European Commission Adopts Corporate Sustainability Due Diligence Directive That Will Impact Many U.S. Companies

By Allen Campbell, JD, MBA and Michael Kraten, PhD, CPA 

Directive on Corporate Sustainability Due Diligence (CSDD)

On February 23, 2022, the European Commission adopted a Proposal for a Directive on Corporate Sustainability Due Diligence (CSDD) that addresses social and environmental concerns, including global warming. If, as expected, the proposed directive is enacted by the European Parliament and the European Council, it will require all 27 member states of the EU to enact laws consistent with the directive. When that happens, global commerce as we have known it for centuries will enter a new era.

CSDD goes beyond the supply chain to deal with a company’s “value chain”, which it defines very expansively to mean activities related to the development, production and providing of goods and services, the use and disposal of products, and the related activities of upstream and downstream businesses.

As presently drafted, CSDD will directly or indirectly affect a large number of companies around the world, including American companies.

Why is this development relevant for American organizations? On March 21, 2022, the Securities & Exchange Commission (SEC) issued a major proposal on climate change disclosure entitled The Enhancement and Standardization of Climate-Related Disclosures for Investors.

The simultaneous emergence of the European and American disclosure proposals is representative of a continuing global wave of reporting requirements.

It is thus helpful for every American organization that is subject to SEC regulation, and not just American organizations that have direct interests in Europe, to be aware of the European proposals. The European market is generally a little more advanced than the U.S. in climate disclosure development, and thus it serves as a helpful barometer of change here. In other words, by understanding European trends in this sector, we can better understand and anticipate disclosure trends in the U.S.

The European law will directly apply to companies within its “scope”, so-called “In-Scope” companies, which are defined in terms of country of incorporation, revenues, headcount and industry sectors in which they operate. There are four categories, as shown in the table below.

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