Cross-Atlantic Compliance: How EU ESG Regulations Are Affecting U.S. Businesses

This article explores the implications of the EU Corporate Sustainability Reporting Directive (CSRD) and associated EU ESG regulations that mandate due diligence in supply chains, including the Corporate Sustainability Due Diligence Directive (CSDDD), Conflict Minerals Regulation, Deforestation Regulation, and the upcoming Forced Labour Regulation, on U.S. companies. These directives and regulations broaden their scope beyond EU borders, influencing U.S. firms that operate within the EU or engage with EU-based businesses. Building on our previous publications -such as "CSDDD From Obligation to Opportunity", “CSRD and CSDDD: connecting the dots", “CSRD, CSDDD and EUDR connecting the dots” and “Introduction to the Dutch Implementation of the CSRD”- this discussion aims to synthesize these insights briefly for US companies. We will check the potential impacts of these regulatory frameworks on U.S. companies and discuss essential considerations they must address to align with these evolving standards.

This article is written by Sefa Gecikli ([email protected]) and Kristi Rutgers ([email protected]). Sefa and Kristi are part of the RSM Netherlands Business Consulting Serviced with a specific focus on International Trade, Sustainability and Strategy Matters.

To achieve compliance with the CSRD and CSDDD, businesses must meet due diligence requirements, develop plans to prevent adverse environmental and human rights impacts, and create compliant contracts. This includes making contractual changes with all business partners.  

Scope of CSRD and Implications for US Companies

The Corporate Sustainability Reporting Directive (CSRD) represents a significant expansion of sustainability reporting requirements within the European Union. It affects not only EU-based companies but also non-EU companies, including those in the United States, that have significant operations or financial interests within the EU.

As we already explained in our previous installment, the scope of the CSRD reaches the following group of entities:

Firstly, US companies with debt or equity securities listed on an EU-regulated market fall directly within the scope of the CSRD. This category includes large US 'public interest entities' in the EU (such as credit institutions or insurance companies) or entities that are parent undertakings of large groups with such listings. If the entity has more than 500 employees, averaged over a year as well, reporting is due from 2025 for financial years starting on January 1, 2024. US small and medium-sized enterprises (SMEs) with debt or equity securities listed on an EU-regulated market are also subject to the CSRD, though they face different thresholds and deadlines compared to large entities. For them, reporting is due from 2027 for financial years starting on or after January 1, 2026. However, in-scope SMEs may opt out until 2028.

Secondly, large EU undertakings and EU parent undertakings of large groups, including those under the control of US parent companies or the ones with US subsidiaries, are also subject to the CSRD. The entity or group must meet at least two of the following criteria on their balance sheet dates either as a single entity or on a consolidated group basis, including all subsidiaries of the EU parent, even those established outside the EU:

• Greater than €25 million balance sheet total.
  Greater than €50 million net turnover.
  Greater than 250 employees (averaged over a year).

For this  group, reporting is due from 2026 for financial years starting on or after January 1, 2025.
Finally, US companies with significant activities in the EU may still be affected by the CSRD if they generate substantial revenue within the EU or operate large subsidiaries or branches there. 

• The company generates a net turnover of more than €150 million in the EU in each of the last two financial years.
  The company has at least one large subsidiary, a subsidiary listed on an EU-regulated market, or a branch with more than €40 million net turnover in the EU.

In this situation, reporting is due from 2029 for financial years starting on or after January 1, 2028.

As demonstrated, the CSRD can have significant implications for US companies. For instance, a large US manufacturing firm that generates a net turnover of more than €150 million in the EU over the past two financial years, and has a large subsidiary in the EU with more than €40 million in net turnover, would be subject to the CSRD’s reporting requirements, despite being headquartered outside the EU. Additionally, in a more indirect scenario, consider a large EU-based consumer goods company with a US subsidiary. The EU parent company, being required to comply with the CSRD due to its size and operational scope in the EU, would necessitate the US subsidiary to provide detailed ESG data. Consequently, the US subsidiary’s operations, sustainability practices, and data collection methods would need to align with the CSRD requirements to enable the parent company to report the necessary information accurately.

ESG Regulations Requiring Due Diligence Throughout the Supply Chain and US Companies

After a two-and-a-half-year legislative journey, the EU's Corporate Sustainability Due Diligence Directive (CSDDD) has been formally adopted and was published in the EU Official Journal on July 5, 2024. The directive imposes specific requirements on both EU and non-EU companies, making it a significant regulation for businesses around the world, including those in the United States.

The CSDDD applies to non-EU companies, including those based in the US, based on their turnover generated within the EU. Even without an in-scope EU entity, a US company falls under the directive if it meets one of the following criteria:

• A global net turnover of more than EUR 450 million generated within the EU.
  Franchisee or licensee royalties of more than EUR 22.5 million within the EU, under specific conditions, such as agreements with independent third-party companies that maintain a common business identity and method.

