Assessing the Extraterritoriality of the EU’s CSDDD on US Companies
The European Council adopted the Corporate Sustainability Due Diligence Directive (“CSDDD”) on May 24, 2024.[1] The CSDDD introduced requirements for large companies regarding their impacts on human rights and environmental protection.[2] The CSDDD’s requirements are not yet fully in force, and will follow a staggered implementation timeline beginning in 2027.[3] Starting in 2027, EU companies with a global net turnover of €1,500,000,000 and 5,000 employees will be covered, with that number decreasing to €900,000,000 global net turnover and 3,000 employees by 2028, and €450,000,000 global net turnover and 1,000 employees by 2029.[4] For non-EU companies, the calendar and monetary thresholds are the same for net EU turnover, with no minimum employee requirement.[5] These requirements extend to non-EU parent companies of groups of EU and/or non-EU companies that, in the aggregate, meet the aforementioned thresholds.[6] Overall, the CSDDD will apply to corporate value chains both within and outside of Europe.[7] This will create a worldwide effect, as global entities from outside the EU, and their suppliers, will be required to change their policies and practices.[8] For example, foreign companies will have to adapt to new human rights and environmental standards, which may cause third-party countries to amend their legislation, like South Korea is currently doing.[9] Therefore, the CSDDD establishes a strong element of extraterritoriality. The CSDDD is in essence another example of the “Brussels Effect,” in which the EU uses unilateral power to regulate global markets.[10]
The CSDDD relies heavily on many international agreements and seeks to incorporate them as legally binding. These include the UN Guiding Principles on Business and Human Rights (“UN Guiding Principles”),[11] the OECD’s Guidelines for Multinational Enterprises (“MNE Guidelines”) and Due Diligence Guidance for Responsible Business Conduct (“Guidance for Responsible Business Conduct”),[12] the UN Sustainable Development Goals,[13] the core 1.5˚C target goal of the Paris Agreement,[14] Article 2(3) of the International Covenant on Civil and Political Rights (“ICCPR”),[15] Article 8 of the Universal Declaration of Human Rights,[16] Article 9(3) of the Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters,[17] Article 7 and 11 of the International Covenant on Economic, Social and Cultural Rights (“ICESCR),[18] Articles 24, 27, 28, and 32 of the Convention on the Rights of the Child,[19] and various recommendations from the International Labour Organization’s (“ILO”) Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy,[20] which cover issues ranging from child labor to trade unions.[21] The CSDDD will therefore have the effect of transforming non-binding UN and OECD guidelines into law on US companies, which will require companies to comply with standards and other obligations that might exceed that company’s domestic law requirements.[22] This is irrespective of the fact that the US opposes the UN Guiding Principles,[23] has signed but not ratified the ICESCR and Convention on the Rights of the Child, has signed only two of the eight applicable ILO conventions,[24] and there remained concerns as to whether the Paris Agreement is legally binding and constitutionally valid from a US law perspective,[25] prior to President Trump’s re-withdrawal from the agreement.
On February 3, 2023, Chairman Patrick McHenry of the United States House Committee on Financial Services announced the creation of the Environment, Social, and Governance Working Group, led by Oversight and Investigations Subcommittee Chairman Bill Huizenga.[26] According to the House Committee, the CSDDD is incredibly concerning for US companies, as they would be required to resolve adverse environmental impacts and develop climate transition plans, and force US-based suppliers and customers to reduce GHGs, regardless of economic consequences.[27] These two congressmen are not the only US politicians voicing their concerns; Congressman Bill Hagerty and Senator French Hill described the CSDDD as an “affront to U.S. sovereignty.”[28] In addition to stating that the CSDDD is an attempt to narrow the post 2008 GDP divide between the US and EU (in 2008 US and EU GDP were roughly equal, whereas current US GDP is approximately 75% higher)[29] through “growth-killing rules on U.S. businesses,”[30] they believe that the CSDDD’s policies would cripple US firms.[31] These politicians are all members of the Republican Party, and given President Trump’s victory and the Republican Party’s full Congressional control, these sentiments likely will continue to grow, causing further pushback. This pushback could cause conflict between the US and EU, at a time in which rising temperatures require cooperation, not hostility.
