The European Green Deal was launched in December 2019. Its stated purpose is to “transform the EU into a modern, resource-efficient and competitive economy”. The foundations are: (i) achieving carbon neutrality by 2050, (i) decoupling economic growth from resource use, and (iii) ensuring that “no person or place is left behind”. Core to the implementation of the European Green Deal is the EU Taxonomy for sustainable business activities.

One regulation for defining “sustainable business activities” is the Corporate Sustainability Reporting Directive (CSRD), which specifies how companies report on their sustainability performance. It is extra-territorial in scope and will apply to approximately 3,000 US companies doing business in Europe which have revenues exceeding the relatively modest level of €150 million in total with €40 million generated within the EU.

The CSRD will be difficult and expensive to implement in the US. We believe the same objective of providing investors with financially material sustainability information, and stakeholders with information on impact materiality, can be done more efficiently through the voluntary adoption of standards from the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI).

In contrast, no feasible alternative exists for the Corporate Sustainability Due Diligence Directive (CSDDD).

The stated purpose of the CSDDD “is to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance”. It aims to reduce negative environmental impacts and violations of human rights, and covers a company’s subsidiaries, business partners, and supply chains.

The challenge with the CSDDD from the US perspective is that its implementation reaches into the very fabric of corporate governance under US law.

The directive requires companies to “have adequate governance, management systems and measures in place” for “identifying, preventing, mitigating and accounting for their adverse human rights, and environmental impacts” in order “to foster the contribution of businesses operating in the single market to the respect of the human rights and environment in their own operations and through their value chains”.

In essence, the CSDDD effectively rewrites Delaware corporate law from Brussels, and establishes sweeping mandates for how US companies operate that could undermine the fiduciary duty of the board of directors.

We obviously agree that companies should operate in a responsible manner, reduce their negative externalities, and protect human rights. We also believe, however, that it is the responsibility of a company’s board of directors to provide the necessary oversight, given their responsibility to the long-term viability of a company and its shareholders.

A further issue is that it is by no means clear how the EU would determine whether a company is in compliance with the CSDDD. How will it determine what is going on in a company’s operations? More disclosure? Regulatory audits? And what would be the guidelines here to ensure that companies, particularly American ones, aren’t being subjected to a political agenda?

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