The EU's Corporate Sustainability Due Diligence Directive: Impact on US Companies

The EU's Corporate Sustainability Due Diligence Directive: Impact on U.S. Companies

3 October 2024

On 25 July 2024, the EU's Corporate Sustainability Due Diligence Directive ("CSDDD") entered into force. It requires EU Member States to introduce laws imposing due diligence obligations on in-scope EU and non-EU companies regarding adverse human rights and environmental impacts. U.S. lawmakers have raised concerns and recently passed a bill within the U.S. House of Representatives to begin evaluating the CSDDD's effects on American businesses domestically.

Background

The CSDDD requires large EU businesses and non-EU businesses (including American businesses) with significant turnover in the EU to undertake mandatory human rights and environmental due diligence ("HREDD"). This risk-based due diligence must identify and address actual and potential adverse human rights and environmental impacts for in-scope companies' own operations, those of their subsidiaries and those of their business partners within their chains of activities.

In addition to HREDD, in-scope companies both in and outside the EU will be required to adopt and put into effect a transition plan for climate change mitigation compatible with the Paris Agreement and EU climate objectives.

For additional context on the CSDDD as it relates to the U.S., see our previous U.S. publication here. Further, see our previous blog, summarizing some of the key elements of the CSDDD, here.

U.S. Lawmakers have expressed concerns about the proposed directive's impact on U.S. businesses

U.S. lawmakers have raised concerns with the U.S. Securities and Exchange Commission ("SEC"), the U.S. Department of the Treasury, and Congress about the extraterritorial application of the CSDDD to U.S. business activity outside of the European Union. In June 2023, a group of Republican lawmakers sent a letter to Treasury Secretary Yellen identifying their concern that the HREDD requirements incumbent upon in-scope U.S. companies could impose "onerous extra-territorial climate mandates on American businesses." Treasury Secretary Yellen had herself previously expressed the Administration's concern about the CSDDD's potential “negative, unintended consequences” on U.S. firms given its extraterritorial scope.

In line with this view, on 19 September 2024, the U.S. House of Representatives passed H.R. 4790, a Bill entitled “Prioritizing Economic Growth Over Woke Policies Act.” The Bill is sponsored by the Financial Services Committee’s Republican ESG Working Group leader, Subcommittee Chairman Bill Huizenga.

If passed in the U.S. Senate and signed by the President, the Bill itself would not result in conflicting legal requirements on U.S. companies, but may open the door to such a scenario in the future. It requires the SEC to examine, evaluate, and report on the "detrimental impact and potential detrimental impact" of the EU's CSDDD and the related Corporate Sustainability Reporting Directive ("CSRD") on the U.S. economy and U.S. companies, consumers, and investors. So, the SEC's recommendations may in due course provide grounds for new regulations or legislation allowing US companies to challenge the CSDDD (indeed, the Bill allows the SEC to recommend "modifications" to the CSDDD and CSRD).

In a publication shortly after the Bill’s passage in the House, Representative Huizenga summarized the impetus behind H.R. 4790 saying that the CSDDD "imposes politically motivated environmental and social mandates on U.S. businesses operating in European markets, threatening U.S. economic sovereignty, and harming [the U.S.] economy."

What does this all mean for potentially impacted U.S. companies?

Although there may be diplomatic negotiations behind the scenes, and noting that the EU Commission is expected to open consultations to hear companies' concerns about implementation of the CSDDD, it is reasonable to assume these efforts of U.S. lawmakers will not be effective in removing the obligations for U.S. companies currently in scope for the CSDDD requirements. In accordance the CSDDD's terms, it will become effective for a first tranche of in-scope U.S. companies in 2027: those who achieve (in the previous financial year) a net turnover in the EU of 1500 million euros. Subsequent phases will catch those with a net turnover in the EU of 900 million euros in 2028, and 450 million euros in 2029.

U.S. companies that may be in-scope of the CSDDD requirements should be considering whether and how this is the case, particularly if they have subsidiaries or branches within the EU. This is necessary both to prepare to comply with the CSDDD's substantive requirements but also to determine how the CSDDD supervisory regime is likely to apply to them. In-scope U.S. companies are required to designate an authorized representative to act as a point of contact for the authority under whose supervision they will fall. There is some uncertainty about how supervision and enforcement will operate with respect to in-scope non-EU companies, depending on their organizational structure and the nature of their business within the EU.

With the new EU requirements rapidly approaching, U.S. companies should begin preparing now by consulting with counsel to determine whether their company is within scope and understanding what a failure to comply could mean for them. These new requirements compound an already complex due diligence and reporting landscape for U.S. companies with overlapping requirements abroad and domestically. This is particularly so should the SEC's Climate-Related Disclosure Rules withstand ongoing U.S. judicial review. U.S. companies that plan now and take the steps of figuring out where the gaps and overlaps are with current disclosure requirements and the new CSDDD requirements will be better positioned in 2027, which isn't as far away as it sounds.

Our global team will continue to monitor due diligence developments and provide comprehensive advice to our clients to avoid substantial penalties for non-compliance.