The Anatomy of Decarbonizing Firms

We study the firm-level drivers of corporate decarbonization using a global panel combining financial characteristics, balance-sheet indicators, ESG metrics, macroeconomic variables, and firms' greenhouse gas emissions. Emission trajectories exhibit strong persistence, with past emissions the dominant predictor of future performance. However, firms with larger carbon footprints also display greater abatement potential, creating opportunities for targeted stewardship and capital reallocation. We identify adoption of Science-Based Targets (SBT) as a significant catalyst for emission reductions and provide causal evidence that credible, externally validated climate commitments accelerate decarbonization. We develop machine-learning models that outperform heuristic benchmarks in forecasting one-year-ahead abatement, especially in hard-to-abate sectors, and we show that such forecasts can help further curtail portfolio-level emissions. Nevertheless, our results indicate that, given current emission trends in the cross-section of firms, building portfolios with net zero objectives for 2050 remains an open challenge.