EU corporate sustainability due diligence directive: Reinventing competitiveness for Bangladesh

Nearly half of Bangladesh's exports land in EU markets, making the new EU Corporate Sustainability Due Diligence Directive (CS3D) a potential game-changer for the garment industry, as well as any other sectors that aim to expand exports. While aiming to align supply chains with rigorous sustainability standards, the directive could reshape corporate practices globally—posing both challenges and opportunities for Bangladesh.

The Directive, adopted by the European Parliament on 24 April 2024, is poised to redefine Environmental, Social, and Governance (ESG) standards and reshape global competitiveness in countries like Bangladesh, which has long been marred by concerns about labour and human rights issues. 

CS3D mandates that companies, both within and outside the EU, engage in thorough due diligence to examine, prevent, and mitigate their negative environmental and human rights impacts, both internally and across their supply chains.

With sweeping scope, the CS3D addresses critical issues such as child labour, forced labour, exploitation, pollution, deforestation, and excessive water consumption, aiming to safeguard workers' rights, ensure fair wages, uphold freedom of association, and combat resource depletion. 

Compliance is expected to drive substantial changes in corporate practices, compelling firms to reassess sourcing strategies, revamp supply chain management, and even redesign products to meet these stringent standards.

The compliance conundrum

Despite its commendable goals, the practicalities of compliance are complex and multifaceted. Implementing the CS3D is no small feat, especially given Bangladesh's limited capacity in assessing, preparing for, and enforcing standard-related issues.

The vast scope of the EU's Corporate Sustainability Due Diligence Directive (CS3D) presents significant challenges for the Bangladesh garment industry, particularly in defining and measuring compliance. 

Factories often face arbitrary procedures and varied guidelines imposed by different buyers, adding layers of complexity. Although the industry is free of child labour, ambiguity remains in defining other critical terms such as forced labour, environmental sustainability, and fair wages. For instance, despite the implementation of minimum wage legislation, determining what constitutes a "fair wage" in a country characterised by widespread low wages complicates the standard-setting process.

The garment industry's fragmented and intricate supply chains exacerbate compliance challenges. Ensuring adherence to CS3D standards requires tracking raw material origins, monitoring production processes, and verifying compliance with environmental and human rights standards across every stage of the supply chain. 

This level of scrutiny is particularly burdensome for smaller firms with limited resources and oversight capabilities, increasing the risk of non-compliance and the associated reputational damage.

Many Bangladeshi garment manufacturers lack the technical expertise necessary to meet CS3D standards effectively. Compliance involves conducting environmental impact assessments, developing risk management plans, and implementing sustainability reporting systems—tasks that require specialised skills and knowledge. 

Without adequate training and support, factories face significant difficulties in meeting these requirements. Building this expertise within the industry demands substantial investment in capacity-building initiatives, which is often a slow and resource-intensive process.

Despite these challenges, Bangladesh has made notable progress in sustainability. The country boasts 213 LEED-certified factories, vetted by the United States Green Building Council (USGBC) Leadership in Energy and Environmental Design—the highest number in the world. 

These achievements highlight the industry's potential to adopt sustainable practices. However, broader compliance with CS3D standards remains an ongoing challenge.

The successful implementation of CS3D also depends on the strength and consistency of the country's regulatory framework. While there have been improvements in some areas, enforcement remains inconsistent across standards and factories. 

Aligning national laws with CS3D requirements is essential to establish a clear legal basis for compliance and effective enforcement.

Squeezed margins and unfair pricing

While the garment industry in Bangladesh has made progress in improving compliance, exporters contend that buyers have yet to reciprocate these efforts with equitable pricing practices. Instead, intense competition among manufacturers has perpetuated downward pressure on margins, thereby constraining their ability to sustain and build further on the existing compliance initiatives. 

According to the International Trade Centre (ITC), garment producers in Bangladesh are paid prices that are at least 32% lower than those received by suppliers in other countries. Moreover, analysis conducted by Research and Policy Integration for Development (RAPID) reveals that, even after accounting for differences in product quality, Bangladesh's top ten garment exports to the EU fetch, on average, prices that are 21% lower than those of Vietnam and 18% lower than China.

Compounding these challenges, the impending graduation from Least Developed Country (LDC) status in 2026, followed by a three-year transition period, will result in the loss of duty-free access to the European Union (EU) market. 

