Sustainability insight | 07 Mar 2025 |

Travers Smith's Sustainability Insights: Will Trump 2.0 kill off the Brussels effect?

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A regular briefing for the alternative asset management industry.

In 2012, Professor Anu Bradford of Columbia Law School coined the term the "Brussels Effect" to describe the process by which EU regulation has shaped international business norms and driven the Europeanisation of key commercial sectors. The EU's large single market and propensity to regulate often means it is efficient for businesses to apply European standards internationally. This phenomenon – similar to its cousin, the "California Effect" – has manifested itself in data privacy, consumer health, and environmental protection standards, among others. So strong is this effect that Professor Bradford's 2020 book had the playful subtitle, How the European Union Rules the World.

But it is now legitimate to ask whether the Brussels effect will survive the new deregulatory era in the United States.

The early signs of this deregulatory push are striking. For example, immediately after taking office in January, President Trump signed an Executive Order "outlawing" DEI programmes in the federal government, labelling them "wasteful" and "immoral" – catalysing a reported retrenchment in such programmes in the private sector.

A few weeks later, the administration suspended enforcement of the Foreign Corrupt Practices Act (FCPA) – the US's far reaching anti-bribery legislation. The aim was to end "overexpansive and unpredictable" enforcement against American corporations and citizens in respect of "routine business practices in other nations", ostensibly to level the playing field.

The following day, the Securities and Exchange Commission signalled its intention to abandon defence of the pending litigation against its Climate Change Disclosure Rules, suggesting that it will scrap, or at least significantly water down, proposed federal rules on climate-related financial disclosures. And, just a few days ago, the Treasury Department announced that it will not enforce beneficial ownership reporting requirements against US citizens or domestic companies.

Although there are some signs that the courts may be able to moderate it – for example, the DEI order has been temporarily blocked – these are strong indications that the US is entering full-on deregulatory mode. If so, what does this mean for the compliance programmes of cross-border businesses, especially those with significant operations in Europe?

We should remember that, in many of these areas, the United States has been a leader. Successive US administrations led the way in addressing corrupt practices, requiring US companies to apply high standards in their dealings, including overseas, through targeted legislation. The FCPA, passed in 1977, pre-dated the UK's Bribery Act by over three decades. The US was five years ahead of the EU in passing federal anti-money laundering laws, it has been a leader in DE&I, and the SEC proposals on climate disclosures were not far behind the UK's adoption of international (TCFD-based) standards.

        
    
" … although it is true that US-headquartered businesses have expanded their compliance programmes to reflect the accretion of EU and UK standards, these have largely gone with the grain of US domestic precedent."

Therefore, although it is true that US-headquartered businesses have expanded their compliance programmes to reflect the accretion of EU and UK standards, these have largely gone with the grain of US domestic precedent.

Will that change if EU or UK laws become markedly more onerous by comparison with revised US federal standards – especially when they are directly at odds with the law in a number of conservative US states?

One important consideration for trans-Atlantic businesses is that many EU and UK laws have extra-territorial reach. For example, the new UK offence of failure to prevent fraud, coming into effect on 1 September 2025, may require anti-fraud risk assessments and controls for wholly non-UK businesses if there is a risk that fraud might be committed in a way which affects a UK stakeholder. And, even after the recently proposed revisions, the Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CS3D) will have explicit extraterritorial reach, applying to many larger US businesses.

In the new environment, though, some businesses might take risk-based approaches. There may be less risk of enforcement from perennially underfunded (and arguably somewhat toothless) European authorities, such as the UK's Serious Fraud Office, than from a formerly scary but (at least temporarily) muzzled US SEC and Department of Justice. Some firms might also look to Asia and the middle East – increasingly important jurisdictions for asset managers – to locate more of their business, avoiding at least some European rules while getting closer to a number of their key investors.

However, for now, global businesses will not rush to make radical changes. The balance lies towards continued compliance with high standards at an enterprise-wide level. Part of the calculus will be that US federal regulation remains on the statute book (at least for now) and time limits on enforcement, for example under the FCPA, will outlive the current administration. In the meantime, US regulators are not toothless, nor will they resile from aggressive enforcement against corporations – at least where that is consistent with White House policy (which is likely to continue to be hard to predict) and particularly where the target incurs the President's ire.

In the medium term, one question is whether the US will allow Europe to continue to make rules that affect American businesses. The Trump administration is already waging a war on EU extra-territorial regulation of international technology businesses, and there are rumours of similar action on the CS3D. Tariffs have become an important weapon in this fight.

It also doesn't help that there are suspicions about international bodies that the US does not control, such as the World Health Organisation (WHO), the Financial Action Task Force (FATF) in the context of financial crime, and the IFRS Foundation in the context of sustainability reporting – which increase the chances of US divergence.

There may well come a time, therefore, when a consistent global application of standards – including those emanating from Europe – is not the optimal way for an international business to proceed. Compliance chiefs will keep a watching brief.

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