This fall, the European Union’s (EU) government in Brussels is set to finalize a sweeping ESG “due diligence” directive that will attempt to reshape global business in Brussels’s image.
The controversial law, several years in the making, has faced stiff resistance from companies and policymakers both within and outside the EU because the directive forces large companies—including non-EU multinationals—to meticulously audit their human rights, emissions, and environmental footprints across entire value chains.
Faced with energy and defense realities in the wake of Russia’s attack on Ukraine, it has become a flashpoint for competing priorities within the EU: the Green Deal’s draconian climate action on one hand, and economic competitiveness on the other. Can a continent truly champion industrial competitiveness while imposing costly and burdensome climate rules that shift focus from manufacturing and innovation to an expanding compliance bureaucracy? Who truly benefits, and does this path risk sacrificing Europe’s industrial vitality on the altar of regulatory and climate idealism?
A lot has changed since Europe formally introduced the law – the Corporate Sustainability Due Diligence Directive, or “CS3D” – on 23 February, 2022. Exactly one day after the legislative proposal was docketed for public comment, Russia launched its ground invasion of Ukraine, setting off a series of diplomatic, military, and energy crises in Europe.
Before Russia’s invasion of Ukraine, Europe enjoyed plentiful natural gas supplied by a mostly reliable but not adversarial partner in Russia. This abundance allowed policymakers in Brussels to pursue ambitious green policies, positioning the continent at the forefront of global efforts to demonize fossil fuels and accelerate the transition to renewable energy.
The crown jewel of this era was CS3D, meticulously shaped from the 2018 OECD Due Diligence Guidance for Responsible Business Conduct. The European Commission’s intent was clear: CS3D would compel domestic and multinational businesses not only to comply with strict climate and human rights standards, but also to serve as global ambassadors of compliance-driven green commerce.
The promise of CS3D was always predicated on the notion that Europe, and multinational businesses, could afford to bear the cost of being the world’s climate conscience. And it is costly. For most businesses, the CS3D represents a seismic financial shift. Compliance means overhauling reporting systems, hiring armies of consultants, and enduring relentless audits. The Danish Presidency of the Council of the European Union’s own analysis estimates that a single company could spend up to EU 2.3 million annually in compliance. Other estimates suggest affected firms could see costs shoot up by 10 to 30 percent.
Oil and gas companies, already under the microscope for their emissions, face additional headaches: they must monitor and report on every supplier’s methane output, overhaul procurement protocols, and invest millions in new software and third-party verification. All companies must also provide a net zero transition plan annually updated to demonstrate fulfillment of emissions reduction targets or lack thereof. Failing to comply is no trivial matter—penalties can reach 5% of global net turnover, and civil liability for damages is now firmly on the table.
Operationally, firms will devote resources to ongoing risk assessment, staff training, and documentation stretching from the boardroom to the field. These are not one-off expenses: the directive requires annual updates, investment disclosures, and persistent scrutiny of supply chains and emissions reduction targets. The bureaucratic load is compounded by the need to chase down compliance across both upstream suppliers and downstream customers, often in countries with no direct link to EU regulation.
Thus, CS3D, by its very design, incentivizes a shift away from material production—the factories, smelters, refineries, and manufacturers that form the backbone of the European economy—toward a white-collar managerial economy, redirecting capital from the business of “building things” to the business of auditing, accounting, and legal compliance. It is a costly model that prioritizes greenhouse gas accountants over engineers and tradespeople at a time when EU leaders say the continent faces a potential war with Russia.
A path towards further deindustrialization is directly at odds with the EU’s “competitiveness” imperative. After Russia’s invasion disrupted gas supplies and exacerbated a cost-of-living crisis throughout the bloc, the European Commission requested an assessment from Mario Draghi, former European Central Bank President, of how to address Europe’s failing competitiveness. Draghi’s September 2024 report put into words what many other world leaders already knew: “the energy landscape has changed irreversibly with the Russian invasion of Ukraine […] fossil fuels will continue to play a central role.” But due to Europe’s decarbonization targets, “EU industries that use energy intensively face higher investment costs than their competitors,” Draghi wrote.
Draghi’s diagnosis of Europe’s self-inflicted stasis gave leaders in Brussels air cover to dethrone climate change as the EU’s top policymaking priority, focusing instead on competitiveness and self-defense. But despite recent rhetoric, Europe continues to forge ahead with its most onerous climate regulations, even as allied trading partners warn of impacts on Europe’s energy supply.
State-owned LNG supplier Qatar Energy, which supplies between 12 and 14% of the EU’s natural gas supply, said in December 2024 that the country would cease doing business with Europe rather than comply with CS3D’s extraterritorial demands. American supermajor ExxonMobil said the directive would “challenge” the US-EU energy deal, comments echoed by US Secretary Chris Wright. Notably, the US currently supplies 45% of the EU’s gas needs.
A second pivotal moment was the election of Donald Trump in November 2024. With the United States adopting a more skeptical and nationalistic stance on climate agreements, European regulators suddenly faced the real prospect of trade friction, energy supplier resistance, and diminished cooperation. CS3D is at the center of these tensions, an archaic holdover from Europe’s pre-war, transatlantic consensus.
In response, talk of “simplifying” CS3D and delaying its implementation until 2028 has gained momentum. Indeed, this fall, Brussels will roll out a “simplified” version of CS3D. The hard truth is that the best version of CS3D is no CS3D at all; but absent scrapping the directive altogether, Brussels must calculate how much of the law it can salvage without risking energy and trade partnerships.
If Brussels is playing a game of chicken, it’s a dangerous game. Reduced gas flows from the US and Qatar would intensify already crippling energy costs across the region, driving further cost-of-living increases in both household spending and industrial operating costs. As Russia continues to encroach on NATO’s eastern border, Europe could not pick a worse time to deprioritize industrial competitiveness seemingly to save face with the green lobby. European leaders know this – this fall, they have a chance to show it.
Tammy Nemeth Ph.D. is a UK-based energy and ESG analyst, leading ESG2Insight, which provides research on Energy, Security, Geopolitics, and ESG issues.
