EU pauses corporate reporting, worldwide companies not yet under Brussels’ thumb

On April 3, the European Parliament ratified a decision to stop the clock on scheduled corporate reporting and compliance requirements–most notably the Corporate Sustainability Reporting Directive (CSRD), earlier adopted by the European Parliament in December 2022, and the Corporate Sustainability Due Diligence Directive (CSDDD), adopted in June 2024. While reporting and due diligence rules may sound anodyne, these aggressive diktats sought to place a large swathe of companies worldwide under the thumb of Brussels bureaucrats. (As the “sustainability” part of their title may suggest, these directives fell under the broader “EU Green Deal” launched in late 2019, which seeks to require companies to reduce carbon emissions by 55 per cent by the of this decade and reach “net zero” carbon emissions by 2050.) 

The decision to pause the implementation of these sweeping efforts and potentially scale them back is a salutary move in light of escalating Trans-Atlantic tensions. To wit: on Friday, March 28, the American embassy in Paris sent a questionnaire to French businesses telling foreign-owned firms with which it does business that they have to comply with President Trump’s executive order 14173, which targets race discrimination including various policies promoting “diversity, equity, and inclusion.” The French Ministry of Foreign Trade predictably decried this action as unjustified extraterritorial overreach. But it is hard for European leaders to complain about extraterritoriality when they had been scheduled to tell companies doing more than €450 million in business in Europe, whether or not headquartered on the continent, how to manage human rights, their labour forces, their supply chains, and their environmental stewardship. 

The previously adopted Due Diligence Directive sought to push foreign companies to hit climate goals far beyond those ratified by the US Congress and ran squarely against well-defined fiduciary duties under American law. To be sure, well-run companies should consider the interests of multiple stakeholders. But unlike in much of Europe, where NGOs, political activists, labour unions, and other interest groups can have formal roles in corporate governance, under American law, ordinary corporations vest decision-making with boards of directors whose fiduciary duties orient exclusively around shareholder value.

Understandably, EU leaders would want their directive to have extraterritorial reach—because they believe in its objectives, because climate issues are indeed global, and because they obviously don’t want to put their own companies at a serious competitive disadvantage. But it is not at all hard to conceive of its rules as tantamount to a trade barrier for US and other foreign firms. America and other countries which trade with Europe could react to the directive’s aggressive extraterritoriality with responses that go far beyond President Trump’s latest order, which focused on race-based diversity programs. Indeed, on March 12, Tennessee Republican Senator Bill Hagerty introduced new legislation, the “PROTECT USA Act,” that specifically pushes back against the CSDDD.

However, even absent Congressional action, American regulators could more broadly retreat from longstanding agreements respecting foreign accounting practices and disclosure rules. America’s rigid Sarbanes Oxley corporate-governance rules, which have applied much more lightly to foreign issuers, could be broadened in reach. American regulators could change accounting equivalency rules and mandate that European firms must now report under US-style GAAP (generally accepted accounting procedures). They could demand foreign firms’ compliance with costly Human Capital Management disclosure requirements. They could compel EU-parented firms to disclose their beneficial owners and comply with American standards for reporting executives’ financial transactions. And there are the new tariffs on European imports—which have always been a risk with this neo-mercantilist administration—sparking a potential trade war deleterious to both sides.

In addition to postponing the reporting and sustainability directives it previously adopted, the European Parliament’s April 3 vote ratified earlier decisions by the commission and council to scale back many of the issues with the original versions of the directives most likely to incite retaliation. 

The newly proposed versions would more carefully delineate which stakeholders are owed corporate engagement–although we still think these changes don’t go far enough and leave directors of US companies facing European due diligence rules in tension with their fiduciary duties under American law. And we continue to worry that the revised version might be wielded to apply European rules on foreign businesses notwithstanding conflicting domestic regimes—such as foisting OECD and UN labour norms on American companies that conflict with US labour law. Still, the EU’s new version at least takes a step in the right direction.

Similarly, the new version of the CSDDD takes a step back from the original’s essentially unfettered civil liability risks. Under the original directive, an NGO with no direct tie to a business at all could have gone into a developing country where the supply chain might touch, find a human rights violation, and sue a foreign company for the alleged harm in European court, with damages scaled up to an incredible 5 per cent of worldwide corporate turnover. Still, the newly proposed CSDDD has problems of its own. Rather than reducing companies’ legal risks, the new version punts many more challenging questions to nation-states rather than Brussels. But national governments no less than the EU might embrace overly-permissive legal theories—and the most aggressive national courts could effectively swamp more measured approaches adopted in most European courts, as we often see in America’s decentralised federalist civil litigation system. As with our concerns about interference with foreign fiduciary laws, the effort here is directionally positive while still inadequate.

Thus, it is understandable that even the revised version of the Sustainability Directive continues to generate criticism. But we still want to applaud the EU for pausing its effort and taking a step back to reassess. Thankfully, there is obvious potential to finalise a rule that both buttresses European companies’ competitiveness and avoids triggering a mutually destructive race to the bottom with American political leaders.

James Copland is a senior fellow with and director of legal policy for the Manhattan Institute. Charles Yockey is a Manhattan Institute policy analyst and Budapest Fellow at the Hungary Foundation.