The CS3D-Caremark Cocktail Was Watered Down, but it Still Packs a Punch

The EU promised the world’s most ambitious ESG legislation: the Corporate Sustainability Due Diligence Directive (CS3D). But almost immediately after the CS3D was enacted, the EU started walking it back. The Draghi report branded sustainability due diligence as a competitiveness burden, and the ensuing Omnibus reform narrowed the Directive’s scope and softened its sanctions. Pressure from within Europe was compounded by pressure from outside: the Trump administration threatened trade measures if the EU applied the Directive to US companies. Yet reports of the CS3D’s death have been greatly exaggerated.

Shortly after the Directive was enacted, we explained why its most important enforcement channel may turn out to be a counterintuitive one: Delaware corporate law. We started with the observation that, with ambitious legislation of this kind, what matters is not what the law says on paper but how it is enforced on the ground. Specifically, the question is whether large companies will resort to check-the-box, cosmetic compliance, or actually change the tone at the top toward human-rights and environmental issues in their supply chains. For the tone at the top to change, there must be some mechanism for holding directors and officers accountable when their companies fail to take sustainability obligations seriously. And because the Directive ended up scrapping the provisions imposing liability on directors, the important channel for individual accountability may come indirectly from corporate law’s oversight duties. Suppose a large US corporation falls short of its due-diligence obligations, and an EU regulator imposes a substantial sanction (for example, exclusion from public procurement contracts). A US plaintiff attorney could then bring a derivative suit in Delaware, arguing that the directors breached their fiduciary duties by failing to oversee compliance with the CS3D. 

Our paper therefore argued that it is the combination of CS3D and Caremark oversight duties that could change corporate behavior. The two regimes reinforce each other. The CS3D pushes human rights and environmental risk onto the board’s agenda and shifts responsibility for these issues from PR and CSR departments toward the Compliance department. And Delaware’s private-litigation machine, in turn can amplify the “Brussels effect.” 

Fast forward to today, and both elements of the CS3D-Caremark cocktail have been watered down. Besides the abovementioned dilution of the CS3D, the 2025 legislative reform to Delaware law (SB 21) narrowed the scope of internal documents that shareholders can inspect (and thereby, on its face, made oversight claims harder to build).

Still, there are ample reasons to think that the CS3D-Caremark cocktail could remain potent once the Directive takes effect. For one, CS3D-oversight claims may be unusually resilient to the SB 21 change. In these cases, it is often the defendants who have every incentive to generate a detailed paper trail (to prove they did discuss the risk). And plaintiffs may be able to rely on information already generated through EU regulatory enforcement proceedings. US plaintiffs would therefore depend less on the inspection rights that SB 21 restricts.

Second, whatever the CS3D rollback does to the Brussels side of the equation, a separate development could widen the cocktail’s reach in a direction few are watching. Consider “EUxit:” the phenomenon of European startups and scaleups (re)incorporating in Delaware, often in search of a less restrictive corporate-law regime. For our purposes, EUxit strengthens the CS3D-Caremark interaction. A European business that migrates to Delaware does not escape the CS3D, which still tracks its European operations; and it adds Delaware’s Caremark regime, because oversight duties track the place of incorporation. In other words, EUxit could extend the CS3D-Caremark interaction beyond US multinationals to EU-based businesses.

The size of that effect depends in part on the EU’s own EU Inc. proposal, whose purpose is in part to give European firms an attractive home-grown alternative. If EU Inc. succeeds in curbing EUxits (something two of us, in separate pieces, have raised strong doubts about: see here and here), then it could curb the drift toward Delaware, and, with it, dampen this mirror-image extension of the Brussels effect. Both dynamics are worth watching.

The takeaway is where we started: enforcement, enforcement, enforcement. Do not judge the CS3D solely by the ambition of its original text or the political theatre surrounding its rollback. Judge it by its enforcement plumbing, and keep in mind that the plumbing may run through Delaware. Even a remote prospect of individual liability, coupled with meaningful regulatory consequences for the company, may be enough to elevate human rights and environmental issues onto the board’s agenda. That is where the real reshaping of corporate behavior may happen.

Luca Enriques is Professor of Business Law at the Bocconi University Department of Legal Studies, and an ECGI Fellow, Board and Research Member.

Matteo Gatti is a professor of law at Rutgers Law School, and an ECGI Research Member.

Roy Shapira is a Full Professor at Reichman University, a Mehrotra Visiting Professor at BU Questrom School of Business, and an ECGI Research Member.

This post draws on our article (78 Stanford Law Review 241 (2026)), and on the GCGC prize-giving presentation.

This blog is based on a paper presented at the twelfth annual Global Corporate Governance Colloquia (GCGC), hosted by the National University of Singapore and ECGI. Visit the event page to explore more conference-related blogs.

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.