For instance, consider a US-based tech company that sells software solutions to multiple EU countries. If this company generates a net turnover of EUR 500 million from the EU market, it would fall under the scope of CSDDD. Similarly, a US-based fast-food chain that licenses its brand and business model to franchisees in Europe and earns EUR 30 million in royalties would also be subject to the directive.

The CSDDD focuses on the identification and prioritization of risks, as well as the prevention, mitigation, and remediation of actual or potential adverse human rights and environmental impacts. These obligations extend across companies' own operations, their subsidiaries, and their business partners throughout the supply chain. Additionally, the directive ensures that those affected by a failure to respect these duties have access to justice and legal remedies.

For example, a US fashion retailer with significant operations in the EU will need to scrutinize its supply chain for potential human rights violations, such as child labor in textile manufacturing, or environmental impacts, like pollution from dyeing processes. The company would be required to regularly report its findings and the corrective actions taken. Failure to comply with these obligations could result in legal penalties, including fines or compensatory damages to affected parties.

US companies that anticipate falling within the scope of the CSDDD should begin preparing by enhancing their due diligence processes, particularly concerning their EU operations. Strengthening relationships with suppliers and ensuring adherence to due diligence standards will be crucial. This might involve renegotiating contracts or implementing stricter compliance checks, which also requires a preparation window.

For instance, a US electronics company sourcing components from multiple countries, including those in the EU, may need to develop new supplier agreements that incorporate CSDDD-compliant due diligence clauses. This could involve on-site audits, training for suppliers, and integrating environmental and human rights benchmarks into their procurement processes.

Obligations under the CSDDD will apply alongside other, more specific, or potentially stricter due diligence obligations under other EU laws, such as the Conflict Minerals Regulation, the Deforestation Regulation, and the forthcoming Forced Labour Regulation.

In terms of the EU Deforestation Regulation, if a US company places any of the in-scope commodities—such as cattle, wood, cocoa, soy, palm oil, coffee, rubber, or derived products like leather, chocolate, tires, or furniture—on the EU market, it becomes an obliged entity under this regulation. The company must ensure that these commodities are not linked to deforestation, conducting thorough due diligence and traceability checks. On the other hand, US companies may be indirectly affected by the regulation: if a US company is a supplier to an EU entity that places these commodities on the EU market, the EU entity might require the US company to provide detailed documentation to demonstrate compliance. For example, a US wood supplier selling to an EU furniture manufacturer will likely need to supply documents proving that the wood was harvested sustainably and in line with anti-deforestation criteria, even though the US company itself is not placing the product on the EU market.

Similarly, the Conflict Minerals Regulation affects EU importers of minerals or metals containing or consisting of listed materials such as tin, tantalum, tungsten, and gold above a certain volume threshold. An EU subsidiary of a US electronics company that imports tantalum into the EU for manufacturing purposes would need to trace the mineral's origin and prove it was sourced responsibly, ensuring compliance with the EU regulation. Again, more indirectly, if a US company supplies these minerals to an EU entity, that EU entity might request detailed documentation to prove compliance with the Conflict Minerals Regulation.

Finally, if a US company is placing or making available products on the EU market, it must ensure that none of its products or components are produced using forced labor. The EU Forced Labour Regulation requires comprehensive due diligence across all tiers of the supply chain. For example, a US electronics component manufacturer supplying to an EU device maker might need to ensure and certify that no forced labor was involved in the mining of minerals or assembly of parts, as the EU entity will need this information to comply with the regulation.

In conclusion, the adoption of the CSDDD and related EU regulations necessitates that US companies, whether directly subject to these rules or indirectly impacted through their supply chains, adopt specific due diligence processes. These efforts are crucial not only for compliance but also for maintaining market access and avoiding legal and financial risks in the EU. Early preparation and strategic adjustments to supply chain management will be key to successfully addressing this evolving regulatory landscape.

Forward Looking

As we look to the future, it is imperative for U.S. businesses to deepen their understanding of these EU regulations and adjust their strategic planning accordingly. The evolving regulatory landscape will likely continue to expand and could prompt similar legislative actions in other regions, influencing global operational standards. Companies that anticipate and adapt to these changes can secure a competitive advantage, foster greater corporate resilience, and enhance their standing in the global marketplace. In essence, the path forward for U.S. businesses involves not only compliance but also an opportunity to lead in corporate responsibility and sustainable development on a global scale.

RSM is a thought leader in the field of Sustainability and Strategy Consulting. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of regulatory obligations and practical applications in working with our customers. If you want to know more, please reach out to one of our consultants.