ESG regulation: has the "Washington effect" trumped the "Brussels effect"?

The Brussels effect describes the phenomenon by which the EU, over the last few decades, has driven up global standards and performance by adopting regulations in fields such as the environment or product safety which are voluntarily observed by global market actors. In order to access the EU market for products or services, multinational businesses must adhere to its high standards. International regulators also, to a degree, look to "outsource" their national rulemaking to the EU. In effect, the EU has taken an approach which could be described as "play on our market, play by our rules."  For example, at the inception of the sustainability regulations now under debate, the EU justified its extra-territorial reach - particularly for the non-EU company requirements of the Corporate Sustainability Due Diligence Directive ("CS3D") under which the only jurisdictional hook is revenue stemming from the EU market - by noting that turnover is a proxy for effects that the activities of third country businesses may have on the EU market.

In February 2025, the EU issued a package of measures which aimed to streamline regulations and reduce the administrative burden for businesses. A key feature was an amendment to the Corporate Sustainability Reporting Directive ("CSRD"), a flagship regulation which would mandate extensive reporting of non-financial information by a vastly increased number of companies and subject that reporting to the same rigorous assurance process as financial reports (albeit to a limited assurance standard). This regulation in particular had become the poster child for over-burden on businesses; six or seven figure consultancy fees to help companies comply were not unusual.  Meanwhile, the reporting became a distraction from the task of actually doing the work of becoming a more sustainable business.

The package also contained a proposal to amend CS3D, reducing the burden of due diligence designed to mitigate adverse environmental and human rights impacts linked to companies' operations, even where not adjacent; further proposals would amend the carbon border adjustment mechanism regulation ("CBAM"), to dramatically reduce the scope of those having to account for (and pay for) embedded emissions in carbon intensive raw materials and semi-finished goods produced abroad under less rigorous environmental standards and subsequently imported into the EU.  For more detail on the Omnibus, see:

• Simplification or Deregulation? The EU's Sustainability Omnibus Explained
  
  
• The clock stops, but the bus rumbles on – CSRD Omnibus clears its first hurdle

On the other hand, on the same day as the Sustainability Omnibus was published, the EU also announced its Clean Industrial Deal and Action Plan for Affordable Energy, both of which would increase renewable energy generation capacity and grid infrastructure improvements. Importantly,  these measures were said to be not only about decarbonisation but also increasing EU energy security, lowering costs for consumers and attracting investment into the EU.

It was easy to predict that President Trump's second term would bring a raft of legislative changes, given the gulf between his own views and the positions adopted by his predecessor. Trump was very clear in pursuing a "massive 10-to-1 deregulation initiative", issuing more executive orders in his first 100 days than any other president before him. The extent of the changes was nonetheless surprising, with USD 9.4 billion in DOGE-led spending cuts and threatened import tariffs of up to 145% being features of Trump's short term to date. Given the unsettling effect of such radical policies - and the tendency for policy decisions to be reversed in short order (in addition of course to geopolitical tensions stemming from the Middle East and Russia) - it is perhaps not too surprising that business as usual in other parts of the world ceased to be seen as a viable option.

Internal drivers of change

However, the EU also has some internal drivers of change. An adjustment in approach became inevitable after Mario Draghi published a report on the Future of European Competitiveness in September 2024, in which he highlighted a "lack of dynamism", in part due to "inconsistent and restrictive regulations". This has led to EU businesses lagging behind US and Chinese competitors, including in new fields where further rapid growth is expected, such as AI and decarbonisation technologies. That said, it should also be acknowledged that many factors unrelated to over-regulation contribute to a lack of European competitiveness, including links to historic industries and cultural aversion to risk-taking.

Deregulation in the UK

Deregulatory sentiment has also reached the UK. The March 2025 action plan on regulation criticized costly administrative burdens and risk-aversion in regulation, echoing the EU’s competitiveness concerns. Sectors targeted for reform include business, finance, energy, environment, and even health and safety, with proposed changes to accident reporting regulations (RIDDOR) raising eyebrows. At the same time, proposals to streamline oversight - for instance, moving to a single lead regulator for large projects (see section 5 of Infrastructure Spotlight Autumn/Winter 2024) - will be welcomed by any business which has wrangled the bureaucracy of obtaining multiple consents and permits for project development.

The EU has a goal to achieve climate neutrality by 2050, a legally binding target enshrined in the European Climate Law. It is largely on track to achieve its 2030 target of reducing emissions by 55% compared with 1990 levels, though it has faced criticism over, firstly, the delay to the announcement and, secondly, the potential softening of its interim 2040 target.

That climate still matters is clear when considering the proposed changes to the CBAM Regulation. The draft amendment would exempt 91% of importers from scope, but continue to capture over 99% of relevant emissions – a smart form of regulatory reform guided by achievement of the policy goal.

On the social side (i.e. the "S" in ESG), prioritisation is less clear. The move to more responsible business conduct and greater integration of soft law human rights frameworks, notably the UN Global Compact and Guiding Principles, and the OECD Guidelines for Multinational Companies, has been occurring in EU sustainable finance legislation over the last five years.  The CS3D was intended to crystallise that trend into a world-leading, horizontal regime. Even the US has strong legislation preventing the import of products produced with forced labour, likely to be exempt from Trump's clear anti-ESG stance given its focus on Chinese imports. However, the proposed weakening of the due diligence requirements in CS3D would be a retrograde step. Claimant law firms and NGOs will no doubt be keen to step into any void; the UK courts are already being asked to enforce a negligence-based duty of care through the supply chain, and between parents and subsidiaries.

Whether the current ESG backlash will wane with the evolution of politics in the US remains to be seen. What does seem to have changed – potentially for good – is the way that sustainability messaging is formulated. In contrast to the position five years ago, when Chief Sustainability Officers crafted statements regarding the seriousness with which their business took their impact on the climate, such narratives are increasingly pivoting to the need for the company to build resilience and protect itself from the financial risks stemming from climate change over the short, medium and long term. These risks will increase and effective sustainability reporting should draw them out, helping to support informed decision-making by investors.