Although Bangladesh is striving to qualify for the EU's GSP+ scheme—which offers duty-free access to 66 per cent of EU tariff lines, including textiles and clothing—the existing GSP+ provisions stipulate that beneficiaries cannot retain preferential access for textile and clothing items that account for more than 6% of total EU imports and 37% of GSP-covered imports within the same product category. 

Given Bangladesh's substantial share of EU apparel imports, it would no longer qualify for preferential treatment and would instead face an average tariff of 11.5%.

Taken together, the financial pressures of compliance with CS3D and the looming prospect of elevated tariffs represent a dual challenge that threatens the long-term competitiveness of Bangladesh's garment industry. 

Thus, while compliance enhances sustainability and aligns with global consumer expectations, it also introduces significant costs that are not yet matched by higher price realisations.

Balancing compliance demands with socio-economic realities

Despite its good intentions, punitive measures against non-compliant firms, such as order cancellations or declarations of non-compliance, could disproportionately impact workers. 

This is particularly critical as Bangladeshi firms face mounting competitive pressures, including those arising from the country's imminent graduation from LDC status, which will not only lead to the loss of trade preferences but also reduce the policy space for government support, such as export subsidies.

In response to increasingly stringent labour and environmental standards, many firms are likely to accelerate investments in automation. This trend, arguably catalysed by the Rana Plaza incident, has already had profound implications for the sector. 

Between 2010 and 2023, apparel export earnings increased fourfold, from approximately $10 billion to $40 billion, yet employment in the sector has stagnated at around 3.5 million workers. Moreover, this technological shift appears to be linked to the defeminisation of the workforce, as the share of women in export-oriented apparel sector employment dropped to 39% by 2022, according to official labour force surveys. This contrasts sharply with perceptions from two decades ago when women dominated the workforce. 

Between 2017 and 2022 alone, 0.18 million women's jobs were lost in the sector. While the reasons for this trend remain unclear, it is plausible that many women's roles, often involving repetitive tasks requiring extended hours, are more easily automated. 

Additionally, technological advancements may disproportionately benefit men, given women's relatively weaker educational backgrounds and the socio-cultural barriers limiting their progression to supervisory roles associated with operating machinery.

Bangladesh's dual economic structure further complicates compliance efforts. Export firms are often held to higher standards, while non-exporting firms, many of which operate informally, exhibit far poorer compliance records. This disparity exacerbates labour market vulnerabilities, particularly in non-exporting sectors, where reduced demand for labour—driven by stringent regulations—could aggravate precarious economic conditions.

To mitigate these challenges, the EU and its institutions must recognise that compliance with the CS3D requires substantial technical and financial support. Such assistance is crucial for raising awareness among entrepreneurs, managers, and policymakers, strengthening enforcement mechanisms, and ensuring meaningful compliance across industries. 

More importantly, the EU must work closely with the government of Bangladesh, private sector enterprises, and other stakeholders to elevate compliance standards across the broader economy. Failure to address these systemic issues risks perpetuating 'compliance leakage,' ultimately undermining the very workers the CS3D seeks to protect.

What needs to be done?

While the challenges associated with implementing the EU Corporate Sustainability Due Diligence (CS3D) provisions are significant, it is imperative for Bangladesh to carefully evaluate the broader merits of improved compliance. 

In the current context, where compliance standards remain weak across many sectors, fulfilling the CS3D provisions may represent an aspirational goal rather than an immediate reality. However, given the critical importance of the EU as an export destination, the directive could serve as a valuable impetus for initiating necessary reforms. 

That said, a compliance agenda driven by local priorities and underpinned by a clear understanding of domestic needs has the potential to act as a far more powerful catalyst for sustainable transformation. By aligning efforts with national development goals and leveraging the CS3D as a benchmark, Bangladesh can formulate policies that not only address external requirements but also deliver tangible benefits for its economy and workforce. 

Such a locally driven approach should form the cornerstone of policy design and implementation, ensuring that compliance efforts are both contextually relevant and strategically impactful.

Role of compliance as a catalyst for export competitiveness and sustainable development

While rising costs remain a significant concern for businesses, particularly in Bangladesh's garment sector, compliance must be recognised as an essential vehicle for sustaining and enhancing export competitiveness. In a global market where consumers, brands, and retailers are increasingly prioritising compliance and sustainability, non-compliance risks losing market share and reputational damage. 

