EU approves law to check rights violation in supply chain. How'll it impact Bangladesh?

• The law requires EU companies to prevent any harm to human rights and the environment, such as child labour and biodiversity loss
• It also requires remediation of actual adverse impact caused
• Companies will also have to prepare plans setting out how they will transition to a low carbon economy
• BGMEA confident the law won't hurt Bangladesh exporters, but BKMEA is concerned

The European Parliament on Wednesday (24 April) voted for a new law that will require larger companies operating in the bloc to check if their supply chains use forced labour or cause environmental damage and act to take action if they do.

EU lawmakers backed the Corporate Sustainability Due Diligence Directive by 374 votes to 235 against, with 19 abstentions.

The Human Rights Watch has called the initiative a step forward for corporate accountability.

However, business groups have complained that it introduces multiple new layers of regulatory burden, with potentially harsh sanctions, places European companies at a disadvantage compared to competitors and discourages investment in Europe. Penalties include fines of up to 5% of global turnover, reports Reuters.

The EU is the largest export destination for Bangladesh, accounting for approximately 45% of Bangladesh's total exports in 2022-23, particularly in the ready-made garments (RMG) and frozen food sectors.

Possible impacts on Bangladesh

Local apparel manufacturers have varied opinions regarding the new EU law. While some say it will not pose any challenge for Bangladeshi exporters, others say that the EU companies' supply chains in Bangladesh might come under increased scrutiny.

Talking to The Business Standard, BGMEA Vice President Miran Ali said he recently visited Brussels and held meetings with officials from various departments of the EU Commission.

Miran Ali said he is confident that the new law being discussed would not pose any challenges for Bangladeshi apparel exporters.

"Bangladesh maintains high standards of human rights and safety, and as such, the new law would not be burdensome for the country," he said.

Meanwhile, BKMEA Vice President Fazlee Shamim Ehsan expressed concerns about the new law, highlighting its potential impact on European companies and their supply chains.

He emphasised that European companies would face strict monitoring of their human rights practices and could incur higher penalties for any violations, including those within their supply chains involving Bangladeshi apparel manufacturers.

The increased monitoring could shut down small businesses that work as local suppliers to Bangladeshi exporters as they are not completely compliant to the rules, said Ehsan.

He also said the law will take time to be implemented, and as the final step, it will pass to the JURI Committee for vote.

After that the 27-member country parliament will pass separate law following the EU law, he added.

Shams Mahmud, managing director of Shasha Denim Ltd, however, believes that the EU law will be a boon for Bangladesh as the South Asian country maintains absolute transparency in the export supply chain.

"The new law will focus on the environmental, social, and governance aspects. The Bangladeshi factories have been publishing ESG reports on their own initiative, which has resulted in a boost in purchase orders from Western buyers in recent times," said Shams.

"Our competitive markets, including China, Sri Lanka, Vietnam, India and Pakistan, do not maintain such standards. This will help Bangladesh get a headstart under the new EU rules," he added.

When asked about the concerns regarding Bangladesh's labour rights situation, he said, Bangladesh is one of the highest signatories of ILO conventions.

"There are some issues that need to be resolved. The government and the businesses are working to that end," added Shams, who is also a BGMEA director.

The new EU rules were watered down to win over some EU members concerned about piling red tape on companies. Germany still failed to support it.

The rules, from 2028, will apply to companies that have more than 1,000 employees and a net worldwide turnover above 450 million euros ($480.8 million), reports Reuters.

The initial proposal had set the thresholds for EU companies at more than 500 employees and 150 million euros turnover.

The law requires companies to prevent and end or mitigate potential or actual harm to human rights and the environment, such as child labour and biodiversity loss. It also requires remediation of actual adverse impact caused.

Financial companies will only have to consider upstream partners in their checks.

Companies will also have to prepare plans setting out how they will transition to a low carbon economy.