EU Sustainability Regulations Will Affect the Apparel and Textile Industry in Bangladesh

The implementation of EU's Corporate Sustainability and Due Diligence Directives (CSDDD) makes material, non-financial reportage across the global supply-chain mandatory.

Companies operating in and out of the EU must report findings of human-rights due diligence practices throughout the production cycle and supply chain. Given that Bangladesh is the second largest exporter of ready-made garments in the world and the EU is Bangladesh's largest trading partner, the upcoming regulatory changes will impact the global supply of consumer apparel.

Analysis

The EU's new directives approved in June 2023 build on the Corporate Suitability Reporting Directive (CSRD) adopted in 2022. Updated non-financial accounting guidelines set by the Sustainability Accounting Standards Board (SASB) are based on the principle of double materiality. This includes disclosures of environmental and human sustainability assessments. Failure to comply can result in fines of up to 2 percent of global revenue levied on the company.

A Strict Timeline

Earliest reports are due in the first quarter of 2024 with disclosures from companies with over 500 employees or €150 million in annual turnover. All EU based companies (barring small enterprises) will be obliged to file sustainability reports by 2026. Regulatory bodies across Europe are sending strong signals to move towards increased transparency and adapt to stringent standards of non-financial reporting. Germany, Norway, Belgium, Netherlands, Luxembourg and Sweden have all proposed laws in accordance with CSDDD. Lawmakers in the United States are also tracking the process since non-EU businesses operating in the EU will be required to release reports starting 2028.

Increased Scrutiny

Companies operating in and out of the EU will face increased scrutiny. In the apparel, accessories and footwear sector, labor conditions are deemed material information per updated standards. For the import-dependent ready-made garment industry, greater inquiry to select upstream partners is lacking. Lapses will cause material and reputational losses for the parent company in addition to the regulatory penalties. In earlier instances of industrial disasters, companies were not liable to compensate workers who were injured or lost their lives. Following the collapse of Rana Plaza, a garment factory that killed 1100 workers and injured 2000 in 2013, international retailers like Primark, Walmart, Inditex and N Brown Group contributed to raise $30 Million in compensation. The companies calculated the sum based on "wages lost." This formula received wide-spread condemnation for being inadequately based on the low wages of factory workers. By imposing punitive measures, CSDDD creates the scope for litigation for damages from foreign businesses in future incidents.

Safety Procedures

Enforcement of safety procedures in Bangladesh remains concerning. There are long-standing problems of capacity building and infrastructure development, which are unlikely to be resolved before the new regulations come into effect. Despite instituting some of the toughest safety protocols in the world, the country continues to suffer from frequent large-scale industrial fires. There have been several such accidental fires every year for the past decade. As of October 2023, there were reports of uncontainable fires in a clothing market in old Dhaka, an explosion in the central Dhaka market due to a faulty gas line, and a fire and explosion in a container depot preparing to ship garments abroad in Chittagong. Each incident reported numerous fatalities. The human loss was exacerbated by inadequate road access and water shortage. The Bangladeshi government's failure to improve public services is an obstacle towards achieving economic growth.

Poor Labor Conditions

Poor labor conditions make Bangladesh less attractive to importers. Improving labor conditions while retaining the market's global competitive advantage has challenged a number of Bangladeshi governments. Labor unions in Bangladesh have criticized international brands like Adidas, Gap, H&M, Zara, Nike, and Primark for paying stagnant low wages. For many factory workers, the wages are below present inflation levels leading to poor human development outcomes.

In June 2023, Asia Floor Wage Alliance, an international advocacy group reported "alarming nutritional deficiency rates" amongst garment workers in Bangladesh. Practices like order cancellations, delayed payments, refusal to pay are also frequent and cause distress to workers. They are scheduled to be included in the new sustainability report under various sub-heads. Businesses will also face additional expenses to conduct frequent due-diligence audits performed by area experts to establish compliance with sustainability guidelines.

Competition Heightens

Bangladesh's adaptability issues will widen compared to its competitors. Alternative trade-partners are moving towards adopting international practices. China, India, and Vietnam have been instituting exploratory committees to find ways to align with evolving global practices. Even though gaps remain, all three countries have the capability to scale exports and meet international standards. Previous attempts by the government of Bangladesh to cooperate with international actors were met with less success. The governments of USA, Canada, and the EU worked with Bangladesh after the Rana Plaza collapse in 2013 to create standards in accordance with the International Labor Organization. While there is partial improvement in insurance and medical coverage, safety and infrastructure development are lacking.

Conclusion

By introducing penalties for environmental and social due diligence across the supply chain, the EU's corporate suitability directive marks a paradigm shift in the development legislature. Changes in EU regulations have major consequences for a price sensitive labor-intensive sector such as the ready-made garments manufacturing in Bangladesh. Industrial accidents, fledgling labor standards, and the lack of governmental support make companies importing apparel and textile from Bangladesh susceptible to additional economic risk.


Ipshita Sharma is a Master of Arts in Global Risk candidate at JHU-SAIS. Her main research interests are political and climate risk with a focus on emerging markets. Before pursuing her graduate education, Ipshita obtained her BA in Global Studies from the University of Denver.