As trans-Atlantic relations grow increasingly fraught, Europe’s ESG regulations are becoming yet another flashpoint that threatens to sour ties.
The American Chamber of Commerce to the European Union (AmCham EU) says proposed revisions to the bloc’s environmental, social and governance rules don’t adequately protect US interests. The complaint is part of a growing US response to Europe’s ESG framework. Republican lawmakers call the rules “hostile” and warn that America’s jurisdictional sovereignty is at stake, while Commerce Secretary Howard Lutnick has said he’s willing to consider “trade tools” to retaliate.
The European Commission proposed changes last week that would rein in the scope of two major ESG laws: the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive. However, big international companies with business in the EU would still have to comply.
The upshot is that non-EU companies risk being ensnared by the bloc’s ESG rules, even for products that aren’t sold in the EU, said Kim Watts, senior policy manager for AmCham EU, whose members include Ford Motor Co., Exxon Mobil Corp. and Amazon.com Inc.
AmCham is worried that the EU “is going too far on extraterritoriality,” she said in an interview.
It’s a complaint that’s being backed up in even stronger terms by GOP members of Congress. In a letter sent shortly after the European Commission published its proposed revisions to the bloc’s ESG rules, the US lawmakers wrote to Treasury Secretary Scott Bessent and National Economic Council Director Kevin Hassett, warning of the “profound” implications of Europe’s due diligence directive for US businesses.
“CSDDD represents a serious and unwarranted regulatory overreach, imposing significant economic and legal burdens on US companies,” lawmakers, including Representatives James French Hill of Arkansas, Ann Wagner of Missouri and Andy Barr of Kentucky, wrote in the letter. “We strongly urge immediate diplomatic engagement to challenge and halt its implementation.” The group also called for clarification to ensure US companies won’t have to develop climate transition plans.
AmCham EU said its concerns apply to both CSRD, which is a reporting requirement, and CSDDD, which is designed to include value chains in ESG risk assessments.
A spokesperson for the commission said the views of all stakeholders were considered before its latest proposal was put forward.
CSDDD was originally designed so that companies in breach of the directive would face fines of as much as 5% of their global revenue. Work on the directive was propelled in part by the 2013 collapse of the Rana Plaza garment factory in Bangladesh, which killed more than 1,100 people who had been working on clothes intended for western markets.
The shock of that event led to a new sensitivity around supply-chain risks, which EU authorities were determined to act on. CSDDD also reflects the goals of the 2015 Paris climate accord, such that companies are expected to have plausible net zero plans.
But the far-reaching ramifications of CSDDD led to widespread pushback, both from within and outside the EU. The commission responded to that pressure last week by dropping an EU-wide civil liability provision and limiting the length of the value chain in the directive.
Those changes still leave US companies in the directive’s scope, something the US Chamber of Commerce says creates “conflicts with American law.”
“The extraterritoriality, it’s not unsolvable, but there needs to be more dialog and attention on this to understand the scale and the scope of the issue here,” Watts said. “We need more understanding from the commission on the challenges that businesses face with trying to comply with extremely, rather vague and complex legislation.”
Ideally, CSDDD should “refer to an EU-nexus chain of activity,” she said. That would mean the EU should “focus the due diligence on the chain of activities that have an end result in the European market rather than focus very broadly on elements that might not be linked to the single market at all.”
Watts said CSRD reporting requirements exceed in some cases those in the US, which leaves companies “open to scrutiny by US investors who are looking for statements that could be the basis of securities litigation.”
AmCham EU members remain committed to their sustainability goals and would like to avoid a trade battle over ESG, Watts said. Tariffs are “a very bad idea” and “not constructive,” she said.
The commission’s proposal still needs to be voted on by lawmakers and member states. And there’s likely to be much more “political wrangling ahead,” particularly as the EU Parliament is “currently very divided,” said Sophie Tuson, head of the environmental unit at the London law firm RPC.
Lara Wolters, the member of parliament who shepherded CSDDD through to adoption last year, has labeled the commission’s proposal “reckless.” She’s now calling on the European Parliament to “succeed where the commission has failed,” which she says entails “finding a compromise for common-sense simplification, without lowering standards.”
At AmCham EU, the goal is to impress upon the EU that adjustments are still needed to its ESG regulations to ensure the framework is “workable for all non EU-headquartered businesses and also European businesses with a global presence,” Watts said.
Photo: Photographer: Geert Vanden Wijngaert/Bloomberg
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