Making Climate Pledges Stick: A Private Ordering Mechanism for Climate Commitments

Corporate climate commitments are an important part of the global response to climate change, but critics have warned that many of these pledges constitute greenwashing—empty commitments whose credibility is difficult to assess at best. Government regulators in the European Union and the United States have taken initial steps to regulate corporate climate behavior and disclosure but have demonstrated little appetite for robust regulation of corporate climate pledges. The current regulatory framework’s weakness means there is little confidence that companies will fulfill their pledges. This Article responds to this regulatory challenge by developing two novel financial instruments that would enable companies to make credible commitments by entering into binding contracts with third parties. The two instruments, which we term a carbon letter of credit and a climate pledge green bond, create a mechanism that binds the company far into the future and ensures that its past commitment will be executed. By providing a reliable mechanism that allows companies to issue a binding climate pledge, we enable climate leaders to credibly distinguish themselves from greenwashers, facilitating the emergence of a separating equilibrium. Public and private regulators can insist that corporations use these instruments, and corporations can use them to support their reputation and gain access to green finance. Our focus is on corporate climate commitments, but organizations can also use the instruments we propose to back commitments on a wide range of topics beyond climate change.