Transnational Litigation Q2 2025 Update – A Growing Divide in ESG Regulatory Approach Between U.S. and EU?
Client Alert | July 11, 2025
Ongoing strong political commitment in the EU regarding growing sustainability and human rights regulations has increasingly attracted political interest and skepticism in the U.S., especially regarding the potential extraterritorial effects of these regulations.
Changes in the ESG regulatory landscape in 2025 were to be expected. While the EU generally continues to stick to its ESG regulatory approach on human rights, reporting obligations, and environmental due diligence, it made serious efforts in the first half of 2025 to significantly cut back obligations for companies. However, in the U.S. the EU’s still far-reaching regulatory efforts, which also affect U.S. companies, are increasingly met with resistance.
In this client alert we set out an overview of developments in the first half of 2025, including (i) an overview of deregulation and postponement efforts in the EU for the Corporate Sustainability Due Diligence Directive (CSDDD)[1] and the Corporate Sustainability Reporting Directive (CSRD)[2], (ii) a summary of political efforts in the US to shield against extraterritorial reach of EU’s CSDDD and (iii) a conclusion for companies caught in between EU and U.S. regulations.
We will continue to monitor and report on any new developments.
1. Deregulation and Postponement of CSDDD and CSRD in the EU
The latest EU efforts to reduce administrative, regulatory and reporting burdens for companies have led to various proposals for amendments on substance and timing affecting CSDDD and CSRD. We have previously reported on these developments in detail here.
The proposed amendments by the EU Commission on the substance of CSRD and CSDDD have been extensive and were combined in one directive (“Amendment Directive”[3] as part of the “First Omnibus Package”), followed by recent additional proposed amendments on June 12, 2025, by the EU Parliament’s rapporteur Jörn Warnborn (the rapporteur). We have reported on his proposed amendments in detail here. Further, the Council of the EU (the Council) released its position on June 23, 2025. Therefore, all three bodies required for EU legislation have provided first proposals.
Deregulation
In brief, the most significant proposed amendments to the CSDDD and CSRD include the following:
Overarching proposal to reduce applicability of CSRD and CSDDD
The rapporteur proposed a harmonized threshold of more than 3,000 employees and a net-turnover exceeding EUR 450 million for both CSDDD and CSRD to apply to EU entities, significantly narrowing the scope of these regulations. The threshold for direct applicability of CSDDD to U.S. and other non-EU entities remains unchanged (i.e., a turnover in the EU exceeding EUR 450 million).
CSDDD
Recent proposals suggest a significant narrowing of due diligence obligations. The scope would generally be limited to companies’ own operations and their direct business partners, relieving them of responsibilities toward indirect suppliers, which is an important simplification for companies given the complexity of global supply chains. Furthermore, companies are proposed to be given the right to prioritize and forgo less material aspects and would no longer be required to terminate business relationships to mitigate adverse impacts.
Additionally, proposals advocate for removing the harmonized civil liability regime originally included in the CSDDD. Instead, national liability rules would apply. This shift addresses one of the most controversial aspects of the directive and responds to longstanding criticism. In addition, the original concept of representative actions by trade unions and NGOs shall be withdrawn.
Further, the Council proposes increasing the applicability threshold to more than 5,000 employees and a worldwide net turnover exceeding EUR 1.5 billion.
Finally, substantial changes are to be expected regarding climate transition planning obligations. The current proposals aim to either deregulate or eliminate the requirement for companies to establish and communicate such plans.
CSRD Reporting
Most significantly for the CSRD, both proposals voted to reduce thresholds for in-scope companies of the CSRD (see above), which would significantly reduce the number of in-scope companies approximately by 80-90%.
In addition, it is proposed to significantly reduce the data points under the EU Sustainability Reporting Standards (ESRS). Also, no additional sector-specific reporting standards shall be adopted.
Further, the requirements for value chain reporting on business partners shall be significantly reduced.
Postponements and Current Timeline
To give companies more time to implement, but also to allow for further political debate on proposed amendments, both, CSDDD and CSRD have been subject to postponements.[4] A respective directive (“Stop-the-Clock”)[5] has already been enacted and is beginning to be transposed by EU member states. According to this directive, the current timeline for CSDDD and CSRD shall be as follows:
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2. Political Efforts in the U.S. to Shield Against Extraterritorial Reach of EU Regulations
From a European perspective, CSDDD does not only apply to companies in the EU but also applies to US companies with a certain revenue generated in the EU (“extraterritorial reach”). In addition, CSDDD as well as CSRD will apply to EU subsidiaries of US companies if the applicability thresholds are met. Therefore, from a European perspective, U.S. companies will have to implement obligations set out by these regulations and will amongst others also be subject to EU’s public and private enforcement in any case of non-compliance.
With regard to CSDDD, these effects could go even further: Drawing on practical experience from the implementation of the German Supply Chain Due Diligence Act (SCDDA), in-scope companies will likely pass on their due diligence obligations to their direct suppliers, typically through codes of conduct, master supply agreements and other instruments. Therefore, additional U.S. (based) companies could indirectly be affected by the CSDDD’s obligations, even though they do not meet the net turnover threshold and would generally not be in-scope of the CSDDD.
