The Climate Crisis and Private Companies: How to Address the Sustainability Arbitrage Problem?

Abstract

There is a wide range of policy proposals concerning the green transition of companies. Although private companies have a significant role in the climate crisis, current strategies focus mainly on public companies. Such a single-minded approach to policymaking could give rise to a phenomenon that we term sustainability arbitrage, whereby activities causing climate change shift gradually from public firms to private ones. In this paper, we focus on sustainability arbitrage, its manifestations and possible strategies to overcome this problem. We first discuss if the current sustainability-driven corporate governance mechanisms are effective in curbing the sustainability arbitrage problem. In order to prevent sustainability arbitrage, we argue for extending mandatory climate disclosure rules to private companies. We also analyze responsible divestment/phasing out of carbon-intensive assets by public companies as a complementary strategy.

Keywords: Sustainabiliy, Climate change, Company law, Sustainability arbitrage, Private companies, Disclosure