The EU and the challenge of regulatory coordination

In recent years, the European Union has issued several directives to push companies towards greater sustainability. From the SFDR, which aims to promote and support sustainable investment practices in the financial services sector, to the CSDR, which this year introduces mandatory sustainability reporting, European companies are being called upon to comply with an increasing number of regulations regarding Esg issues in recent years. According to Datamaran, the number of regulations and initiatives concerning ESG issues increased by 72% from 2013 to 2018, a much higher percentage than in the US over the same period. Therefore, European regulation is broader and growing faster than in comparable economies. Moreover, EU legislation is subject to frequent changes over time and requires national transposition of European laws. In addition, companies may be subject to additional national regulations on top of European ones. The presence of multiple layers of regulation means that the same issue is regulated by several bodies, resulting in so-called regulatory fragmentation. Regulation on ESG issues is not the only one exposed to this phenomenon. Another emblematic example is the banking sector, where banks have to comply with regulatory requirements common to non-financial companies, but also with specific provisions of central banks and banking supervisory committees (such as the Basel Committee).

Despite growing evidence of regulatory fragmentation, its pros and cons are still debated. On the one hand, the presence of multiple regulators could have advantages for investor protection, as regulators with different knowledge and experience can join forces and thus increase monitoring of companies. On the other hand, there is concern that the existence of multiple regulators entails costs for companies, especially when regulators do not coordinate their actions. Lack of coordination can lead to redundancies and inconsistencies between regulations. According to a Business Europe gap analysis of 13 EU laws, 169 requirements were duplicative, of which 11 per cent were inconsistent. In addition, it can generate uncertainty among companies about which regulations to follow, increasing compliance costs. Furthermore, companies may prioritise compliance with regulators over which they have greater influence. From this perspective, the presence of multiple authorities and legislations may not be optimal for companies. In line with this idea, recent empirical evidence shows that regulatory fragmentation is associated with lower productivity, profitability and growth of companies.

These findings are consistent with a recent speech by Mario Draghi to the European Commission in September 2024. Draghi emphasised that European companies are exposed to an increasing number of regulations, noting that excessive regulation at the European level represents 'a major source of regulatory burden, amplified by the lack of guidance to facilitate the application of complex rules and clarify the interaction between different pieces of legislation'.

Draghi encouraged the reduction of regulatory requirements for EU companies by 25 per cent (50 per cent for SMEs) to protect their competitive advantage and stimulate innovation. Implementing this reduction is not easy, as reducing the regulatory burden on companies must be balanced with adequate investor protection. Moreover, given the synergistic potential between regulators, for the reduction to be effective, regulators must cooperate and coordinate their actions. The joint effort of regulators is a prerequisite for maintaining investor protection and the integrity of financial markets while reducing compliance costs for firms. However, coordinating regulators can be a challenge, as regulators often protect specific interests and compete with each other. Overcoming such dynamics seems crucial to ease the regulatory burden on companies and ensure that regulatory compliance is not an impediment to business success.

Bocconi University