The laws will initially apply to all EU companies with more than 5000 employees and net worldwide annual turnover of more than €1.5 billion, and to non-EU (or "third country") companies that generate more than €1.5 billion in annual net turnover in the EU (alone or on a group-wide basis). Once fully phased in, they will apply to all EU companies with more than 1000 employees and net worldwide turnover of more than €450 million and third country companies that generate net turnover in the EU of more than €450 million, in each case alone or on a group-wide basis.

The Directive will also apply to companies that derive over €22.5 million in annual EU franchising fees and royalties and are either EU companies with over €80 million in net world-wide turnover or third country companies with over €80 million in EU net turnover. The CSDDD will thus come to apply to most large multinational enterprises, whether publicly listed or private, and whether or not they are headquartered or have a subsidiary in the EU.

Smaller companies that are suppliers or other business partners of companies that are subject to the Directives' due diligence obligations will also be affected. These companies will receive due diligence questions relating to their own human rights and environmental compliance and greenhouse gas ("GHG") emissions, and may be required to agree to contractual clauses designed to ensure compliance.

Unsurprisingly, there have been objections to the extraterritorial reach of the EU's recent lawmaking activities. In June 2023, 28 members of Congress wrote to Secretary Janet Yellen, complaining that "the extraterritorial application of EU requirements on American businesses as a violation of international norms and an infringement on U.S. sovereignty."²

The U.S. Chamber of Commerce, while generally supportive of the CSDDD's intent, has expressed similar objections.³ The U.S. government is in a uniquely weak position to challenge the extraterritorial reach of these laws, as its laws — particularly antitrust laws and trade sanctions — often have extraterritorial reach. Other countries are also likely to object, for a range of reasons discussed below.

While the CSDDD has been named a "due diligence" directive, its implications go well beyond that. The Directive will convert the U.N. Guiding Principles on Business and Human Rights,⁴ as further developed by the OECD Guidelines for Multinational Enterprises,⁵ which are legally non-binding, into national laws binding upon most large multinational enterprises.

The Directive will impose affirmative obligations on companies to conduct due diligence into their own global operations and the activities of companies in their upstream and downstream "chain of activities," to identify any actual or potential "adverse human rights impacts" and "adverse environmental impacts," and to prevent or mitigate those adverse impacts. Companies that fail to comply with these requirements may be subject to criminal penalties and civil liability.

The Directive aims to protect a broad range of human rights, based on widely-adopted international human rights conventions, including the International Covenant on Civil and Political Rights, the International Covenant on Economic, Social and Cultural Rights ("ICESCR"), the Convention on the Rights of the Child ("CRC"), and eight of the core conventions of the International Labour Organization ("ILO").

Notably, the U.S. has never ratified the ICESCR or the CRC, and has only ratified two of the eight ILO conventions. The challenge for multinational enterprises will be to assess how to align their corporate behavior with the human rights protected by these treaties, especially when operating in countries that do not uphold or protect those rights.

Human rights, labor and other non-governmental organizations ("NGOs") will use the legal processes established under the Directive to pressure multinational enterprises to conform their conduct to the requirements of these human rights conventions, whether or not doing so is required by the laws in the places where they or their subsidiaries are doing business or, in some cases, would be prohibited by local law.

The CSDDD will require companies to adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, that the business model and strategy of the company are compatible with the goal of limiting global warming to 1.5°C in line with the Paris Agreement⁶ and the objective of achieving "climate neutrality" in line with the EU's targets.⁷

This is not a mere disclosure or "comply or explain" obligation. Companies that do not already have a transition plan will be required to adopt one. Transition plans will be required to include time-bound targets for 2030 and in five-year steps up to 2050, to describe the decarbonization levers and key actions planned, and to explain and quantify the investments necessary to implement the plan, which must be updated every 12 months.

National supervisory authorities will be required to supervise the adoption and design of companies' transition plans. Most companies that will be subject to the CSDDD will have similar reporting obligations under the recently adopted EU Corporate Sustainability Reporting Directive ("CSRD").⁸ But the CSDDD goes further, e.g. by requiring companies to put their transition plan into effect and to update it annually to assess progress.

