Lawmakers Say EU ESG Regulation Should Exempt US Businesses
Commentary by Stuart Neely
Senior Republican members of both the Senate and the House denounced the European Union's Corporate Sustainability Due Diligence Directive ("CSDDD"), stating that its application to US companies would be inconsistent with US law and policy, and describing the CSDDD generally as creating a "hostile business climate."
In a letter to Treasury Secretary Scott Bessent and National Economic Council Director Kevin Hassett, the legislators said the CSDDD mandates "the evaluation of supply chains to identify, mitigate, and eliminate human rights and environmental abuses" as defined by United Nations and the Organization for Economic Cooperation and Development. The legislators stated that "these principles have not been ratified by Congress," and are inconsistent with US policy. The legislators also raised concerns about the legitimacy of EU enforcement against US companies.
The legislators noted that at least 300 US companies listed in the S&P 1500 are directly affected by CSDDD, with additional businesses likely impacted due to the directive's broad scope. The legislators asserted that compliance with the Directive diverts resources from innovation, talent acquisition and investment.
Further, the legislators underscored the potential consequences for small businesses, warning that CSDDD would require US firms to restructure supply chains to comply with EU mandates, even if their operations are solely domestic. They also pointed to recent regulatory developments, including the SEC's move to roll back similar disclosure requirements, as evidence that CSDDD is incompatible with US legal principles.
The lawmakers urged the Administration to:
- support efforts to pause CSDDD indefinitely;
- oppose the directive's extraterritorial application and highlight its negative impact on transatlantic economic relations;
- ensure that CSDDD's civil liability provisions are not applied to US companies; and
- reject EU-imposed net zero transition plans that conflict with evolving US climate policies.
The legislators called for "immediate diplomatic engagement" to prevent the directive from imposing regulatory burdens on American companies.
Commentary
Last week, on February 26, 2025, the European Commission published legislative proposals with the stated aim of simplifying the requirements of the Corporate Sustainability Reporting Directive ("CSRD") and Corporate Sustainability Due Diligence Directive ("CS3D"). A key change is the increased thresholds proposed under CSRD. According to the European Commission, around 80% of companies would be removed from the scope of CSRD. Under CS3D, the Omnibus proposes to amend the due diligence duty. For example, while companies would still be required to undertake a risk mapping of their value chains (both tier one and beyond), the obligation to carry out an in-depth assessment based on the results of such mapping would only apply to the company's direct business partners, unless "plausible information" suggests adverse impacts in further tiers. The Omnibus also envisages that civil liability for damages suffered as a result of a company's failure to exercise due diligence would be available at EU Member State national level, by removing the existing obligation on Member States to create a civil remedy. Whether all this will be enough to calm concerns in the US remains to be seen but these proposals will be finalized by the end of this year. Further information can be found in our client alert.