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In the presence of pressing challenges related to climate change, there is a wide range of policy proposals concerning the green transition of companies. Although private companies—especially those in the energy sector—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 gradually shift from public firms to private ones. This may, in turn, create a world where public firms look relatively green while their private rivals become the main driver of activities contributing to the climate crisis. 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. [ABSTRACT FROM AUTHOR]