Why is CAGR so important for setting your target?
The first topic in your target-setting conversation is setting a baseline year, which is needed to identify the starting point of your decarbonisation pathway. However, to set more realistic targets, this itself is not enough. Without a metric that predicts your growth, you will not be able to determine a pathway that is the most suitable for your company. This is where CAGR comes into play.
According to Corporate Finance Institute, the Compound Annual Growth Rate measures an annual growth rate over a period of time. For a company, it is a metric used to reflect a company’s projections of future annual growth. CAGR is, therefore, a good benchmark used to project a company’s future development over time.
In the context of target setting, CAGR acts as a proxy for a company’s emission growth. This is because there is usually a strong correlation between a company's corporate economic growth and its Scope 1, 2, and 3 emissions.
As a company grows, there will be various increases in company-owned and controlled resources (facility size, vehicle fleet, etc.), consumption of purchased energy (purchased electricity, heat, etc.), and activities that occur throughout the value chain (business travel, employee commute, supplier activities, etc.). CAGR is therefore taken into account when calculating the projected emissions under Business-as-Usual (BAU), which is the expected trajectory of a company’s emissions where no sustainability actions are taken.
How to determine your company’s CAGR
The calculation formula used for CAGR is a fairly simple and flexible one, requiring only the beginning value of your company’s balance, the ending value, and the number of years you would like to project.
CAGR = [ (Ending balance / Beginning balance) ^ (1 / # Years) ] – 1
What if CAGR is not an option?
In instances where a company does not have its CAGR and/or is not willing to disclose it, we recommend using any other metric that determines your growth rate, for example:
Projected Average annual growth rate
(Growth rate in Period A + Growth rate in Period B +...+ Growth rate in Period N) / N
Projected Annual employee growth rate
(# Employees at the end of the period - # Employees at the beginning of the period) / # Employees at the beginning of the period
Projected Annual revenue growth rate
(# Revenue at the end of the period - # Revenue at the beginning of the period) / # Revenue at the beginning of the period
Projected Annual customer growth rate
(# Customer at the end of the period - # Customer at the beginning of the period) / # Customer at the beginning of the period
Projected Annual product growth rate
(# Products at the end of the period - # Products at the beginning of the period) / # Products at the beginning of the period
Plan A recommends using CAGR to calculate your company’s emissions under BAU. You are free to use any other growth metric you are more comfortable with as long as you are aware that it is not the best way to estimate your BAU emissions.
If you have other concerns when determining your CAGR, please get in touch with your Customer Success Manager or Plan A Support. We are here to help you!