Will EU Corporate Sustainability Reporting Law Become a Trade Issue?

Almost no one in the US business media or politics is talking about the European Union Corporate Sustainability Reporting Directive or the related Corporate Sustainability Due Diligence Directive, which together could affect tens of thousands of US companies. Given the current climate in Washington on the topic of trade and deregulation, expect attention to grow about the impact of these laws on US companies. The new administration may make the laws a bargaining chip in trade negotiations, but companies seeking to do business with the EU had better take note: it is highly unlikely that this law will go away. If US companies don't like disclosures, they can withdraw from the EU market.

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European Union disclosure requirements now in effect do not just affect the estimated 3,000 or so US companies with operations large enough on the continent to be subject to the law. They will have impact on most companies in the US that do business with either EU companies in the US or with US companies doing business in the US because of the law’s supply chain due diligence requirements.

US companies can avoid compliance with the law by pulling out of the European Union or by refusing to supply or serve European companies doing business here or with US companies doing business in Europe. Otherwise, there appears little they can do.

The European Union’s Corporate Sustainability Reporting Directive, now in effect, has faced increasing headwinds in Europe due to concerns about the administrative burden, but as recently reported in ESM, the substance of the law likely will remain the same in spirit with pared down metrics disclosures. Essentially, the European Union is moving to merge the CSRD with the Corporate Sustainability Due Diligence Directive, now in effect, which obligates organizations to report on the risks, opportunities, steps taken to address them of their distribution and supply chains, and the metrics used. No one is expecting the demise of the disclosure rules, rather, some simplification, especially related to environmental and climate issues in the supply chain and reporting on supply chain and distribution partners. The laws do not require companies to be good citizens, merely to report on their management practices, metrics, and methods of risk mitigation.

The biggest unknown now is how the new US administration will react when these new disclosure laws get its attention, which is bound to happen due to intense lobbying against the laws by US business interests. It’s a safe bet the topic will come up in tariff and related trade negotiations.

However, “The US government can’t protect US companies from EU regulations,” Samantha Elliot, a CSR (Corporate Social Responsibility) /ESG Associate with the Boston-based legal firm Ropes & Gray, told a recent business gathering, according to a report in TriplePundit. Michelle Dunstan, Chief Responsibility Officer of the London-headquartered global asset management firm Janus Henderson Investors, told the group that her firm integrates ESG principles in all aspects of its operations as a matter of sound financial practice. “This is not ‘values investing,’” she emphasized. “It’s not touchy-feely. These are things that impact cash flow.”

Even small companies that fall well under the thresholds for required reporting will likely receive questionnaires related to:

Human rights: How suppliers treat their employees, including labor rights, working conditions, and potential adverse impacts on human rights, such as child labor or unpaid overtime.

Environmental impact: Details on suppliers' environmental practices, their carbon footprint, waste management practices, and efforts to mitigate environmental harm.

Supply chain transparency: Comprehensive data on the suppliers' own operations and their sub-suppliers to ensure transparency across the supply chain.

Double materiality: Information on how suppliers identify, prevent, mitigate, and remediate risks related to human rights and environmental impacts and how they create opportunities.

Climate change mitigation: Suppliers' plans and actions for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement.

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