Complex EU Reporting Rules Undermine Global Sustainability and Economic Growth

By Ewa Staworzynska, Director, Corporate Responsibility and Labor Affairs at USCIB

The EU’s new sustainable reporting and due diligence directives could drive away business investments, undermine global agreements and disincentivize the very standards it wishes to promote.

Ewa Staworzynska is the Head of Corporate Responsibility and Labor Affairs practice at the United States Council for International Business. She represents multinational companies in global policy negotiations at the OECD, the ILO and the UN, and she serves as the Chair of the International Organisation of Employers’ (IOE) Policy Working Group on Human Rights and Responsible Business Conduct.

While the European Union’s sustainability ambitions should be acknowledged, recently passed legislation on corporate reporting, notably the Corporate Social Responsibility Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D), signal a stark departure from established international governance frameworks and pose serious risks for industrial competitiveness. The EU’s approach unfortunately omits addressing the root causes of human rights and labor rights violations globally, and, instead, burdens companies in a manner that does not drive impact.

Policymakers must recognize that CSRD and CS3D’s unilateral approach could create more barriers for companies to achieve sustainability goals while also undermining the multilateral frameworks that have governed international business cooperation for decades. With these regulations, the EU is essentially ignoring the rigorous global negotiations held between the OECD, the ILO and the UN, by setting its own rules with extra-territorial implications – in other words, enforcing EU standards far beyond its own jurisdiction. The EU itself does not recognize the extra-territorial application of laws adopted by third countries and considers such effects to be contrary to international law.

Under the planned legislation, any company that does significant business with the EU, whether European or not, would be required to put in place comprehensive due diligence systems that assess environmental and labor risks across their full supply chains – including outside the EU. This may seem good in theory but, in reality, it risks setting unachievable goals and creating massive barriers for businesses operating globally. For example, CS3D could hold companies legally liable for setting, reporting, and showing progress towards Paris-aligned climate targets – even in countries where such standards are not aligned, not enforceable or simply don’t exist. If companies are thus not hitting their climate goals in every country around the globe where they operate, they would be considered “violating” CS3D and potentially faced with fines or other barriers to business within the EU.

Manufacturing companies, for example, would be required to conduct due diligence across their entire “chain of activities,” including upstream suppliers of raw materials like aluminum, copper, and timber from multiple countries, while ensuring compliance with over 20 specific human rights standards and environmental protections – creating cascading contractual obligations that can extend to hundreds of subcontractors and suppliers globally.

These substantial compliance challenges would not only create administrative burdens, but they could also completely upend global supply chains, as smaller suppliers that lack the resources to fulfill due diligence requests might find themselves excluded from EU-linked commerce.

Industries with complex, global supply chains – construction, technology, energy, and retail – face the greatest exposure as they must scrutinize suppliers across developing countries for EU-specific compliance. Some jurisdictions make it nearly impossible for companies to obtain necessary data from suppliers and CS3D could penalize companies for simply operating within the laws and norms of local markets.

The Danish EU Presidency has estimated that it could cost companies up to €2.3 million each year just to comply with the directive. While this might sound like a large sum, other estimates place the cost even higher. Law firm DWF surveyed over a thousand EU C-suite executives, and found that business leaders estimate that 9%of their revenue will be spent on CS3D compliance.

The implementation challenges are compounded by overlapping and conflicting disclosure requirements in the EU and in member states, while late-stage guidance creates legal uncertainty before compliance deadlines. For example, the EU’s AI Act and CS3D create duplicative risk assessment requirements with unclear legal jurisdiction. This uncertainty can undermine business planning and investment decisions, particularly affecting smaller companies smaller legal and compliance budgets.

It is time to acknowledge that these sustainability directives may inadvertently affect trade flows and encourage production localization in ways that undermine the stable regulatory environment necessary for international commerce.

Most importantly, the directives fail to address root causes of labor and human rights violations – namely lack of rule of law, good governance and high levels of informality, particularly in developing countries. The UN Guiding Principles on Business and Human Rights already provide a comprehensive framework with three foundational pillars: the state duty to protect human rights, the corporate responsibility to respect human rights, and access to remedy. The Guiding Principles are designed as “a coherent whole” that applies “to all States and to all business enterprises, both transnational and others, regardless of their size, sector, location, ownership and structure.”

In global policy discussions, NGOs and civil society representatives often caution against “ticking the box” exercises, but, ironically, this is exactly what the EU has instigated by establishing legal requirements pertaining to sustainability. Not only does this “outcome-based approach” deviate from the Guiding Principles’ “process-based approach”, but it is also moving companies’ sustainability work into the hands of legal teams, thereby focusing on pure compliance instead of impact.

Rather than building upon this established foundation, the EU is creating a parallel regulatory system that could fragment international approaches to business and human rights governance while disproportionately impacting non-EU companies. This fragmented regulatory environment risks undermining the collaborative approach needed for effective international cooperation on sustainability challenges. If competitiveness was a concern for the EU at the time of the release of the Draghi report, there is certainly low hope for the EU’s commercial future with the forthcoming implementation of sustainability laws.

The fundamental challenge of CSRD and CS3D lie in balancing worthy objectives with practical implementation realities. EU policymakers must return to collaborative, multilateral approaches that work within existing frameworks rather than creating parallel regulatory systems. Europe can advance its sustainability goals while maintaining the international legal principles that have enabled decades of successful global commerce.