Environmental Regulatory Compliance within the European Union: Benefits, Challenges, Policy Recommendations, and Governance Strategies for Multinational Corporations
Elif Aytekin, LLM 2024-2025
1. Introduction
In recent years, corporate governance has evolved beyond traditional issues and expanded to include wider duties concerning environmental, social, and governance (ESG) issues.[1] The environmental aspect addresses how a company affects the environment by putting particular attention on climate change, pollution, and use of resources.[2] Given that climate change is viewed as a financially material risk for companies, environmental compliance has consequently emerged as a key factor in corporate governance frameworks, influencing how businesses address their obligations under the ESG framework.[3]
Within the European Union (EU) environmental regulatory framework, the Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD) stand out. The former focuses on fostering ethical and sustainable corporate practices in the operations of companies, with the primary duty of corporate due diligence.[4] The latter highlights the obligation of large companies, small and medium-sized enterprises (SMEs), and parent companies of large groups to issue reports regarding the environmental and social risks they encounter.[5] Nevertheless, the introduction of these instruments raises significant concerns regarding the benefits of these frameworks and the legal challenges they present for businesses, especially for multinational corporations (MNCs).
In this line, this paper will answer the following question: ‘‘What are the key benefits and challenges of the EU environmental regulatory framework for MNCs from a corporate governance perspective, and what policy recommendations and governance strategies can ensure effective compliance?’’ A legal doctrinal methodology will be adopted to answer this question.
2. Key Legal Frameworks
2.1 Corporate Sustainability Due Diligence Directive
The CSDDD introduces the process that companies can identify, prevent, mitigate and account for how they address their actual or potential negative effects on human rights and the environment.[6] In accordance with Article 2(1)(a) of the CSDDD, within the EU, the Directive applies to large EU limited liability companies and partnerships that have over 1,000 employees on average and exceeding EUR 450,000,000 net worldwide turnover. Under Article 2(2)(a) of the CSDDD, outside the EU, it applies to large non-EU companies that generate over a net turnover of EUR 450,000,000 in the EU.
2.2 Corporate Sustainability Reporting Directive
The CSRD mandates that companies larger than a specific size issue reports about potential opportunities and risks they perceive to be associated with environmental and social challenges, as well as the effects of their operations on both the environment and society.[7] The size thresholds for companies under the CSRD were further clarified in the Proposal for a Directive amending certain corporate sustainability reporting and due diligence requirements. Accordingly, the obligation to report is solely for the large companies that have over 1,000 employees and a turnover exceeding EUR 50,000,000 or a balance sheet over EUR 25,000,000.[8]
3. Benefits of Environmental Regulatory Compliance for Multinational Corporations
3.1 Internal Governance for Environmental Responsibility
Environmental regulatory compliance under the CSDDD and the CSRD enhances MNCs’ internal governance for environmental responsibility by integrating environmental responsibility into internal management, corporate policies, and monitoring procedures. Article 7(1) of the CSDDD mandates businesses to incorporate due diligence into their policies and systems. By aligning internal rules with environmental goals, the CSDDD allows businesses to reduce negative risks such as environmental issues, employee strikes, health and safety concerns, and corporate liability.
This internal governance foundation for environmental responsibility is further developed by the CSRD, specifically by Article 1 of the CSRD, which highlights the amendments to Directive 2013/34/EU.[9] Accordingly, companies are required by Article 19a(2)(a) to describe their business model and strategy, including how they account for sustainability risks and opportunities. By integrating environmental responsibility into strategic planning and guaranteeing its implementation, Article 19a(2)(a) reaffirms the need for environmental responsibility to be considered within internal corporate governance.
At the corporate group level, Article 29a(1) widens these governance responsibilities by mandating that parent undertakings create consolidated sustainability reports that encompass the whole corporate group. This eliminates any possible oversight gaps that can occur in intricate structures of MNCs by guaranteeing that environmental responsibilities are enforced uniformly across all levels.
3.2 Risk Management and Long-Term Strategy
The CSDDD and the CSRD also improve risk management and long-term strategy for MNCs by incorporating environmental risk considerations into strategic planning and operational procedures. Article 8(1) of the CSDDD requires companies to detect and examine both actual and potential negative environmental effects within their own activities and value chains. This early detection system not only promotes compliance with environmental requirements but also improves risk management and long-term strategy for MNCs.