The Directive will also require companies to refrain from causing environmental degradation, such as water or air pollution, excessive water consumption, or deforestation, that adversely affects (among other things) the production of food, access to clean water, or human health.

Companies will also be required to comply with 13 environmental conventions and protocols (of which the U.S. has ratified only six), relating to the protection of biological diversity, endangered species, mercury, persistent organic pollutants, hazardous chemicals and pesticides, ozone depletion, and ocean pollution.

National supervisory authorities will have the power to investigate alleged violations on their own initiative, or in response to concerns raised by trade unions, NGOs, and other stakeholders. If the supervisory authority finds that there is a violation, it will be empowered to order the company to cease its infringing conduct, to order remediation, and to impose penalties.

Pecuniary penalties are required to be "effective, proportionate and dissuasive," and are to be calculated based on the violating company's net worldwide turnover. The maximum limit of financial penalties must be set by national legislation at not less than 5% of net worldwide turnover. Even for the smallest companies on the Fortune 500 list, that would translate into potential penalties of over $350 million.

The CSDDD will also create private rights of action by those adversely affected by a company's intentional or negligent failure to mitigate or terminate environmental damage or human rights violations.

Affected persons, or trade unions and NGOs acting on their behalf, will be empowered to hold companies liable in European courts for actual damages caused by the company or its subsidiaries anywhere in the world in violation of the environmental and human rights protected by the Directive. Companies may be held liable even where their conduct was legal in the country in which the harm occurred.

The broadening of potential liability of multinational corporate groups is striking, but not unprecedented. While the U.S. Supreme Court has in recent years all but eliminated the application of the so-called Alien Tort Statute to alleged corporate violations of human rights,⁹ several other countries' courts have moved in the other direction.

In 2021, for example, the U.K. Supreme Court held that a U.K. parent company could be held liable to affected Nigerian villagers for widespread environmental damage in Nigeria caused by the alleged negligence of its Nigerian subsidiary.¹⁰ And in 2020 the Canadian Supreme Court held that Eritrean claimants had standing to sue a Canadian parent company in Canada for alleged breaches of their fundamental human rights while conscripted to work at the company's subsidiary.¹¹

The CSDDD appears to signal the de facto end, within EU courts, of "corporate veil" protection against serious human rights and environmental damage claims, and the embrace of what has been called "enterprise liability."

Private litigants may also seek to use the laws enacted pursuant to the Directive to pressure companies to reduce their greenhouse gas ("GHG") emissions. In 2021, the Hague District Court ordered Royal Dutch Shell to reduce its worldwide CO₂ emissions (including those within its value chain) by 45% by 2030.¹² The claimants argued that Shell has an obligation to take steps to meet the 1.5°C maximum warming objective set forth in the Paris Agreement.

Shell is appealing, and one of its defenses is that the judgment was not based on any specific law or standard that mandates that reduction. NGOs are likely to argue that the CSDDD is just such a law, and to use that as a basis to bring many more cases of this type.

The adoption of the CSDDD should not be surprising. France's Duty of Vigilance Law, the German Act on Corporate Due Diligence Obligations in Supply Chains, and the U.K.'s Modern Slavery Act, demonstrated a trend in European law to provide legal "teeth" to companies' environmental, social and governance (ESG) duties.

What is striking is that the EU is boldly taking the lead in this field, with extraterritorial reach, while some business groups and legislators in the U.S. are trying to curtail ESG initiatives.

Although many U.S. companies have come to embrace, at least to some extent, ESG objectives and reporting, there has been strong push-back by some business groups and politicians. These critics attack the increased corporate focus on ESG objectives as being an ostensible deviation from profit maximization, a manifestation of "leftist" or "woke" ideology, or otherwise politically and/or economically objectionable.

As a consequence, numerous U.S. states have passed or are considering laws to restrict the use of ESG factors in making investment and/or business decisions. Because of this head-on legal culture clash, companies may be obligated under EU laws to take actions that will adversely affect them under U.S. state "anti-ESG" laws.

The U.S. is not the only likely source of objections. Companies from countries whose domestic policies and labor practices are not in line with international norms will have great difficulty complying, and may refuse to do so.

