The Long Hand of Brussels on US Businesses
In the world of corporate governance, the deepest fault line today runs between the shores of the Atlantic. While the United States is retreating from ESG (Environmental, Social, Governance) ambitions, the European Union recently passed a directive that could redefine global corporate standards: the Corporate Sustainability Due Diligence Directive (CS3D).
Passed by the European Parliament in June 2024, the directive requires member states to implement its contents by July 2026, with obligations gradually coming into effect from July 2027. Application thresholds vary: for EU companies, they start at 500 employees and €150 million in turnover (or 250 employees and €40 million in high-impact sectors). For non-EU companies, such as US multinationals, the threshold is set at €450 million in revenues generated in the European market.
A standard of process, not of outcome
CS3D does not impose outcomes, but requires the adoption of “appropriate measures” to prevent and mitigate adverse impacts on human rights and the environment, throughout the value chain. It is a “process” standard, forcing each company to design a tailored sustainable due diligence system. “The risk, however, is that it all comes down to a formal compliance exercise,” warns Luca Enriques, professor of business law at Bocconi University and co-author of the paper How the EU Sustainability Due Diligence Directive Could Reshape Corporate Americapublished in the ECGI Law Working Paper Series. “This is why involving the top management is crucial to the success of the directive.”
Three key contributions
The paper by Enriques, Matteo Gatti (Rutgers University) and Roy Shapira (Harry Radzyner Law School) contributes to the debate on three fronts. First, it clarifies what the directive provides for and to whom it applies, focusing on the three pillars of due diligence: identifying and assessing adverse impacts (e.g. forced labor, barriers to collective bargaining, biodiversity loss, pollution), preventing and mitigating them, and finally addressing actual impacts.
Second, it explores how CS3D can expose directors of US companies to personal liability for failure of oversight. The paper distinguishes three types of actions: those related to the absence of an adequate information system, those related to the failure to react to the so-called red flags, and those arising from knowingly approving a noncompliant business plan (so-called Massey claims).
Third, the paper analyzes the combination of particularly ambitious regulation in Europe and private enforcement mechanisms in the United States. “The risk of being sued in Delaware could make US firms more alert to CS3D than their European counterparts,” notes Enriques. In other words, the “Delaware Effect” could strengthen the effectiveness of the “Brussels Effect”.
The Caremark Breakthrough
The central issue is that CS3D makes attention to ESG risks mandatory. These risks, the paper points out, may now become mission critical for any company active in the EU market. Ignoring them may constitute a breach of duty of care under the Caremark doctrine, which has seen a revival in US courts in recent years. “This shifts the axis of the debate: it is no longer a question of ethics or reputation, but of liability for damages,” Enriques points out.
Conformity or real change?
One of the central concerns addressed in the paper is that of cosmetic compliance: the adoption of cosmetic policies without real operational transformation. In this context, the ability of US shareholders to file lawsuits and obtain access to internal documents (books and records) becomes a significant deterrent against inaction.
Practical implications
In the final part, the paper provides operational recommendations: companies will need to rethink the structure and composition of their boards to incorporate effective ESG expertise. And the courts will need to decide how far to extend access to prefiling discovery, including in view of enquiries by European authorities.
In short, CS3D marks a paradigm shift. As Enriques concludes, “It could represent the beginning of a new stage, in which Europe sets the standards not only for itself, but for anyone who wants to be part of its market.”
Possible developments
But developments within the EU, recent changes to Delaware corporate law, and the seismic shift caused by the Trump administration could lead to a major scaling back of the directive’s effects on both European and American companies. In the EU, the Omnibus Proposal aims to reduce the regulatory burden of CS3D, while the Trump administration threatens retaliation against extraterritorial application of its rules. Finally, Delaware amended its corporate law by limiting shareholders’ inspection rights. Despite these changes, CS3D’s impact on American companies will remain significant, and so will its impact on European companies.