How Political Shifts Could Water Down the Corporate Sustainability Due Diligence Directive

In a recent paper, we examine how the EU Corporate Sustainability Due Diligence Directive (CS3D) could reshape the behavior of American corporations. The CS3D holds large corporations legally accountable for how they protect human rights and the environment throughout their value chains. The Directive thus represents a significant shift in the approach to corporate social responsibility, moving from voluntary guidelines or reporting requirements to mandatory substantive requirements. Importantly, the CS3D applies not only to EU companies but also to American corporations that generate significant revenues in the European market. But the key question when examining the real-world impact of such a regulation is not how ambitious it is on paper, but rather how it will be enforced on the ground. As we highlighted elsewhere, the effect of the EU’s Directive on American corporations will be a function of corporate law’s duty of oversight (often dubbed Caremark duty, after Delaware’s leading precedent) and the vibrant private litigation environment in the US.

But while the CS3D-Caremark cocktail can be very potent, policymakers and practitioners on both sides of the Atlantic are already working to dilute its various components. In an updated version of our paper, which is forthcoming in the Stanford Law Review, we highlight three types of developments that could water down the effect that the CS3D has on American corporations.

Pressures from Inside the EU

Following the Draghi report in September 2024, which criticized the ‘sustainability reporting and due diligence framework’ as ‘a major source of regulatory burden’, the EU began exploring ways to roll back some aspects of the CS3D. In February 2025, this culminated in the so-called Omnibus Proposal, which aims to simplify the rules on sustainability reporting and due diligence.

The Omnibus proposal includes three key changes that could reduce the Directive’s impact. First, it narrows the scope of due diligence obligations to apply only to companies’ direct business partners, rather than multiple layers of the supply chain. Second, the proposal waters down the climate transition plan requirement: while companies must still develop plans to mitigate climate change, they would no longer be required to implement them. Finally, the proposal dilutes sanctions for noncompliance, including removing the ‘minimum cap’ of sanctions reaching five percent of the non-compliant company’s net worldwide turnover.

Still, even if the Omnibus Proposal passes in its entirety, it may tinker with some relevant details but will not shake the CS3D’s pillars. The CS3D will still represent a considerable departure from the regulatory environment that American corporations operate in. To be sure, the legislative process in the EU could lead to further tweaks meant to reduce the CS3D’s impact, but that’s less likely to be an outcome of EU inter-institutional dynamics (given how the Parliament and the Council typically balance each other out in their push towards the opposite directions of more and less centralised regulation), and more likely to be a collateral damage of Trump’s trade war.

Pressures from the US

The Trump administration has voiced strong opposition to the CS3D’s territorial outreach. In February 2025, Secretary of Commerce Howard Lutnick threatened to use ‘trade tools’ to retaliate against the EU if the CS3D adversely impacts American companies. The following month, Senator Hagerty introduced the ‘PROTECT USA Act’, which aims to shield US companies from the CS3D, even prohibiting certain US companies from complying with foreign sustainability due diligence regulation. Then, in April 2025, the Trump administration started the largest trade war of our time. It is hard for us to predict what the endgame is for the Trump Administration. But we can conjecture that if its goal is to make deals with other countries and trading blocks, including the EU, then aspects of the CS3D (or its extraterritorial reach) could end up being sacrificed on the altar of the new trade order.

In fact, even if the CS3D’s entry into force will not be on the table in trade negotiations, the current political climate makes it safe to predict that European regulators will be deterred from aggressively enforcing the Directive against US companies, at least in the near future.

Changes in Delaware Corporate Law

Meanwhile, inside the US, the Delaware legislature passed Senate Bill 21 in March 2025, overhauling key aspects of its corporate law, including shareholders’ inspection rights. The amended Section 220 now effectively limits the kinds of documents that shareholders can obtain to core materials such as board minutes and financial statements, with courts having limited discretion to order additional documents in rare circumstances.

These changes could limit shareholders’ ability to hold corporate insiders accountable for oversight failures by restricting access to informal electronic communications that often provide crucial evidence of directors’ knowledge and intentions. However, the specific type of claims linked to the CS3D may be less dependent on prefiling discovery rights than other corporate law claims, for the following two reasons. First, in failure-of-oversight cases, it is usually the defendants who are incentivized to maintain and produce detailed documentation of every CS3D-related discussion. Second, companies will likely be required to report substantial information to European regulators, and that information could then be accessed by American plaintiffs in shareholder litigation.

Modular Analysis of Potential Impacts

In our updated paper, we introduce a modular analysis to understand how these three developments might affect the CS3D-Caremark dynamics. We argue that the most important variable is not the eventual text of the Directive itself (following the Omnibus discussions), but rather how vigorously EU regulators will enforce the directive on in-scope American businesses.

Ultimately, the political climate, influenced by both internal EU dynamics and external pressures from the US, makes it difficult to envision EU regulators aggressively targeting US firms for CS3D noncompliance, though this could change rapidly with shifts in the political landscape.

The CS3D-Caremark combination represents a fascinating case study in how regulations crafted in one jurisdiction can exert influence globally, particularly when paired with robust enforcement mechanisms in another jurisdiction. It provides broader lessons on how the Brussels Effect is shaped by litigation, and how geopolitics affects and is affected by corporate law. Our analysis suggests that even with the proposed watering-down changes, the CS3D will remain a significant force shaping corporate governance in the years to come, though perhaps not with the transformative impact initially anticipated.

The updated version of the authors’ article can be found here.

Luca Enriques is a Professor of Business Law at Bocconi University.

Matteo Gatti is a Professor of Law at Rutgers Law School.

Roy Shapira is a Professor of Law at  Reichman University (IDC).