EU's sustainability rules trigger transatlantic tensions over extraterritorial reach

The European Union’s pared-back sustainability rulebook is provoking renewed transatlantic tensions as Washington presses the bloc over the extraterritorial reach of its Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD).

The dispute centres on the EU’s decision to narrow the scope of those rules this year while retaining provisions that apply to large foreign firms operating in the single market. The shape of the final package , including a deal that will exempt more than 80% of companies once in scope , has prompted sharp criticism from senior US officials who argue the measures still amount to regulatory overreach.

“They have to deliver on this,” Jamieson Greer, President Donald Trump’s top trade negotiator, said during a Senate hearing, continuing: “The reality is, if the Europeans don’t deliver on what they’ve committed, they won’t receive the benefit of the tariff relief they’ve been granted.” Greer’s remarks were made in response to questions about a trans-Atlantic tariff agreement reached in July that limited duties on most EU exports to 15% and included an EU commitment to ensure sustainability rules do not impede trade.

US lawmakers have moved to challenge the EU measures domestically. Senator Bill Hagerty, R‑Tenn., told the Senate appropriations committee he would use “every tool” to block the due diligence directive; he earlier introduced the Prevent Regulatory Overreach from Turning Essential Companies into Targets (PROTECT USA) Act of 2025. Hagerty described the EU initiative as “extremely egregious, this attempt to overreach as they have.”

EU negotiators, however, frame the outcome as politically unavoidable and necessary to preserve a level playing field. “This outcome was politically unavoidable,” Jorgen Warborn, a lawmaker from the centre‑right European People’s Party who oversaw talks in the European Parliament, told Bloomberg, arguing that options such as limiting the rules solely to EU‑based companies were never viable. He said the due diligence directive “is, by its nature, an extraterritorial instrument,” and that “its overall reach remains” intact.

Inside the EU the package has been reshaped repeatedly this year. According to a briefing by Skadden, in April 2025 the European Parliament voted to delay implementation of CSRD and the due diligence obligations, part of a wider push to simplify the bloc’s environmental, social and governance (ESG) regime. The Council of the EU followed in June by agreeing a negotiating mandate to simplify reporting and due diligence requirements to boost competitiveness, measures presented under the Commission’s ‘Omnibus I’ simplification package.

Those manoeuvres reflected growing concern among member states and industry about compliance burdens and potential competitiveness impacts. Pascal Canfin, a senior lawmaker negotiating for the centrist Renew Party, said the recent legislative text “safeguarded” the core purpose of Europe’s ESG regulations and pointed to ongoing opposition from the Trump administration as proof of their significance. Canfin warned companies such as Exxon Mobil Corp. “could face fines of up to almost $10 billion” if they fail to comply with due diligence obligations, according to his remarks after a Dec.16 parliamentary vote.

The EU says it will apply the rules fairly and without discrimination and that engagement with the US will continue under the EU‑US joint trade agreement. A European Commission spokesperson told reporters by email that the bloc’s rules are designed to ensure all companies operate on a level playing field and that specific US concerns had been addressed, including removing mandatory climate transition plan requirements.

Yet the politics remain unsettled. In October 2025 the European Parliament rejected a direction that would have rolled back elements of the CSDDD and related rules, underscoring a persistent split between parliamentarians defending legal accountability and some governments seeking to reduce regulatory burdens to attract investment, according to a review on the Harvard Law School Forum on Corporate Governance. Advocacy groups warn rollback risks. Walk Free, an anti‑slavery organisation, said in August 2025 proposed amendments , such as raising employee thresholds, limiting due diligence to direct suppliers and removing civil liability provisions , would weaken efforts to tackle modern slavery and hold companies accountable.

Commentators and industry figures have also weighed in. An opinion piece in Le Monde in October 2025 argued that abandoning the CSDDD would be “a historic mistake for Europe”, warning it would erode victims’ rights, environmental accountability and Green Deal commitments. Conversely, industry voices such as Exxon CEO Darren Woods have criticised the directive as unworkable; Forbes reported in August 2025 that the Trump administration warned the rules could jeopardise a separate energy agreement between the US and EU, which envisages large EU purchases of American energy products.

Despite the diplomatic sparring, market signals show no obvious investor flight from Europe. Data compiled by Morningstar and cited in reporting on the issue indicate Europe‑domiciled funds holding US equities attracted net inflows comparable with funds holding European equities in the year through October, while US‑domiciled funds continued to attract substantial inflows to US equity strategies.

For policymakers in Brussels the calculus is political as well as economic: legislators who pushed for simplification argued reductions were necessary to secure parliamentary majorities and to avoid imposing unsustainable compliance costs on companies further down supply chains. Critics counter that watering down extraterritorial obligations compromises the EU’s ability to enforce human rights and environmental standards across global value chains.

The standoff illustrates a broader competition over regulatory sovereignty and economic strategy between the world’s two largest trading blocs. Washington frames parts of the EU package as an affront to US sovereignty and a potential barrier to trade, while Brussels stresses that its regulations aim to align corporate behaviour with the bloc’s sustainability goals and that equal treatment for all firms operating in the EU is essential.

As the two sides continue talks under the joint trade accord, the contours of any final accommodation remain unclear. The US has signalled it will press for further concessions to remove perceived extraterritorial reach, while many EU lawmakers and advocacy groups insist the essence of reporting and due diligence obligations must be preserved to protect rights and the environment. The outcome will be a litmus test for how far regulatory harmonisation can be reconciled with competing claims of sovereignty and competitiveness on both sides of the Atlantic.