China's stock exchanges have recently proposed draft ESG disclosure guidelines that, if implemented, will require large listed companies to disclose information concerning GHG emissions, environmental impact, rural revitalization, and supply chain security, among other topics, but corporate compliance with human rights standards is not included.¹³

In that field, China has responded to due diligence efforts mandated by the U.S.'s Uyghur Forced Labor Prevention Act by countermeasures under its anti-espionage and anti-sanctions laws that have placed multinational enterprises operating in China in a precarious position.

Countries may worry that the Directive will adversely affect their companies' exports and file complaints with the WTO, as several have done in response to the due diligence requirements in the EU's Deforestation Directive.¹⁴

Companies from countries that rely heavily on coal to meet their energy needs, including China, India, Indonesia, Vietnam and the Philippines, may continue their reliance on coal and thus fail to meet transition plan targets and/or become disfavored suppliers to companies seeking to reduce their Scope 3 emissions.

Other companies, including those from the Global South, may lack the human and/or financial resources to respond to detailed due diligence demands and/or to implement emission reduction initiatives.

The potential impact of the CSDDD cannot be overstated. There will be significant legal and diplomatic resistance to the Directive. NGOs will aggressively use the laws enacted in accordance with the Directive to promote corporate respect for human rights, reduce GHG emissions and prevent environmental degradation. Companies will struggle to balance their need to comply with the Directive's requirements against the consequences of violating other laws.

The EU's recent action is only the beginning of a fundamental legal culture clash.

1 Directive on Corporate Sustainability Due Diligence, avail. at https://bit.ly/3TxXMss. The Directive is scheduled for final approval by the European Parliament on April 24, 2024. Although approval is not assured, it is expected.

2 Letter dated June 13, 2023, avail. at https://bit.ly/3TTWY2k; see also Letter from Tim Scott and James Comer to Secretary Janet Yellen, dated June 5, 2023, avail. at https://bit.ly/49s.

3 U.S. Chamber of Commerce, Analyzing CS3D: What the EU's Corporate Sustainability Due Diligence Directive Means for Business 5-7 (Oct. 6, 2023), avail. at https://bit.ly/4atk5GK.

4 Guiding Principles on Business and Human Rights (2011) avail. at https://bit.ly/4arkJV5 .

5 OECD Guidelines for Multinational Enterprises (2023 ed.), avail. at https://bit.ly/3xjTIEB.

6 Paris Agreement to the United Nations Framework Convention on Climate Change, Dec. 12, 2015, T.I.A.S. No. 16-1104, avail. at https://bit.ly/4cLyCj5.

7 The targets are set forth in Regulation (EU) 2021/1119 of 30 June 2021 establishing the framework for achieving climate neutrality (the so-called "European Climate Law"), avail. at https://bit.ly/3TxDJKD.

8 Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022, avail. at https://bit.ly/3TxYlCA.

9 Nestle USA, Inc. v. Doe et al., 593 U.S. ___ (2021), avail. at https://bit.ly/3PCfGcm. The jurisdictional scope of the ATS had previously been severely curtailed by Kiobel v. Royal Dutch Petroleum, 569 U.S. 108 (2013), avail. at https://bit.ly/3vrtjEy.

10 Okpabi and others (Appellants) v. Royal Dutch Shell plc and another (Respondents), [2021] UKSC 3, avail. at https://bit.ly/49cp25x. See also Vedanta Resources Plc and Konkola Copper Mines Plc (Appellants) v Lungowe and Ors. (Respondents) [2019] UKSC 20, avail. at https://bit.ly/4avwxWa.

11 Nevsun Resources Ltd v. Araya, 2020 SCC 5, avail. at https://bit.ly/4a7XaB2.

12 Milieudefensie et al. v. Royal Dutch Shell plc, Case No. C/09/571932 (26 May 2021), avail. at https://bit.ly/3vuQZb4. Shell has appealed the decision.

13 See Press release of the Shanghai Stock Exchange (Feb. 8, 2024), avail. at https://bit.ly/43wXdUv.

14 See, e.g., Joint letter submitted to the WTO by Indonesia and Brazil (Nov. 29, 2022), avail. at https://bit.ly/3TS0QAY.