EU Due-Diligence Directive for Corporate Sustainability: Consequences for Bangladesh

This new regulation can encourage innovation in the apparel industry. This allows manufacturers to invest in new technologies in the production process, such as recycling water or using energy-efficient technologies. It will also help reduce the negative environmental impacts of business operations.

Md. Julfikar Islam, Research Manager, BFTI
14 August, 2024

The European Parliament (EP) has approved the Corporate Sustainability Due Diligence Directive (CSDDD) on April 24, 2024.  The Directive on CSDD entered into force on July 25, 2024.[1] It is a European Union (EU) initiative whose main objective is to ensure sustainable business practices in various industries, including ready-made garments. This directive was proposed by the European Commission (EC) in February 2022 to create a legal liability for companies in the EU and beyond regarding environmental and human rights violations in the global supply chain.

According to the directive, major EU and non-EU companies operating within the EU will have to take actions to identify, prevent and alleviate any adverse effect on the environment and human rights caused by their operations, or the operations of their subsidiaries, or the operations carried out by their business partners.[2] Such effects will include child labor, labor exploitation, slavery, biodiversity loss, pollution or devastation of natural heritage. Whether an EU-based company will come under the jurisdiction of this directive will be assessed based on the number of employees and net worldwide turnover. On the other hand, non-EU companies will be assessed based on their net turnover generated within the EU.

Table 1: Thresholds for companies in the scope of CSDDD

The export volume of Bangladesh to the EU during the period July-May of FY 2023-24 was 23.06[3] BN USD which accounted for 44.74% in the same period.  Knitwear, Woven Garments, Home Textile, Frozen & Live Fish, Agriculture Products, Plastic, Jute & Jute goods, Leather & Leather Products, Footwear etc. are the top export products from Bangladesh to EU. However, the question is what effects will this new directive have on the export sectors of Bangladesh?

For maintaining accession into the EU market, the largest destination for our ready-made garments, it is essential to conduct the business in line with the CSDDD. This directive also establishes civil liability and penalties for any violations of these regulations. Inability to comply with this directive can lead to legal risks including fines and market entry restrictions. As a result, our garment factory owners will have to bring new EU regulations into business practices to evade such risks.

The new EU regulations may significantly affect manufacturers in several ways. Manufacturers need to have a thorough understanding of their entire supply chain, from procurement of raw materials to manufacturing of final products. These include whether environmental standards are met at every point of the supply chain and whether workers' rights are maintained.

The EU’s new directive for forced labor may significantly impact Bangladesh’s RMG exports, as companies importing Bangladeshi products into the EU will be required to make sure that their supply chains are free from forced labor.

Companies will be required to report according to European Sustainability Reporting Standards (ESRS). This reporting also ensures that all the stakeholders including consumers and investors are informed about the company's sustainable practices. Thenceforth the fashion brands need to be more involved with the suppliers to ensure greater transparency. Subsequently, the manufacturers are likely to face new audits.

The implementation of the new regulations may have the possibility to increase costs. Apparel manufacturers may face cost overruns due to investments in better supply chain management systems, new audits, and potentially higher-priced materials purchases from sustainable sources.  This cost may also affect product pricing strategies, profit margins and competitiveness.

However, conducting business in compliance with the CSDDD may be a competitive advantage for some suppliers. At present consumers are more aware of the environmental and social impact of goods production. As a result, businesses that practice sustainability will get more customers. This can be an opportunity for some suppliers. Brands will increase business with responsible and conscious apparel manufacturers.

This new regulation can encourage innovation in the apparel industry. This allows manufacturers to invest in new technologies in the production process, such as recycling water or using energy-efficient technologies. It will also help reduce the negative environmental impacts of business operations.

The members of the EU will have to transpose the rules into national law and communicate the pertinent texts to the EC by 26 July 2026. One year later, the regulations will commence to apply to companies, with a gradual phase-in between three and five years after entry into force.[4]  A set of guidelines to be circulated by the EC will help companies conduct due diligence. 

This directive is part of a larger strategy to ensure corporate accountability. Additionally, companies must adopt a plan that makes sure their business model and strategy align with the Paris Agreement.[5]   The new directive is a vital step in ensuring more sustainable and responsible corporate practices in the EU. Hence the companies do not just try to make a profit but seriously consider the environmental and social impacts of their business operations.

At present, Bangladesh has shown impressive success in the Leadership in Energy and Environmental Design (LEED) green garment factories. According to BGMEA, Bangladesh has 224 LEED green garment factories certified by the U.S. Green Building Council (USGBC). Moreover, 54 out of the world's top 100 green garment factories are located in Bangladesh and 500 more factories are in the process of getting LEED certification. RMG Sustainability Council (RSC) is a safety monitoring body for the Ready-Made Garment (RMG) sector in Bangladesh which is governed by brands, manufacturing associations and trade unions. It promotes and oversees the implementation of occupational safety and health standards as well as conducts inspections in the areas of structural, electrical, fire & life safety etc.  

Adopting and maintaining in line with the CSDDD may be challenging and expensive for Bangladesh. However, the long-term benefits of building a sustainable industry outweigh the initial investment. This applies not only from a business profit perspective but also to contributing positively to society and the environment.