US demands EU carve American firms out of sustainability directives

The United States has told the European Union that its sustainability reporting and due diligence laws still impose unacceptable burdens on American companies, despite Brussels having already scaled back both directives substantially. In a comment letter that stops just short of an explicit threat, Andy Puzder, the US ambassador to the EU, warned that Washington would take "any actions necessary" unless the directives are further curtailed for US businesses.

The letter, reviewed by the law firm Ropes & Gray, represents a sharp escalation in the transatlantic dispute over how far EU regulation can reach beyond its borders. It also raises an uncomfortable question for Brussels: if raising compliance thresholds to exclude the vast majority of companies is not enough, what would satisfy Washington short of a complete exemption for American firms?

What Washington is demanding

Puzder's letter sets out specific demands. The US wants the Corporate Sustainability Due Diligence Directive (CSDDD) to apply only to the EU subsidiaries of American companies, or to their EU business partners, rather than to the parent companies themselves. It wants the law to cover only goods produced in the EU and services supplied from the EU, not those merely sold into the bloc. And it asks that no penalty be imposed on a US company, or on the EU subsidiary of one, that is calculated on the basis of revenue earned outside the EU.

These requests, if granted, would effectively sever the link between a US parent company and the due diligence obligations that the CSDDD imposes on value chains. An American firm selling into Europe through a small EU subsidiary would face minimal obligations, regardless of its global footprint. The letter also takes aim at the Corporate Sustainability Reporting Directive (CSRD), objecting to its double materiality standard, which requires businesses to report not only how sustainability issues affect their finances but also how their operations affect the environment and communities. Puzder's letter argues that this approach "would significantly expand the reporting burden for non-EU companies with minimal links to the EU market."

The concessions Brussels has already made

The US demands arrive at a moment when the EU has already retreated considerably on both directives. In December, EU legislators reached a political agreement to raise the compliance thresholds for both laws. The revised CSRD now applies only to EU-based companies with more than 1,000 employees and more than €450 million in annual revenue. Non-EU companies fall within its scope only if they generate more than €450 million of revenue in the EU. The previous thresholds would have captured far more businesses. According to estimates, the December changes removed roughly 90 per cent of companies from the CSRD's scope.

The CSDDD was trimmed even more aggressively. It now applies only to EU companies with more than 5,000 employees and more than €1.5 billion in revenue, and to non-EU entities that generate more than €1.5 billion in the EU. That removed approximately 70 per cent of companies from the directive's remit. The European Parliament and the European Council both adopted the revised text.

Then, in July, the European Commission adopted revised sustainability reporting standards under the CSRD, cutting the number of mandatory data points by 60 per cent and reducing total data points by 70 per cent. The Commission also introduced a voluntary standard for companies outside the law's scope, and prohibited companies within scope from demanding more information from their supply chain partners than the voluntary standard requires.

Taken together, these changes represent a significant dilution of the original ambition behind both directives. The Commission has clearly been trying to balance regulatory ambition with competitiveness concerns, a tension that has sharpened as the EU's economic outlook has weakened. Yet Puzder's letter makes clear that even the diluted versions go too far for Washington.

Double materiality as the flashpoint

The US objection to double materiality goes to the heart of a philosophical disagreement about what corporate reporting is for. The EU's approach treats companies as having responsibilities that extend beyond shareholder value. Under double materiality, a firm must report not only the financial risks that climate change or labour abuses pose to its balance sheet, but also the impact its own activities have on the climate, on workers, and on the communities where it operates.

The US position, as articulated in Puzder's letter, is that this framework imposes disproportionate costs on companies with limited connections to the EU market. The implication is that a US company selling goods into Europe should not have to account for its environmental or social footprint in its American operations or its Asian supply chain simply because those goods end up on European shelves.

This is not a marginal dispute. If double materiality is stripped back for non-EU companies, the reporting framework becomes materially less useful for investors, civil society organisations and regulators who rely on it to assess corporate conduct. If it is preserved but US companies are exempted, European competitors will face obligations that American rivals do not, creating the very competitive distortion that Brussels has been trying to avoid.

The trade agreement backdrop

The letter does not arrive in a vacuum. Last year, the EU and the US concluded a trade framework agreement that both sides described as a first step towards deepening the transatlantic trade and investment relationship. The agreement was always vague on specifics, but its political function was clear: to lower the temperature on a set of disputes that had been escalating since the Biden administration's Inflation Reduction Act, which the EU regarded as discriminatory, and since Brussels began rolling out a series of regulatory initiatives that Washington saw as targeting American firms.

Puzder's letter makes explicit what has been implicit for some time: the US regards the CSDDD and CSRD as part of a pattern of EU regulation that reaches beyond the bloc's borders in ways that burden American commerce. The Ropes & Gray lawyers who reviewed the letter, partner Michael Littenberg and associate Samantha Elliott, noted that the US government has raised concerns about both laws since their proposal stage, particularly regarding their extraterritorial reach.

The extraterritoriality problem

Puzder's demands amount to a request that the EU abandon the extraterritorial dimension of its sustainability regulation entirely. The CSDDD and CSRD were designed to operate on the principle that any company, wherever it is domiciled, must meet certain standards if it wants access to the EU single market. This is the same principle that underpins the EU's data protection regime under the GDPR, which has also drawn American criticism for its reach beyond European borders.

If the EU were to accept Puzder's proposed limitation, applying the CSDDD only to the activities of EU subsidiaries and EU business partners, the directive would lose most of its force. Large American companies could structure their operations so that their EU subsidiaries were small and compliant, while the parent company and its global value chain remained outside the scope of EU due diligence requirements. The directive would regulate European subsidiaries of American firms but not the firms themselves.

Washington's position also creates a structural asymmetry. EU companies operating in the US are subject to American regulations, including securities laws and export controls, that have their own extraterritorial effects. The US has never shown much reluctance to extend its regulatory reach when it suits its interests, from sanctions enforcement to antitrust actions. The difference is that the US has the market power to enforce its preferences, and the EU is still working out whether it does.

What happens next

The European Commission now faces a decision. It can hold the line on the current scope of both directives, accepting that this will provoke further friction with Washington and potentially trigger retaliatory measures. Or it can seek further accommodations, either through implementing rules that soften the obligations for non-EU companies or through bilateral understandings with the US.

The Commission's July move to cut reporting data points by 70 per cent suggests it is already inclined towards pragmatism. But there is a limit to how far Brussels can go without rendering the directives meaningless. The European Parliament, which has been the most vocal institutional champion of both laws, is unlikely to accept further weakening without a fight, particularly from centrist and green MEPs who regard sustainability regulation as central to the EU's strategic autonomy.

The next concrete step will be the implementation of the revised reporting standards, which companies subject to the CSRD will need to begin applying in the coming reporting cycles. How the Commission interprets and enforces those standards for non-EU companies, and whether it adjusts them in response to Puzder's letter, will reveal whether Brussels intends to accommodate Washington's concerns or hold firm. The US has set the terms of the confrontation. The Commission's response will determine whether EU sustainability regulation retains any meaningful extraterritorial force.