Following the detection, examination, and prioritisation of environmental concerns, Articles 10 and 11 of the CSDDD require companies to take ‘‘appropriate measures’’ in order to prevent or bring such negative effects to an end. Accordingly, environmental risk management is transformed from a reactive procedure to a forward-looking strategic function, which improves the long-term strategy for MNCs.
Moreover, the risk management and long-term strategy for MNCs are further elaborated by the CSRD, particularly under Article 1 of the CSRD, which emphasises the amendments to Directive 2013/34/EU. In this line, this preventive approach is reinforced through Article 19a(2)(b), which requires businesses to establish time-bound sustainability goals. This provision guarantees that risk management includes a systematic approach for tracking sustainability risks by converting environmental strategy into precise and quantifiable goals.
3.3 Transparency, Accountability, and Stakeholder Confidence
The CSDDD and the CSRD increase transparency, accountability, and stakeholder confidence by requiring companies to conduct due diligence procedures and publish information about their environmental effects. Article 13 of the CSDDD mandates meaningful engagement with stakeholders as part of the due diligence process. In this sense, it requires an inclusive strategy that incorporates the opinions of stakeholders into corporate decision-making, which not only fosters inclusivity but also increases transparency and accountability.
The CSRD builds on this through mandatory sustainability reporting under Article 1 of the CSRD, underscoring the amendments to Directive 2013/34/EU. Accordingly, Article 19a(2)(e) and (f) require companies to disclose information about their incentive schemes related to sustainability issues, as well as information on their due diligence processes. These measures go beyond procedural compliance by requiring disclosure of both incentives and operational performance.
4. Challenges of Environmental Regulatory Compliance for Multinational Corporations
4.1 Complexity in Implementation and Uncertainty in Enforcement
One of the most significant challenges of environmental regulatory compliance for MNCs is the complexity in implementation and uncertainty in enforcement. The implementation of the CSDDD creates significant challenges as it might be adopted by different Member States (MS) with differing levels of strictness, which could result in fragmentation of the requirements.[10] Even though Article 37 of the CSDDD requires the MS of the EU to transpose the Directive into national law, it does not provide extensive guidance on how the transposition should be carried out in practice. This lack of specificity may give discretion to MS, which could create divergent approaches throughout the EU.
In the context of the CSRD, the challenge of complexity in its implementation is caused by the Directive’s broad scope. Article 1 of the CSRD, amending Directive 2013/34/EU, states that parent companies of large groups have the obligation to disclose information under Article 29a. However, this reporting duty applies to both businesses within and outside of the EU. This extraterritorial reach of the CSRD may create significant challenges for MNCs, particularly when the parent companies are established outside of the EU.
Nevertheless, in any case, effective implementation is closely tied to the adequacy of enforcement mechanisms. The CSDDD encompasses both public enforcement mechanisms. Considering the public enforcement mechanisms, Articles 24 and 25 of the CSDDD require the MS of the EU to appoint supervisory authorities with sufficient powers to monitor adherence to the laws. However, their effectiveness relies heavily on the extent of powers and resources that are granted by the MS of the EU.[11] The Directive also establishes private enforcement mechanisms in accordance with Article 29 of the CSDDD, under which the MS of the EU are obliged to establish civil liability for companies for breaches of their due diligence duties. Nonetheless, scholars have criticised this approach due to the possibility of limiting the Directive’s enforcement system.[12]
Moreover, with respect to the CSRD, the Directive does not set out clear provisions on public and private enforcement mechanisms. Instead, enforcement is primarily left to the MS of the EU in accordance with their national law. Therefore, this absence of clear provisions may lead to the risk of creating significantly different approaches within the EU.
4.2 Financial and Administrative Burdens
Another key challenge of environmental regulatory compliance for MNCs is the financial and administrative burdens that the CSDDD and the CSRD can create. The CSDDD requires companies to adopt comprehensive due diligence processes in order to identify, prioritise, prevent, and bring environmental harm to an end in accordance with Articles 8-11 of the CSDDD. However, they pose financial burdens as businesses are required to invest in new compliance systems and specialised expertise to comply with the requirements set by the CSDDD.[13] This results in not only considerable expenses for MNCs but also administrative burdens since they must adapt their internal structures and supply chain management systems accordingly.
Moreover, Article 1 of the CSRD, amending Directive 2013/34/EU, requires large companies and SMEs under Article 19a(1), and parent companies of large groups under Article 29a(1) to disclose sustainability information. This imposes extensive obligations to collect, process, and disclose environmental data, which can create financial burdens for MNCs due to the costs of developing reporting systems. At the same time, these obligations may lead to considerable administrative burdens as companies need to integrate detailed reporting processes into their existing activities.
