On August 21, the US and EU announced that they have agreed on a Framework on an Agreement on Reciprocal, Fair, and Balanced Trade. The Framework Agreement expands upon earlier official statements on the US-EU trade deal and is intended as a first step in a process to improve market access and increase the US-EU trade and investment relationship.
Although not the principal focus of the Framework Agreement, 4 of its 19 key terms relate specifically to EU ESG/CSR-related compliance requirements. This post discusses these key terms and how they may impact EU compliance requirements of US-based multinationals.
The US-EU trade deal was first announced last month. However, the July announcements by both the US and EU were thin on some of the details relating to reducing non-tariff trade barriers, especially relating to the Framework Agreement terms discussed in this post.
The Framework Agreement announcements by the US and EU are here and here, respectively. According to the Framework Agreement, the US and EU will promptly document the Agreement on Reciprocal, Fair, and Balanced Trade to implement the Framework Agreement, in line with their relevant internal procedures. Therefore, more details are still to come.
As further discussed below, four paragraphs of the Framework Agreement specifically intersect with EU ESG/CSR-related compliance requirements that impact US-based multinationals.
EU Deforestation Regulation
Paragraph 10: “Recognizing that production of the relevant commodities within the territory of the United States poses negligible risk to global deforestation, the European Union commits to work to address the concerns of US producers and exporters regarding the EU Deforestation Regulation, with a view to avoiding undue impact on US-EU trade.”
The EU Deforestation Regulation (EUDR) covers cattle, cocoa, coffee, oil palm, rubber, soy(a) and wood, as well as many derived products. Timber and timber products have been a particular concern of the US. The Regulation currently is scheduled to apply beginning at year-end.
EUDR compliance already has been delayed by a year. In addition, in April, updated guidance and FAQs were published by the European Commission that simplified some aspects of EUDR compliance (see this Ropes & Gray post). According to the Commission, these measures will in the aggregate result in an estimated 30% reduction in administrative costs and burden for companies.
With the initial compliance date drawing near, there are numerous calls to further delay and streamline the EUDR. For example:
- The European Commission is conducting a call for evidence on an environmental omnibus proposal, which is expected to result in a simplification package in the fall (see this Ropes & Gray post). According to some sources, this omnibus will among other things sweep in the EUDR. As has been the case with other Commission omnibus proposals, this may involve a “stop the clock” proposal while substantive changes are negotiated. Simplification and delay are publicly supported by many EU member states.
- In July, the European Parliament adopted a non-binding resolution objecting to the country risk classifications adopted by the European Commission in May (see this Ropes & Gray post) and calling on the risk classifications to be revisited.
Additional details on some of the recent initiatives to further delay and streamline the EUDR are discussed in this Ropes & Gray post.
Carbon Border Adjustment Mechanism
Paragraph 11: “Taking note of the US concerns related to treatment of US small and medium-sized businesses under the Carbon Border Adjustment Mechanism (CBAM), the European Commission, in addition to the recently agreed increase of the de minimis exception, commits to work to provide additional flexibilities in the CBAM implementation.”
In June, the EU announced that a provisional agreement to simplify its carbon border adjustment mechanism had been reached. The overall aim is to reduce the regulatory and administrative burden, as well as compliance costs, for EU companies, especially small- and medium-sized enterprises. A more expansive de minimis exemption was agreed to, encompassing covered importers not exceeding a single mass-based threshold of 50 tons per year. According to the European Commission's calculations, this will reduce the number of CBAM declarants by 91%. Simplification changes also are being made to the CBAM authorization procedure, data collection processes, calculation of embedded emissions, emission verification rules and calculation of authorized CBAM declarants' financial liability. According to the Council, adoption of the changes is expected by September 2025.
Corporate Sustainability Reporting and Due Diligence Directives
Paragraph 12: “The European Union commits to undertake efforts to ensure that the Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD) do not pose undue restrictions on transatlantic trade. In the context of CSDDD, this includes undertaking efforts to reduce administrative burden on businesses, including small- and medium-sized enterprises, and to propose changes to the requirement for a harmonized civil liability regime for due diligence failures and to climate-transition-related obligations. The European Union commits to work to address US concerns regarding the imposition of CSDDD requirements on companies of non-EU countries with relevant high-quality regulations.”
The European Commission released its CSRD/CSDDD omnibus proposal at the end of February, as discussed in this Ropes & Gray post. This summer, the European Council approved its negotiating position on the Commission’s omnibus proposal. In many respects, the Council is aligned or largely aligned with the Commission, although there are important differences, as further discussed in this Ropes & Gray post. The European Parliament is expected to finalize its negotiating position in October. Once the Parliament finalizes its negotiating position, the Council presidency and Parliament will enter into negotiations to come to a final text.
Areas in play include the following, among others. Some of these are noted in the Framework Agreement:
- Compliance thresholds (CSRD and CSDDD);
- Timing (CSDDD);
- Value chain reporting (CSRD);
- Due diligence (CSDDD);
- Climate transition plan requirements (CSDDD); and
- Liability for violations (CSDDD).
