Comment: The EU’s CSDDD usurps the role of US fiduciaries

American firms are up in arms at the prospect of being forced to account for their supply chains by European policymakers – and rightly so, say Daniel Crowley and Robert Eccles.

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.

Daniel Crowley headshot
Daniel Crowley

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.

Robert Eccles headshot
Professor Robert Eccles

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?

Public vs private 

But there’s a deeper problem. The CSDDD blurs the line between the role of the public and private sector for dealing with the threats posed by climate change and protecting human rights. It is an attempt to make companies responsible for issues that are better addressed through sound public policies, which might include a carbon tax or sanctions against adversarial nations like China that use forced labour.

The core role of the corporation in society isn’t to make the world a better place but to generate long-term value for shareholders. In doing so, it must take account of the material issues that matter to other stakeholders. The “shareholder vs stakeholder” capitalism debate is an empty argument being driven by political rhetoric on both sides of the aisle.

Don’t get us wrong. We aren’t proponents of a Dickensian world where companies operate with complete indifference to their environmental impacts and disregard for human rights. In generating shareholder value, they should not be making the world a worse place, and their products and services can make it a better one.

Companies must be accountable to their shareholders and other important stakeholders and should strictly obey laws and commercial norms of practice. But US companies should not be subjected to a directive intended to dictate the way they operate, and which has no regard to shareholder returns.

In 2008, the Eurozone and US had comparably-sized economies as measured by GDP ($14.2 trillion and $14.8 trillion respectively). Since then, cumulative Eurozone economic growth has been anaemic, growing only 5.6 percent in comparison with 81.8 percent growth over the same period in the US.

Moreover, according to the Securities Industry and Financial Markets Association, the US has more than twice the equity market capital of the EU and China combined. The CSDDD is an attempt, perhaps an unconscious one, to level that playing field.

The CSDDD has not yet become law, so there’s still time for the US to act.

The Biden administration should make clear to the EU that, if this law passes, every European company, both public and private, that has at least $150 million in revenues with $40 million of those coming from the US will have to file their financial statements in US GAAP to the SEC every year.

Sounds ridiculous, right? So is the CSDDD.

Daniel F C Crowley leads the global financial services policy practice at law firm K&L Gates LLP.

Robert G Eccles is a visiting professor of management practice at Saïd Business School, Oxford University, and the founding chairman of the Sustainability Accounting Standards Board.