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Monday, July 15, 2024

“The Brussels Effect”: How EU Regulations Shape Global Compliance Strategies

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In the ever-evolving landscape of global regulatory compliance, the “Brussels Effect” emerges as a powerful force. Named after the European Union’s de facto capital, this phenomenon has far-reaching implications for multinational companies.

Does global regulatory compliance feel like a moving target? For many organizations, staying ahead of the curve is not just advantageous – it’s essential. Information about what regulations impact your organization and how to comply with them is widely available but sometimes difficult to distill. Additionally, keeping track of what is anticipated for the future can feel like juggling plates.

Where should risk and compliance leaders look to guide their strategy? One phenomenon that has garnered significant attention in recent years is the Brussels Effect. Named after the European Union’s de facto capital, this concept has far-reaching implications for companies operating on a multinational scale. As compliance and risk officers, it’s imperative to grasp the nuances of the Brussels effect and understand why it’s crucial to our roles within organizations, as this can help proactively guide compliance strategy.

What is the Brussels Effect?

The Brussels Effect refers to the remarkable ability of European Union regulations to influence global standards and policies. Coined by Anu Bradford, a professor at Columbia Law School, this term underscores the EU’s unparalleled impact on regulatory frameworks beyond its borders.

When the EU enacts regulations, the rest of the world often follows suit. This phenomenon arises from the EU’s economic clout as the world’s largest single market, compelling companies worldwide to comply with its standards to access this lucrative market.

Simply put, when the EU enacts regulations, the rest of the world often follows suit.

The impact of the Brussels Effect on global regulations

The Brussels Effect permeates various industries, shaping laws and standards globally. For instance, in the technology sector, the EU’s General Data Protection Regulation (GDPR) sets a precedent for data protection laws worldwide, with other data protection laws following core principles and requirements from the GDPR.

Similarly, environmental standards set by the EU influence policies to combat climate change globally. Even in finance, regulations like the Markets in Financial Instruments Directive (MiFID) reverberated beyond European borders, affecting financial institutions worldwide.

Compliance challenges and addressing pushback

Navigating the regulatory landscape amidst the Brussels Effect can challenge compliance officers. Ensuring compliance with diverse and sometimes conflicting regulations across jurisdictions can be daunting. Selling the idea of adjusting risk and compliance strategy “because this is what the EU is doing” may be challenging to a board of C-suite leadership if they’re not fully satisfied with the value of a robust compliance program. So, the first step naturally becomes getting compliance to go beyond ticking the box.

The rapid pace of regulatory changes demands agility and adaptability from compliance teams. Balancing compliance with risk management adds another layer of complexity, requiring a holistic approach to mitigate potential legal, financial, and reputational risks.

The adage holds regarding the risk and compliance landscape: those who fail to plan plan to fail.

Many companies and non-EU regulatory bodies push back on the implications of the Brussels Effect, namely because EU regulations are often seen as overly ambitious. It is certainly true that the EU sets forth some of the most aspirational laws we see globally, namely with Directives such as the Corporate Sustainability Reporting Directive (CSRD), the proposed Corporate Sustainability Due Diligence Directive (CSDDD) that has yet to be codified, and other climate-related targets. Even within the EU, legislation only sometimes passes smoothly without push-back from the member states. Recently, voting on the CSDDD was delayed due to eroding support from some member states, giving it an uncertain future and one that many are closely watching.

Frankly, these lofty goals and ambitious regulations cause great debate in places where progression towards climate neutrality or addressing ESG issues is seen as “woke politics” or simply an unworkable burden.

However, regulatory mandates or not, the growing sentiment from stakeholders and consumers is to move towards many of the principles the EU is driving. More and more, the demand for ethical and compliant companies that do more than the bare minimum is greater than ever. Organizations can adjust strategies that go beyond strictly required and those with a competitive advantage.

Not only does this principle help improve investor and consumer sentiment, but it also attracts more talent. Today’s workforce is also shifting on where they want to work, focusing on companies that prioritize an ethical environment and operate transparently. Attracting and retaining top talent may depend on, or at the very least be linked to, a company’s focus on ethics and compliance.

Whether or not the term “Brussels Effect” is used when making the case for aligning to EU standards, the case for going above the minimum and planning for the future is strong.

Staying ahead of the curve: strategies for compliance officers

To effectively navigate the Brussels Effect, compliance officers must adopt proactive strategies. Firstly, staying informed about EU regulations and their potential global impact is paramount as they will inevitably guide global compliance – it just won’t happen instantaneously.

Regular monitoring of regulatory developments and engaging in industry discussions provide valuable insights. And for those reading this article, you already know the risk and compliance community is thriving and eager to share information and best practices. Start there. By learning what is working for your peers and keeping track of trends and developments for applicable laws and regulatory changes before they take effect, you’re already positioned better than those who wait for new laws to come into force before acting.

Fostering a culture of compliance within the organization and integrating compliance considerations into business processes can mitigate risks and streamline compliance efforts. Leveraging technology solutions, such as compliance management software, can also enhance efficiency and effectiveness in compliance operations.

If gaining buy-in for risk and compliance programs is difficult, adjusting strategy to anticipate regulations because of trends in the EU and the rest of the world may be a tall order. However, proactive leaders see the value in planning and adhering to what is widely known as best practices from EU regulations. The concept of, “this is what the EU is doing, perhaps we should follow suit,” may not gain traction. However, taking a principled approach to risk and compliance strategy can still use EU guidance for data protection, ESG disclosure, supply chain due diligence, and the like, which will position your program for the future.

Creating a culture that does much of the work for you (prioritizing integrity and compliance) doesn’t happen overnight. Focusing on clear and consistent communication about company values and expectations, ongoing training from the top down, and accountability when the values are not upheld are all critical pieces of the foundation. Focusing efforts on those areas will not come easily, but the juice is well worth the squeeze.

Final words

The Brussels Effect represents a paradigm shift in global regulatory dynamics, with profound implications for compliance and risk management professionals. Understanding and anticipating the impact of EU regulations on global standards is essential for navigating the complex regulatory landscape.

By embracing proactive strategies and staying informed, compliance officers can effectively mitigate risks and ensure regulatory compliance in an increasingly interconnected world. As guardians of ethical and legal integrity within organizations, compliance and risk officers play a pivotal role in adapting to the challenges and opportunities presented by the Brussels Effect.

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