Bangladeshi suppliers need to operate with necessary transparency to enable their German sourcing companies to comply with a new supply chain law that obliges the latter to actively perform due diligence to prevent human rights and environmental abuses within their global supply chains.
The German enterprises will be subject to penalties of up to €8 million or 2% of their annual global turnover if any of their foreign suppliers violates the rules.
Moreover, if an administrative fine is imposed above a certain minimum level, enterprises may be excluded from public procurement for up to three years.
As a consequence, they will insist on having all the relevant norms and standards followed by all of their partners along the supply chain, according to a letter by the German embassy sent to Bangladeshi exporters associations last week.
The bill is similar to a move initiated in the United Kingdom to tag the fashion industry more strictly with ESG environmental, social and governance (ESG) issues to stop "greenwashing" by apparel and footwear industries. Greenwashing refers to practices by companies or organisations to project an environmentally responsible image.
In the USA, a similar bill titled the Fashion Sustainability and Social Accountability Act was introduced which would require the fashion industry supplying to the US to disclose if their products are sourced from areas with reported forced or child labour, or "sweatshop" working conditions. Fashion products suppliers to New York will have to disclose information on social and environmental practices at every stage of the supply chain from raw material sourcing to finished goods.
Talking about Europe-wide imposition of such rules, the Federal Ministry for Economic Cooperation and Development of Germany said this law should serve as a blueprint of European law.
It will probably take several years for having such a European set of rules, it noted.
Passed by Germany's parliament last year, this law, which will enter into force in 2023, will initially apply to companies with 3,000 or more employees. From 2024, this threshold will be reduced to 1,000 employees.
The due diligence obligations will also apply to actions of indirect suppliers alongside the German enterprises' own business areas and to actions of their contractual partners, said Achim Tröster, German ambassador to Bangladesh, in the letter.
This means that a company's responsibility no longer ends at its own factory gate but applies along the entire supply chain, the ambassador said.
"As a result, if any company in Germany violates its due diligence obligations, it can be fined by the competent authority based on the severity of the offence as well as the company's total turnover," he stressed.
Leaders of Bangladesh Garment Manufacturers and Exporters Association (BGMEA) and Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) leaders acknowledged that they received such a letter recently and they would come up with a formal reaction after analysing the German government's directive for the adoption of the supply chain act.
BGMEA President Faruque Hassan told The Business Standard, "Bangladeshi apparel exporters will not face any trouble to comply with the new law."
BKMEA vice-president Fazlee Shamim Ehsan said large exporters may not be affected by the law.
But a number of vendors may be eliminated from the supply chain as most of them will fail to comply with the new due diligence procedures, he added.
"We are creating scope for small entrepreneurs as they provide us with some services and goods, such as label printing," Ehsan further explained.
Exporters now have to do such small jobs by setting up their own facilities to maintain the due diligence for preventing human rights violation in the workplace and environmental abuse, he added.
The letter says, "Germany is Bangladesh's largest trading partner in Europe and the second largest globally, this law is likely to have profound impacts on Bangladeshi exporters".
The new law places enterprises that have their central administration, principal place of business, administrative headquarters, statutory seat or branch office in Germany under the obligation to respect human rights and environmental standards by implementing defined due diligence requirements, according to the letter.
Md Moazzem Hossain Moti, president at Bangladesh Garments Accessories and Packaging Manufacturing and Exporters Association, said, "We are doing business as the suppliers of export-oriented industries by complying with local laws regarding labour and environment."
If Germany has additional requirements for Bangladesh to comply with, a government-to-government initiative is needed in this regard, he added.
The accessories suppliers contribute about $6.9 billion to apparel exports as a backward linkage industry. The association has about 1,450 export-oriented suppliers who exported about $900 million worth of goods directly in FY21, he noted.
"Our business costs will go up if we are to conform to due diligence obligations, which buyers will have to bear," Moazzem Hossain pointed out.
Monsoor Ahmed, chief executive officer (in charge) at Bangladesh Textile Mills Association, said, "We have 220 export-oriented spinning mills and 200 textiles mills that are fully compliant with local laws. But the German new law may put some additional pressure on their suppliers," he added.
The supply chain law
According to the Federal Ministry for Economic Cooperation and Development of Germany, the new law is highly focused on freedom of associations, preventing discrimination in employment and wages.
The law also mandates preventing harmful changes to soil, water and air pollution, harmful noise emission, overconsumption of water, which severely impairs natural resources necessary to preserve or produce food, denies access to drinking water, destroys or impedes access to hygiene facilities, or has harmful effects on human health.
The German companies will have to stop sourcing goods from supplier factories, which acquire, develop, or otherwise use land, forest, or water from unlawfully evicting persons who are dependent on those for livelihood.
Commissioning or using private or public security forces to protect a business project will have to be stopped, according to the law.
The law also obliges prohibition of an action or inaction that is directly capable of infringing a protected legal interest in a particularly serious manner and whose illegality is obvious, taking into account all circumstances.
What are diligence procedures
Companies within the scope of the act must establish a risk management system and define internal responsibility for compliance with it – for example, by appointing a human rights ombudsperson.
Besides, they need to carry out regular risk analyses and adopt a policy statement on the company's general human rights strategy.
The law also requires them to take remedial actions if a violation has already occurred or is imminent, alongside setting up an internal complaint procedure.
Moreover, the companies will have to document due diligence procedures, risks identified, measures taken, and then publish a yearly report on its website, which must be free of charge and publicly available.
Why Germany has taken this move
In the context of globalised trade, value and supply chains extend across the entire world. International corporations that do not voluntarily comply with human rights and environmental standards along their supply chains (83-87% of German companies) have been criticised for several decades for profiting from weak and poorly enforced national regulations in emerging and developing countries, especially in the Global South, according to the DLA Piper, a global law firm.
The call for companies to comply with these standards is emphasised by the fact that the International Labour Organisation estimates that 25 million people worldwide are victims of forced labour, and that global environmental damage is also steadily increasing, according to the UN.
Against this backdrop, and as a result of the tragic collapse of the Rana Plaza textile factory in Bangladesh in 2013 that claimed the lives of over 1,000 people, the necessity for German lawmakers to adopt a legally binding and stricter liability regime for corporate supply chains was confirmed.
In June 2021, the German legislature passed the new law.