These far-reaching effects on U.S. based companies are increasingly met with disapproval in the U.S. In order to avoid these effects, CSDDD and CSRD have been challenged by various actions in the U.S.:
Letters by State Officials criticizing CSDDD and CSRD
On February 25, 2025, state officials have sent a letter[6] to U.S. President Trump asking the United States Trade Representative to investigate CSRD, CSDDD, and related directives under Section 301 of the Trade Act of 1974 and “consider the impact of these directives as part of any overarching trade initiatives” with the EU.
Similarly, on February 26, 2025, Republican lawmakers urged the U.S. Department of Treasury and National Economic Council to “support European calls to indefinitely pause CSDDD,” find that its “extraterritorial application is untenable and detrimental to global productivity,” argue that civil liability under CSDDD should be removed, and clarify that “U.S. companies are not bound by net zero transition plans akin to those imposed on EU firms.”
U.S. Senators Bill: “Protect USA Act of 2025”
Further, the extraterritorial reach is intended to be challenged by the “Prevent Regulatory Overreach from Turning Essential Companies into Targets Act of 2025”; short-titled “Protect USA Act of 2025”.[7] It was introduced in the U.S. Senate on March 12, 2025. The bill rests on the premise that EU regulations conflict with U.S. priorities, impose burdens on U.S. businesses, and infringe upon U.S. sovereignty, which is considered to violate U.S. law.
Generally, the bill sets out a prohibition against “any foreign sustainability due diligence regulation” for “entities integral to the national interests of the United States”, particularly those involved in natural resource extraction and industrial production (including their subsidiaries). Despite the explicit reference to the CSDDD in the bill, it is possible that other sustainability regulations, such as the CSRD or the EU Deforestation Regulation (EUDR) may be covered as well, according to the bill’s content and purpose. According to the wording, both U.S. and non-U.S. companies may fall within the scope of the bill.
To protect U.S. companies from enforcement in cases of non-compliance the bill introduces that no adverse action may be taken against an entity covered by the bill. Further, the bill provides for fines and suspension from federal contracts in cases of non-compliance.
Since the introduction of the bill in the U.S. Senate, the bill has undergone two readings in the U.S. Congress and has been referred to the Committee on Foreign Relations. To pass the U.S. Senate, it will likely require approval by 60 senators to overcome a potential filibuster.
Should the Act be adopted, companies may face the dilemma of having to decide whether to comply with U.S. or EU law.
3. Practical Impacts
First, at this early stage, companies should wait to see how opposing regulatory efforts continue to evolve. The EU, as outlined, is working to scale back its far-reaching obligations, and, in doing so, appears to be addressing some of the concerns raised by the U.S. Further, there is growing opposition to the CSDDD within the EU itself: Both the French and German governments (Germany following its announcement to intend to repeal its own supply chain act) have publicly called for the complete withdrawal of the CSDDD, citing concerns over regulatory burdens and competitiveness. Accordingly, it is difficult to predict how far apart the U.S. and EU will actually still be in the near future.
Second, it is also worth noting that similar regulations are not unprecedented in the EU[8] and member states such as France[9]. They have themselves enacted laws aimed at shielding against extraterritorial effects of U.S. laws (“blocking statutes”). It seems possible that the various opposing efforts will be part of future negotiations between U.S. and EU to align both efforts, as was the case in the past.
Finally, with respect to EU’s deregulation efforts, companies should not overlook the fact that the remaining obligations will still involve considerable effort and require thorough preparation. While lengthy negotiations amongst EU parties concerning the various proposed amendments, especially regarding scope, are to be expected, companies should nevertheless prepare timely to implement obligations. To assist in-scope companies with preparations, the European Commission publishes guidance that should be reviewed on a regular basis.
[1] Directive (EU) 2024/1760.
[2] Directive (EU) 2022/2464.
[3] COM(2025) 81 final, 2024/0045 (COD).
[4] For CSRD and CSDDD see COM(2025) 80 final, 2024/0044 (COD).
[5] COM(2025) 80 final, 2024/0044 (COD).
[6] https://sfof.com/wp-content/uploads/2025/02/USTR-European_Letter.pdf.
[7] https://www.congress.gov/bill/119th-congress/senate-bill/985/text.
[8] Regulation (EC) 2271/96 of 22 November 1996, protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom.
[9] “Loi de Blocage”, Statute n° 68-678 of July 26, 1968, modified by the Statute n° 80-538 of July 16, 1980; initially adopted in reaction to U.S. discovery rules.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of Gibson Dunn’s Transnational Litigation or ESG practice groups, or the following:
Transnational Litigation:
William E. Thomson – Los Angeles (+1 213.229.7891, wthomson@gibsondunn.com)
Susy Bullock – London (+44 20 7071 4283, sbullock@gibsondunn.com)
Perlette Michèle Jura – Los Angeles (+1 213.229.7121, pjura@gibsondunn.com)
Markus S. Rieder – Munich (+49 89 189 33.260, mrieder@gibsondunn.com)
Andrea E. Smith – Houston (+1 346.718.6751, aesmith@gibsondunn.com)
ESG: Risk, Litigation, and Reporting:
Ferdinand Fromholzer – Munich (+49 89 189 33.270, ffromholzer@gibsondunn.com)
Robert Spano – London/Paris (+33 1 56 43 13 00, rspano@gibsondunn.com)
Carla Baum – Munich (+49 89 189 33.263, cbaum@gibsondunn.com)
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