4.3 Technical Complexity and Data Challenges
Another major challenge of environmental regulatory compliance for MNCs is technical complexity and data challenges. Article 15 of the CSDDD obliges companies to conduct assessments and monitor all due diligence procedures related to their own operations, subsidiaries, and business partners in order to examine the implementation and effectiveness of identifying, preventing, mitigating, and bringing the negative effects of environmental issues to an end. This provision further clarifies that these examinations need to use both qualitative and quantitative parameters. In practice, these obligations create significant challenges for MNCs since managing and gathering data demand specialised knowledge and require businesses to guarantee the validity of the data that they gather.[14]
In the context of the CSRD, Article 1 of the CSRD, amending Directive 2013/34/EU, demands under Article 29b to empower the European Commission (EC) with the authority to enact delegated acts, which provide businesses with the detailed guidelines they must follow when reporting pursuant to Articles 19a and 29a. Accordingly, the disclosed information should be ‘‘understandable, relevant, verifiable, comparable and represented in a faithful manner’’ in accordance with Article 29b(2). However, these requirements also create significant technical complexity and data challenges for MNCs. In practice, it can be difficult for companies to gather, verify, and standardise data, especially in complicated topics such as emissions and social impact measures, due to gaps in availability and uneven data quality.[15]
5. Policy Recommendations and Governance Strategies for Multinational Corporations
The CSDDD and the CSRD mark significant progress in aligning corporate governance with sustainability objectives; however, their challenges should be addressed. To start with, in order to address the challenge of complexity in the implementation of the CSDDD, the MS of the EU should ensure that they are not transposing the Directive into national law with different levels of strictness. They should strive towards achieving a similar level of strictness in order to prevent differing approaches within the EU.[16]
Considering the implementation challenges of the CSRD, a crucial recommendation is to adopt more precise guidelines at the EU level. In this regard, the EC could publish comprehensive implementing acts and guidance notes to clarify issues regarding the scope of the CSRD.
In the context of uncertainty in public enforcement mechanisms of the CSDDD, more structured cooperation at the national supervisory level is necessary to ensure consistency across MS. In this sense, increasing the role of the European Network of Supervisory Authorities may be a useful way to promote harmonisation and resolve disparate national practices within the EU.[17] Concerning the private enforcement mechanisms under the Directive, a key recommendation is to incorporate private international law into its regulatory structure.
Concerning the enforcement of the CSRD, the EC can offer clear guidance regarding the public and private enforcement mechanisms in order to have a uniform application throughout the EU. Detailed provisions are needed on sanctions for breaches of sustainability reporting since they would promote consistent and harmonised enforcement and increase corporate accountability, while minimising the risk of divergent approaches among the MS of the EU.
Another challenge of environmental regulatory compliance for MNCs is the financial and administrative burdens. Considering the requirements under both the CSDDD and the CSRD, a core policy recommendation is to simplify due diligence and disclosure requirements in order to mitigate both financial and administrative burdens.[18] In practice, complying with these Directives may require significant resources and expertise. Therefore, policy measures should prioritise targeted simplification of the requirements.
Another significant challenge to address is technical complexity and data challenges that MNCs face. In the context of the CSDDD, an essential recommendation would be to enhance the data governance systems of businesses. In this regard, harmonised data collection mechanisms can be implemented in order to minimise inefficiencies in the due diligence procedures.
Considering the CSRD, technical complexity and data challenges arise because of gaps in availability and uneven data quality, especially throughout the value chain. To overcome these challenges, joint supplier engagement initiatives can be launched in order to improve transparency along the value chain. Therefore, these initiatives can lead businesses to reduce the difficulty of data collection, as they allow data to be gathered progressively in stages.[19]
6. Conclusion
The insights gained from this paper suggest that, while the CSDDD and the CSRD represent important steps towards embedding sustainability into corporate governance, their continued refinement will be crucial. By addressing the identified challenges, future revisions to these Directives can enhance consistency and legal certainty across the EU, reduce financial and administrative burdens, and minimise technical complexity and data challenges. This will better enable MNCs to integrate environmental responsibility more effectively into their governance frameworks, thereby advancing the EU’s transition to a sustainable economy.
