investors make responsible decisions while maximizing returns through investing in efficient compnaies.

Even though a company's CGS is low because of economies of scale, it will still be contributing emissions with relation to its units produced. This will result in a higher emission per $CGS, which then will be then be reflected in the final metric of Excess Carbon per $ of CGS

Design and Modeling

Assumptions

  • The production process is one of the major factors contributing towards a company's scope 1 emissions
  • Factors such as inflation will effect the whole industry in the same manner, therefore the effect of systematic increases in CGS will offset each other. eg, price of oil increase by 15% increasing the cost of production by 10%, a relative increase of 10% in cost will be observed throughout the industry

Inputs

  • Total Revenue of each company in a given industry
  • Gross Profit for each company in the industry
  • Carbon Emissions for each company
  • Respective industry's average carbon

Formula

  • Calculate and Normalize Cost of Goods Sold
  • Gross Profit = Revenue - CGS
  • Normalization is done through taking the natural logarithmic  function of each CGS value
  • LN (CGS)
  • Calculate Emissions per $CGS (A)
  • Individual Carbon Emission / Normalized CGS
  • Calculate Emission per $CGS using industry average emissions (B)
  • Industry's average emissions / each company's normalized CGS
  • Calculate Excess Carbon over Industry Norm
  • (B) - (A)
  • Calculate the 90th percentile value of Excess carbon over Industry Norm
  • Excel has formula
  • otherwise rank them in an ascending order and select the Kth percentile. K being 90 in our case (detailed formulas for percentile ranking can be provided if it cant be done through a formula at your end @Gautam Bakshi )
  • Automate process of returning companies in the 90th percentile
  • Any company with Excess Carbon greater than the 90th percentile value in the top 10% of the industry in terms of carbon emission as a function of each dollar spent on production
  • At a company level, we can determine in which percentile the company falls in and return that percentile to determine its level of carbon efficiency with respect to the scale of production.