In conclusion, the EU should amend the “Brussels Effect” portion of the CSDDD, as it’s extraterritorial impact on US companies is unlikely to work and is likely against international law.
Antonio Videla is a staff member of Fordham International Law Journal Volume XLVIII.
[1] Press Release, Council of The EU, Corporate Sustainability Due Diligence: Council Gives its Final Approval (May 24, 2024), https://www.consilium.europa.eu/en/press/press-releases/2024/05/24/corporate-sustainability-due-diligence-council-gives-its-final-approval/.
[2] Id.
[3] Lars Raedschelders & Wouter Vandorpe, The EU’s Corporate Sustainability Reporting Directive (CSRD): What You Need to Know, Fieldfisher (July 19, 2023), https://www.fieldfisher.com/en/locations/belgium/insights/the-eus-corporate-sustainability-reporting-directive-csrd-what-you-need-to-know.
[4] Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending, 2024 O.J. (L).
[5] Id. at Art. 2.
[6] Id.
[7] Daniel Zmak, How the EU Corporate Sustainability Due Diligence Directive (CSDDD) Impacts Your Supply Chain Operations, Diligent (Apr. 24, 2024), https://www.diligent.com/resources/blog/eu-corporate-sustainability-due-diligence-directive.
[8] Bernaz, Martin-Ortega, The EU Directive on Corporate Sustainability Due Diligence (CSDDD): The Final Political Compromise. 9 Bus. and H.R. J. 294 ( 2024).
[9] Id.
[10] Anu Bradford, The Brussels Effect: How The European Union Rules The World, xiv (2020).
[11] Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending, supra note 4 at recital (5).
[12] Id. at recital (6).
[13] Id. at recital (8).
[14] Id. at Art. 1.
[15] Id. at recital (82)
[16] Id.
[17] Id.
[18] Id. at Annex Part I, number 6, 7.
[19] Id. at Annex Part I, number 8.
[20] Id. at recital (6).
[21] Id. at Annex Part I, number 9–11, 13, 14.
[22] David Lakhdhir, The EU Due Diligence Directive: Implications for U.S. Companies, American Bar Association (July 15, 2024), https://www.americanbar.org/groups/business_law/resources/business-law-today/2024-july/eu-due-diligence-directive-implications-us-companies/#:~:text=Those%20agreements%20include%20three%20international,111.
[23] U.S. Mission to International Organizations in Geneva, The U.S. Government’s Opposition to the Business and Human Rights Treaty Process (Oct. 26, 2020), https://geneva.usmission.gov/2020/10/26/the-u-s-governments-opposition-to-the-business-and-human-rights-treaty-process/.
[24] Lakhdhir, supra note 22.
[25] See Richard A. Epstein, Biden’s Unlawful Re-Entry Into Climate Accord, Hoover Institute (Feb. 1, 2021), https://www.hoover.org/research/bidens-unlawful-re-entry-climate-accord.
[26] See generally House Committee on Financial Services, ESG Working Group, The Failure of ESG: An Examination of Environmental, Social Governance Factors in the American Boardroom and Needed Reforms (Aug. 1, 2024), https://financialservices.house.gov/uploadedfiles/hfsc_esg_working_group_staff_report.pdf.
[27] Id.
[28] Bill Hagerty, French Hill, European Regulators Make a Power Grab, Wall St. J. (Oct. 15, 2024), https://www.wsj.com/opinion/european-regulators-make-a-power-grab-and-biden-harris-dont-stop-it-econ-harm-bb50d548?page=1.
[29] Id.
[30] Id.
[31] Id.
This is a student blog post and in no way represents the views of the Fordham International Law Journal.