Advising Non-EU Companies Directly or Indirectly Affected by CSDDD

The European Union’s (“EU”) recent regulatory initiatives are notable for their extra-territorial reach. This blog post is based on the panel discussion at the BHRLA Conference “Navigating change” that took place in London on 4-5 February 2025. The panellists were Pratik Bakshi (BTG Advaya), Lucy Blake (Jenner & Block), Nathan Lankford (Miller & Chevalier), Hideaki (Roy) Umetsu (Mori Hamada & Matsumoto), Junko Watanabe (Nishimura & Asahi) and Santiago Zuleta (Zulegal). Samantha Rowe (Debevoise & Plimpton) moderated the discussion.

Introduction

Lucy explained that the EU’s Corporate Sustainability Due Diligence Directive (“CSDDD”) entered into force in July 2024. CSDDD is expected to apply to EU and non-EU companies generating over certain turnover thresholds, as set out below:

• EU companies with over 1,000 employees and over EUR450 million in net worldwide turnover in the previous financial year; and
• non-EU companies generating more than EUR450 million turnover from the EU market in the financial year preceding the past financial year.  

Application is to be phased in, starting with the largest businesses from 2027 and trickling down to smaller businesses meeting the above thresholds by 2029.  

CSDDD is expected to require in-scope companies to conduct human rights and environmental due diligence throughout their and their subsidiaries’ operations (referred to as the direct effect) and to the operations of their business partners across the supply chain (referred to as the indirect effect). Companies are also required to prevent, mitigate and bring to an end adverse environmental and human rights impacts. Penalties for non-compliance are high, coming up to 5% of a company’s net worldwide turnover.

Lucy noted that the European Commission was working on a proposal known as the Omnibus package that was intended to simplify the myriad of EU ESG laws and reduce the regulatory burden going forward, particularly on smaller companies. The European Commission published the first round of proposed amendments on 26 February 2025, proposing to limit the due diligence obligations to direct business partners, and postpone the application of CSDDD until 2028, among other issues.

Legal issues in practice

Santiago explained that there is significant pressure for non-EU companies to comply with CSDDD as they must meet investor and stakeholder expectations, under the risk of losing business or funding. However, it is not always clear by reference to which countries’ laws should a company assess compliance. In case a conflict of laws arises, Santiago recommended that companies prepare to comply with the law requiring the highest standard. In the event of a dispute, Santiago added that companies should refer to the law of the contract or the jurisdiction of the dispute. The choice of dispute resolution mechanism is also significant, with arbitration being one of the most common options.

Santiago noted that companies must provide strong evidence of the steps taken to comply with CSDDD. These steps should include monitoring the supply chain, carrying out compliance audits, consulting stakeholders (including civil society representatives), providing training to staff, ensuring board-level responsibility, and establishing mechanisms for reporting adverse impacts in the supply chain. There are several challenges with ensuring the requisite level of evidence due to the complexity of global supply chains, data availability and reliability (especially in jurisdictions where there is less regulatory oversight or there are political issues regarding some of the data), as well as the costs required for carrying out due diligence and monitoring.

Compliance challenges: case-study on India and Japan

Pratik explained that India is a key trading partner to the EU and U.S.. There are, broadly, two categories of companies that are concerned about the situation in India: multinational companies with business partners in India and Indian companies that are part of their supply chain. While multinational companies are making good progress with complying with CSDDD, the same cannot be said for their Indian suppliers. However, for both categories of companies, there are several issues to consider.

Pratik considered that multinationals are often able to allocate resources to carry out the required investigation and reporting under CSDDD, and many have dedicated teams to assist with this exercise. Indian suppliers, however, may not have the same capacity to address these issues. Due to the impact on their business, Indian suppliers sometimes resort to a quick apparent solution by ensuring that they comply with human rights due diligence laws on paper, without doing so in practice. Pratik recommended that:

• multinationals should consider how CSDDD benchmarks against Indian law. For instance, when the German Supply Chain Act came into force, a comparison with Indian laws revealed that local requirements were more onerous, which meant that complying with Indian laws automatically satisfied the German Supply Chain Act obligations. However, companies should bear in mind that legislation in India is often fragmented and rapidly changing, which means that constant monitoring is required.  
• when engaging with Indian suppliers, companies should attempt to partner with them instead of pushing down responsibility. Similar issues arise across all emerging markets, so terminating the relationship with Indian suppliers is unlikely to solve the problem.

