Will Bangladeshi garment exporters be able to meet EU's upcoming standards?

How will Bangladesh's garment and textile industry be impacted if the European Commission approves its proposed Corporate Sustainability Due Diligence Directive (CSDDD)? This issue is currently a focal point of discussion among garment exporters. The directive, if enacted, would establish a legislative framework, compelling companies, whether EU-based or not, to showcase their efforts in safeguarding the environment and upholding human rights.

Under the directive, companies would have to follow due diligence not only within their own operations but also across their subsidiaries and other entities in their value chains with whom they maintain direct and indirect business relationships. Bangladesh has particular concerns about this.

The European Union, consisting of 27 nations, has been a significant player, accounting for over 50% of Bangladesh's garment exports valued at nearly $47 billion in the fiscal 2022-23 that ended on 30 June. The concern is the possibility that a large number of factories in Bangladesh may struggle to follow the strict regulations in the proposed due diligence directives.

For example, Swedish retail giant H&M, the largest buyer in Bangladesh, plans to ensure 100% of its materials are either recycled or sustainably sourced by 2030. Just a few years ago, H&M sourced about $5 billion worth of garment products from Bangladesh annually. It is now below $4 billion. The multinational clothing retail company has already brought down the number of factories it buys garments from to around 180 from over 300 in the past several years.

For perspective, the Spanish fast-fashion brand Zara, part of the Inditex Group, one of the world's largest fashion retailers, Primark, an Irish fast-fashion retailer with a significant presence in Europe, and Marks & Spencer, a major British multinational retailer that also buys garments worth billions of dollars annually from Bangladesh.

Also, US clothing retailers and brands that have been operating in Europe will come under the EU's due diligence laws. Accordingly, the sourcing of garments by US brands and retailers including Gap, Levi Strauss & Co, and Tommy Hilfiger from Bangladesh may be affected.

Current state of the directive

The due diligence directive was proposed by the European Commission in February 2022 and is moving through the European Union legislative process. In December 2022, the European Council finalised its position, added some amendments and suggested a less strict approach in enforcement.

For example, the Council made amendments to add a three-year phase-in period and narrowed the scope, to capture only EU companies with more than 1,000 employees and euro 300m net worldwide turnover. And, for non-EU companies, it is set at euro 300m net turnover generated in the EU.

The Council has also clarified the four conditions that must be met for a company to be held liable. These are damage caused to a natural or legal person, a breach of the duty, a causal link between the damage and the breach of the duty and a fault (intention or negligence).

The European Parliament is expected to vote on its formal position later in 2023, then legislative negotiations can begin. Based on recent votes by the EU Parliament's Economic and Monetary Affairs Committee (ECON) and Environment Committee (ENVI), it is likely that members of the EU parliament will vote to expand, rather than narrow, the scope of the directive. The only respite for Bangladesh is that the directive is unlikely to come into force until 2025 at the earliest.

Number of companies that may be affected by the act

The due diligence act will affect larger EU and non-EU companies. Estimates show that the directive applies to 13,000 EU businesses and 4,000 non-EU businesses. Small and medium-sized businesses are technically exempt but will likely see some impact when doing business with larger firms.

The German Supply Chain Due Diligence Act

The German Supply Chain Due Diligence Act, effective from 1 January 2023, applies to approximately 700 companies, having over 3,000 employees in Germany. Focused on safeguarding the rights of global workers contributing to the German market, the Supply Chain Act (Lieferkettengesetz) addresses the sourcing of garments from Asia, cocoa and fruit from Africa, and coffee from South America.

The Due Diligence Act will affect larger EU and non-EU companies. Estimates show that the directive applies to 13,000 EU businesses and 4,000 non-EU businesses. Small and medium-sized businesses are technically exempt but will likely see some impact when doing business with larger firms.

The Act imposes a robust set of obligations, requiring companies to establish a risk management system for compliance, implement preventive and remedial measures, and institute mandatory complaint procedures. Stringent documentation and reporting are mandatory, with significant fines for violations. 

The law required organisations to address infringements within their operations and throughout their direct supply chain, irrespective of the location of the activity. The Act places a clear responsibility on organisations for their supply chain conduct and insists on proactive measures and meaningful remediation.

Will green factories save Bangladesh?

Bangladesh is a hub of 200 green factories that received certification from the United States Green Building Council (USGBC) for their green initiatives, such as reduction in energy and water uses and carbon footprint.

Among these certified factories, an impressive breakdown includes 73 achieving platinum ratings, 113 securing gold ratings, 10 attaining silver ratings, and four standing as officially certified establishments. Notably, Bangladesh is proud to host some of the world's premier factories, with 13 out of the top 15 LEED green factories globally situated within its borders.

Fazlul Hoque, managing director of Plummy Fashions, a top green knit apparel manufacturing unit in Bangladesh, is not so worried about the EU's upcoming due diligence rules.

"Rules, whatever are coming, will be applicable for all countries. Bangladesh is better-placed and competitive than many nations," he told The Business Standard. Plummy Fashions has successfully reduced energy use by 40%, water consumption by 41%, and carbon dioxide emissions by 35%.

On the decline in purchases by H&M from Bangladesh, Hoque attributes it to their sluggish business performance rather than being directly related to the EU's due diligence rules.

What GIZ Bangladesh says

In an email response, Andreas Kuck, the Country Director of GIZ Bangladesh, commented on the potential challenges Bangladesh's exports to the EU might encounter with the implementation of the CSDDD.

He says Bangladeshi producers will not be subject to the obligations defined under the act as there will be no direct restriction of exports from Bangladesh to Europe.

However, he says companies under the scope of the act will have to perform due diligence regarding their suppliers in case of established business relationships. Therefore, indirect effects for suppliers (including in Bangladesh) can be expected (similar to the ones of the German Act): e.g., support ensuring access to grievance and remedy for rights holders, provide more information to buyers to conduct a risk assessment and report on the effectiveness of preventive and remedial measures, and cooperation on minimising specific risks that may be identified, he says. 

"Robust implementation of social and environmental standards will probably be a competitive advantage for suppliers (and countries) that want to export to European buyers," says Andreas.

The GIZ Bangladesh's country director also says that compared to the German Act, the scope of CSDDD is foreseen to include many more companies, estimated above 12,500 and it is foreseen to have a stronger focus on climate change mitigation in line with the 1.5-degree target of the Paris Agreement.

He says companies under the scope of the act will probably have to report according to the Corporate Sustainability Reporting Directive (CSRD) and these reporting requirements would be less extensive compared to those of the German Act. At the same time, the CSDDD foresees civil liability in case damages occur because a company did not fulfil its due diligence obligations. However, this is still unclear and will also depend on the concrete implementation of the directive by the respective member states in the following years, says Andreas.

However, he says the GIZ is implementing measures to support producers in global supply chains to be prepared for human rights and environmental due diligence. Also, Responsible Business Help Desks have been set up in Bangladesh and other countries to provide support to producers, he says.