What does the EU’s new due diligence directive mean for Bangladesh?
For Bangladesh, this is expected to have significant implications both as a manufacturing hub and as a destination for investment
The EU Corporate Sustainability Due Diligence Directive (CS3D), adopted in June 2024, is a major step in the development of global ESG (environmental, social and governance) policy.
It is the first major piece of legislation that places requirements on companies beyond transparency, reporting and disclosure – and moves to the transition phase of the Green Deal.
The CS3D requires in-scope (businesses that are legally obligated to follow the directive's regulations) to investigate, identify and assess actual and potential risks of contravening EU human rights and climate policy standards. It places obligations on companies to consider and positively amend their own business strategy, practices and arrangements.
Importantly, it imposes responsibility on in-scope EU and non-EU companies for their business partners and supply chains on a global level.
Keep updated, follow The Business Standard's Google news channel
For Bangladesh, this is expected to have significant implications both as a manufacturing hub and as a destination for investment.
The government is seeking to promote the ICT and services sector, positioning the country as a growing destination for Business Process Outsourcing.
Until now, global brands manufacturing and providing services on an outsourced basis have been able to rely on third-party supplier undertakings in compliance with broad and high-level international human rights and governance standards.
Through the imposition of responsibility, arguably under a strict liability regime, buyers and global brands are expected to take deeper steps to ensure compliance.
In-scope companies include large EU companies with over one thousand employees, and a net worldwide turnover of more than €450 million, or have generated royalties in the EU of over €22.5 million and a net worldwide turnover of more than €80 million.
It also includes large companies not incorporated in the EU that have a turnover of more than €450 million generated in the EU or have generated loyalties in the EU of more than €22.5 million and a net turnover of more than €80 million.
While the application is set to be phased in from the next three years, global in-scope firms are expected to begin implementing standards and compliance functions almost immediately.
In-scope companies are responsible for ensuring that their activities and those of their group, as well as their global business partners and supply chain up and downstream, are compliant with the EU standards as set out in the Directive.
The EU Directive presents important compliance challenges for in-scope and non-scope firms, globally. The responsibility imposed on firms caught by the Directive implies potentially significant business model questions, challenges and opportunities.
We expect these implications to run through supply chains affecting non-scope firms and companies on an international level. CS3D, therefore, poses compliance and commercial risks for all companies, suppliers and manufacturers dealing with in-scope firms.
The state of Bangladesh
According to the World Bank, Bangladesh faces alarming levels of pollution and environmental health risks that disproportionately harm the most vulnerable people – the poor, children under five, the elderly and women.
Specific health risks arise from unsafe water, air pollution, poor sanitation, hygiene and lead poisoning.
In 2022, the RMG and textiles sectors contributed to 32% and 68% of emissions, respectively. Ineffective ESG strategies of major global brands have been associated with serious contraventions of environmental and social standards.
Concerns about the reliability of ESG and CSR reporting pose significant risks for global companies manufacturing in Bangladesh.
Notable sectors also include the fast-growing pharmaceutical exports sector.
Moreover, growing concerns about the prevalence of counterfeit medicines produced in factories imply supply chain insecurity.
The textiles sector
The MSCI Industrial Materiality Map rates textiles (apparel and home furnishings) to pose the highest material impact on environmental issues, including raw material sourcing and carbon emissions footprint.
The textiles sector also scores high in terms of risk of adverse social impacts, especially on labour management, supply chain labour standards and chemical safety.
The sector is rated among the highest risk sectors for general governance, including business ethics practise, ownership and control and pay, indicating implications for employee and management relations.
Companies operating in the large and fast-growing textiles sector of Bangladesh will need to consider various aspects of their ESG obligations under the Directive. Bangladeshi companies are likely to come under extreme scrutiny due to the risk-based approach.
The European Commission cites Bangladesh regularly in regulatory updates and references to Rana Plaza appear frequently when justifying onerous requirements.
Risk management
The Directive poses potentially significant strategic and business model questions.
It also presents clear risks. Some risks are common to regulatory regimes due to the legislative and oversight approach.
Other risks are peculiar to due diligence requirements as designed under the regime, and more so due to the nature of high-risk sectors and activities.
The main risks identified arise from compliance challenges in remote jurisdictions, embedding new operational compliance functions but also risks associated with uncertainty, with litigation and enforcement risks posing the highest cost.
The sustainability-based litigation is one of the fastest growing and highest-cost areas of litigation with potentially high levels of damages and awards as many cases involve large classes of claimants, or they are economy-wide.
The Directive is expected to push the number of actions and the size of claims higher, as well as broaden out to human rights and labour-related claims.
Compliance
The approach to compliance in relation to all aspects of the Directive requirements is yet to be determined.
The Commission is anticipated to provide specific guidance in some areas, anticipated to involve delegated and regulatory technical standards.
There is a high prospect that the authorities will not provide guidance in relation to broad areas of the regime leaving companies and industry sectors to determine the approaches.
Companies are expected to discharge their obligations and meet requirements on a risk-based means rather than outcomes basis with the onus being on continual efforts to eradicate poor and harmful practices.
This approach is anticipated to flow through the global supply chains of global brands, impacting the ongoing practices of suppliers, manufacturers, logistics companies and providers of BPO services.
Embedding responsible business conduct policies and processes, identifying and assessing systematic and idiosyncratic adverse impacts, and mitigating, preventing, or ceasing activity or activity with companies, are all core aspects of the compliance function.
Local companies and global buyers will have to take significant advice on putting in place tight policies and processes to stay compliant on an ongoing basis.
Parvez Khan is a partner at South Global Partners, an advisory firm specialising in market access, regulatory and licensing, public affairs and risk management. Formerly a career civil servant, he was Head of Financial Services for the UK in the European Union.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