Elif Aytekin completed her LL.B. in European Law at Masstricht University, where she also undertook a minor in Business and Law. She later pursued an LL.M. in International Commercial Law at the University of Nottingham. During her studies, she worked as a Research Assistant at UNCLC. Alongside Elif's academic work, she actively contributes to the European Law Students' Association.
[1] Kayode Akinsola, ‘The Evolving Role of Corporate Governance in Shaping Business Practices and Legal Accountability in the 21st Century’ (2025) 1-2 <https://ssrn.com/abstract=5115523> accessed 31 July 2025.
[2] Dan Byrne, ‘ESG: A comprehensive guide to the main principles’ (Corporate Governance Institute) <www.thecorporategovernanceinstitute.com/insights/guides/esg-a-comprehensive-guide-to-environmental-social-and-governance-principles/?srsltid=AfmBOop1hUNtzHVrYT3hbLmBVtS5JA1ZT6MkUfva93IdpveAcqBwFSPB> accessed 31 July 2025.
[3] OECD, Climate Change and Corporate Governance (OECD Publishing 2022) 7 <https://doi.org/10.1787/272d85c3-en> accessed 31 July 2025.
[4] Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859 [2024] OJ L, 2024/1760.
[5] Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting [2022] OJ L 322.
[6] OECD, OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (OECD Publishing 2023) 17 <https://doi.org/10.1787/81f92357-en> accessed 31 July 2025.
[7] ‘Corporate sustainability reporting’ (European Commission) <https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en> accessed 8 July 2025.
[8] Proposal for a Directive of the European Parliament and of the Council amending Directives 2006/43/EC, 2013/34/EU, (EU) 2022/2464 and (EU) 2024/1760 as regards certain corporate sustainability reporting and due diligence requirements [2025] COM/2025/81 final 4.
[9] Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC [2013] OJ L 182.
[10] Anchal Singh, ‘Navigating the Challenges of the Corporate Sustainability Due Diligence Directive (CSDDD) in Supply Chain Management’ (SustainoMetric) <https://sustainometric.com/navigating-the-challenges-of-the-corporate-sustainability-due-diligence-directive-csddd-in-supply-chain-management/> accessed 21 August 2025.
[11] Racha Radja and Seniha Irem Akin, ‘Strengthening the Efficacy of the CSDDD through Private International Law’ (2024) 32(5) European Review of Private Law 895 <https://doi.org/10.54648/erpl2024044> accessed 23 August 2025.
[12] ibid 884.
[13] ‘CSDDD: Corporate Sustainability Due Diligence Directive’ (Asuene) <https://asuene.com/us/blog/understanding-the-corporate-sustainability-due-diligence-directive-csddd-key-requirements-and-benefits> accessed 9 August 2025.
[14] Hugo Hernández-Ojeda Alvírez, ‘Navigating the challenges and opportunities of ESG compliance’ (International Bar Association, 20 June 2023) <www.ibanet.org/navigating-challenges-opportunities-esg-compliance> accessed 7 August 2025.
[15] Lexicon, ‘CSRD challenges and how to overcome them’ (Institute of Sustainability Studies, 27 November 2024) <https://instituteofsustainabilitystudies.com/insights/lexicon/csrd-challenges-and-how-to-overcome-them/> accessed 22 August 2025.
[16] Anchal Singh (n 10).
[17] Selin Parlak de Oliveira Serra, ‘Corporate Governance and Due Diligence Analysis Under the Corporate Sustainability Due Diligence Directive (CSDDD): Legal and Extraterritorial Challenges’ (2025) Stanford-Vienna European Union Law Working Paper No. 105 16 <https://law.stanford.edu/publications/no-105-corporate-governance-and-due-diligence-analysis-under-the-corporate-sustainability-due-diligence-directive-csddd-legal-and-extraterritorial-challenges/> accessed 21 August 2025.
[18] Sarah Grumberg, ‘Exploring the Opportunities & Challenges of CSDDD: A Multi-Stakeholder Perspective’ (International Association of Oil & Gas Producers, 29 January 2025) <https://iogpeurope.org/event/exploring-the-opportunities-and-challenges-of-csddd-a-multi-stakeholder-perspective/> accessed 21 August 2025.
[19] Måns Dunfjäll, ‘Materiality in Transition: Challenges and Opportunities in Corporate Sustainability Reporting under the CSRD’ (2025) European Journal of Risk Regulation 14 <https://doi.org/10.1017/err.2025.10016> accessed 31 August 2025.