Junko explained that, in Japan, roughly 100 companies are estimated to directly fall into scope of CSDDD. Before CSDDD entered into force, Japanese companies would normally conduct due diligence by sending general questionnaires to their direct suppliers. However, this practice is not compliant with CSDDD, as Article 2 also requires companies to carry out meaningful engagement with the people directly affected. As this is a new approach, Japanese companies are considering what it means in practice. Although many prefer clear guidance on what to do, the answer depends on the circumstances of each case, i.e., considering the local specificities and, sometimes, the gender lens. This may require involving a local team, to ensure that they create a friendly environment that facilitates engagement with workers along the supply chain.

Junko also noted that, at the same time, Japanese companies are inclined to take a collaborative approach towards their suppliers by asking them to cooperate with the due diligence exercise, instead of pushing down compliance obligations. This approach is an example of best practice, which should be replicated across the board.

Roy added that, on an international level, however, Japanese companies find themselves caught in the middle between several factors: (i) the contrast between the EU and U.S. legislation on ESG and human rights, which can make companies feel that they are progressing and regressing at the same time; (ii) the tension between the U.S. and China, especially considering that many Japanese companies have long supply chains in China. For instance, executives attempting to comply with the United States’ Uyghur Forced Labor Prevention Act (“UFLPA”) carried out investigations in Xinjiang that led to their arrest in China; and (iii) the relationship between the Japanese headquarters and their foreign subsidiaries, where the headquarters’ lack of clear instructions can lead to confusion and a fragmented approach at the subsidiary level.

Roy concluded that, all things considered, the recommended approach for Japanese—and other companies—is to establish their own policy and practice, tailored to their own business, rather than following other companies’ approach.

Tension between the EU and U.S.

Nathan explained that, since President Donald J. Trump took office, the United States’ approach to ESG, and in particular diversity, equity and inclusion (“DEI”) and the environment, changed significantly. It is yet unclear how far these changes will go, but some longer-term trends can be discerned:

• while the Security and Exchange Commission’s greenwashing enforcement will likely halt at least for the next four years, anti-forced labour enforcement under the UFLPA will likely continue.  
• State-level regulation, enforcement and litigation are likely to continue and may have a significant impact on companies. For instance, California’s climate disclosure legislation will continue to impact a significant number of companies, as it applies to companies doing business in California. We have also seen recent enforcement actions brought by “Red” state attorneys general against companies for certain ESG initiatives. In addition, recent years have seen a steady stream of civil litigation at the state level against greenwashing, which may continue.

Nathan and Lucy discussed the fact that companies subject to U.S., UK, EU and other global legislation may face contradictory requirements on how they should proceed. They noted that the first step is for global companies to understand which laws apply to them and determine what steps they need to take to comply. The next step is to consider how their legal and compliance risks align with their core business practices, values, and policies. This could include thinking about the environmental benefits to be derived from reducing operational costs through energy efficiency, the social benefits of improving workforce satisfaction and retention, and how good governance practices mitigate risks and avoid regulatory fines in respect of other compliance risks, such as anti-corruption or money-laundering. Companies should move beyond using “ESG” as a shorthand, look to break down more precisely what risk they are looking to mitigate, and articulate the financial benefits to stakeholders of managing those risks.  

Companies should then look to enhance their compliance framework to holistically combat those risks, including developing a strategic and coordinated reporting strategy which takes into account the risks across all applicable jurisdictions. Companies who take a siloed approach to compliance and reporting run the risk of the right hand not talking to the left due to a lack of internal coordination. They could find themselves making green claims in statements that cannot be substantiated (leading to greenwashing risks), or reporting certain information on sensitive subjects such as DEI to satisfy reporting requirements in one jurisdiction, while failing to include explanatory language that is necessary to mitigate risks of legal exposure in other jurisdictions.

On DEI specifically, each company should assess their legal exposure to the U.S. and collateral consequences, especially if they have federal contracts, as well as reviewing their obligations to take, and report on, DEI measures in other countries around the world. They should also take a detailed inventory of the company’s current substantive activities in connection with DEI programmes, followed by a break-down of activities per risk level, so that management can make informed decisions on what approach to take. There is no one-size-fits-all solution to managing contradictory regimes in the U.S. and Europe—each company will need to consider what makes sense based on their own risk profile, stakeholders, and corporate values. However, all companies should analyse these issues holistically to determine a strategy that is, insofar as possible, consistent with legal obligations across jurisdictions, and publicly reported in a manner that is both accurate and mitigates enforcement or litigation risks.  

Conclusion

The panellists concluded that, for now, multinational companies may seem trapped between a rock and a hard place. This demonstrates that companies should take a multi-dimensional approach when addressing ESG and compliance issues, including bringing together multiple different company functions—including Sustainability, DEI, Legal, Compliance, HR, and Communications—across all the relevant jurisdictions so they can work together to support and protect the company in this fast-evolving and political field.

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