Improved compliance not only ensures access to key markets like the EU but can also elevate Bangladesh's standing as a responsible and reliable sourcing destination, ultimately improving price prospects. As global buyers shift towards sustainability-conscious procurement, meeting these standards will likely become a baseline requirement rather than a competitive advantage.

It is worth noting that, while rules and regulations in developed countries are often regarded as unrealistic drivers of improved compliance, evidence from many developing contexts shows that multinational corporations are proactively pursuing higher standards. 

For instance, motivated by global greening initiatives, many brands and retailers are taking measures to reduce their environmental footprints. Among others, H&M, one of Bangladesh's largest garment buyers, has committed to reducing emissions by 56% by 2030 (from the 2019 baseline) and freshwater usage by 30% over the same period (from the 2022 baseline) in their production processes. 

These heightened standards are being imposed across their entire supply chains. Similarly, companies such as Nike, Levi's, and Adidas have outlined comparable targets. Consequently, improved compliance is increasingly becoming a global trend and a key determinant of export success.

Although the garment industry often draws the most attention due to its export dominance, compliance issues in other sectors are most likely to be worse, and it is equally important to strengthen compliance across all industries to avoid selective progress and ensure a uniformly competitive trade and investment environment. 

By addressing systemic weaknesses, Bangladesh can attract foreign investment and diversify its export base. Thus, improving compliance must be viewed not as an additional cost but as an investment in the country's long-term economic resilience and global competitiveness.

Promoting compliance as a domestic agenda

Positioning compliance as a domestic, home-grown agenda is vital. A nationally driven approach underscores the country's commitment to labour rights, environmental sustainability, and global trade standards. 

This is particularly important in countering the perception that compliance is an externally imposed obligation. By internalising these standards, Bangladesh can proactively demonstrate its commitment to and progress towards sustainable trade practices, rather than merely responding to external pressures.

Furthermore, embracing compliance as a domestic priority ensures that the benefits extend beyond export-oriented industries. Improved labour conditions and environmental safeguards can uplift the broader economy and enhance the quality of life for workers and communities. 

This approach also helps create a uniform regulatory framework that applies to both exporting and non-exporting sectors, reducing the risk of compliance leakage and ensuring consistency in enforcement.

To operationalise this vision, Bangladesh should consider preparing a detailed national strategy for compliance. This strategy should outline clear goals, timelines, and responsibilities, while also identifying the resources required to build capacity across industries. 

Such an approach can ensure a structured and coordinated approach to meeting international standards, supported by both government initiatives and private sector engagement.

Collaborative and policy approaches in promoting compliance

Promoting compliance with the EU CS3D can benefit significantly from collaborative efforts, such as public-private partnerships. The government can play a pivotal role by offering targeted incentives to encourage improved compliance with environmental and labour standards. Such incentives might include tax benefits, grants for capacity-building, or subsidised training programs for factory management and workers. 

These measures not only enhance the capability of firms to meet stringent compliance requirements but also create a business environment that fosters sustainable practices.

Crucially, providing compliance incentives is likely to have a more substantial impact on export competitiveness in the medium to long term compared to direct export subsidies. While export subsidies might deliver immediate price advantages, they are incompatible with the rules and regulations of the World Trade Organization (WTO), making them unsustainable given the upcoming LDC graduation of Bangladesh. 

In contrast, support for improved compliance can be structured in a manner that aligns with WTO regulations, thereby avoiding potential trade disputes or sanctions. Moreover, compliance-oriented incentives can attract support from the EU and other development partners, which can amplify their impact.

Adopting a compliance-first approach has the added advantage of bolstering Bangladesh's reputation as a responsible trading partner. This not only secures existing market access but also makes the country's trade and investment regime more attractive to foreign investors. Firms that meet rigorous standards are often perceived as more reliable and sustainable, providing long-term assurance to buyers and investors alike.

While the CS3D may seem overambitious, overly complex, and challenging for many developing countries, there is no denying that Bangladesh must significantly improve its compliance standards to enhance and sustain export competitiveness. In the evolving global landscape, competitiveness is no longer solely defined by price but increasingly by the ability to uphold human and labour rights and embrace sustainable practices, which are now indispensable for securing a foothold in international markets.

Sketch: TBS

Mohammad Abdur Razzaque, Chairman of RAPID

The author is an economist and serves as Chairman of Research and Policy Integration for Development (RAPID). He can be reached at [email protected].