US efforts to water down the CSDDD and CSRD have been ongoing for some time, dating back to the Biden Administration. Some of those initiatives are discussed in this Ropes & Gray post.
Through its delegated authority, the European Commission is taking other actions to significantly reduce CSRD reporting. The Commission has directed EFRAG to work on simplified European Sustainability Reporting Standards (ESRS) (the EFRAG workplan is discussed in this Ropes & Gray post). At the end of July, EFRAG published Exposure Drafts that propose reducing current ESRS disclosure requirements and length by approximately 60% (see Ropes & Gray posts here and here). Earlier in July, the European Commission adopted a Delegated Regulation scaling back EU Taxonomy reporting (see this Ropes & Gray post).
Forced Labor
Paragraph 16: “The European Union and the United States commit to work together to ensure strong protection of internationally recognized labor rights, including with regard to the elimination of forced labor in supply chains.”
The EU’s forced labor Regulation was adopted in December 2024. The Regulation will prohibit products made with forced labor from being imported into or exported from the EU or otherwise made available on the EU market. The Regulation will apply starting in December 2027. The Regulation is discussed in this Ropes & Gray post. In addition, the risk assessment, mitigation and remediation requirements under the CSDDD also address labor rights, including forced labor. For a discussion of the human rights due diligence coverage of the CSDDD, see this Ropes & Gray post.
Regulation of imports involving forced labor is an area where the US is ahead of the EU. Section 307 of the US Tariff Act, which was adopted in 1930, prohibits importing into the US goods that are produced wholly or in part by forced labor. After decades of minimal enforcement, Section 307 was reinvigorated in 2016 with the repeal of the “consumptive demand exception” to that section.
In 2017, the Countering America’s Adversaries Through Sanctions Act (CAATSA) was adopted. CAATSA restricts entry into the United States of goods made with North Korean labor. It created a presumption for purposes of Section 307 of the Tariff Act that goods made with North Korean labor anywhere in the world involve the use of forced labor. CAATSA is discussed in this and numerous subsequent Ropes & Gray posts.
In 2021, the Uyghur Forced Labor Prevention Act (UFLPA) was adopted. The UFLPA created a presumption for purposes of Section 307 of the Tariff Act that goods produced in whole or in part in the Xinjiang Uyghur Autonomous Region of China, or by entities specified by the US government, are produced using forced labor. The UFLPA is discussed in this and numerous subsequent Ropes & Gray posts.
Enforcement of the UFLPA has been fairly vigorous. Almost 150 entities are now on the Entity List (see this Ropes & Gray post). Since the UFLPA took effect, more than 10,000 shipments across a wide range of industries and from several countries have been denied entry into the US. See here for US Customs and Border Protection’s UFLPA enforcement statistics.
What Does the US-EU Trade Agreement Mean for ESG/CSR Compliance?
At this early juncture, it is not clear what all of this will mean in practice. As discussed in this post, the EU already is on its own initiative scaling back the EUDR, CBAM, CSRD and CSDDD, as part of its drive to enhance the competitiveness of the EU bloc. Therefore, it remains to be seen what additional changes the US will seek. Some possible areas include the following:
- EUDR: Based on the Framework Agreement, perhaps the US will seek a further reduction in EUDR compliance requirements for the lowest risk countries, i.e., those “presenting negligible risk to global deforestation.” The US is characterized as a negligible risk country in the Framework Agreement. A new lower compliance, negligible risk category also would benefit EU producers.
- CBAM: Also based on the Framework Agreement, it is likely the US is seeking further concessions on the CBAM, beyond those already agreed to by the Council and Parliament. The Framework Agreement key terms specifically refer to “additional flexibilities in the CBAM implementation” in addition to “the recently agreed increase of the de minimis exception.” These may include a further bump up in the de minimis threshold, as well as other changes. Since this provision specifically refers to action by the Commission, perhaps it is intended to be limited to action the Commission can take through its delegated authority.
- CSRD/CSDDD: As earlier noted, there already is significant momentum in the EU to limit some of the aspects of the CSDDD noted in the Framework Agreement, specifically its impact on small- and medium-sized enterprises and its civil liability and climate transition-related provisions. Based on the Framework Agreement, perhaps US negotiators also will seek an equivalence exemption for US-based companies. The Framework Agreement indicates that the “European Union commits to work to address US concerns regarding the imposition of CSDDD requirements on companies of non-EU countries with relevant high-quality regulations.”
- Forced labor: The area where there appears to be the most US alignment with current EU legislation is forced labor. However, even here, the devil is in the details. For example, the US and EU may have very different views on enforcement. Perhaps this will be an area where the US will seek to foster a harmonized approach.
In the coming weeks and months, there will be more visibility on the parties' specific, more granular negotiating positions. In the meantime, the Framework Agreement is likely to be used as an additional justification by the pro-simplification camp within the EU for trimming ESG/CSR-related compliance requirements.
