Complying with supply chain due diligence

On June 11 earlier this year, the German Parliament, the Bundestag, passed a law called "Act on Corporate Due Diligence in Supply Chains". This law obliges business organisations to fulfil their due diligence obligations in their supply chains with regard to respecting internationally recognised human rights and certain environmental standards.

In other words, companies have to take responsibility for any labor or environmental abuses in their global supply chain; they will be held responsible in case of any violation of human rights while conducting any activity, from raw material sourcing to finished products.

This law originated from the UN's guiding principles on business and human rights, which are the most important internationally recognised standards of corporate responsibility.

This act will come into effect in 2023. Initially, German companies having 3,000 or more employees will be under the purview of this law.

From 2024 onwards, business houses with 1,000 or more employees will be brought under this law. In accordance with the law, companies will have to ensure that there are no human rights violations in their immediate business activity and the business operations of their direct or primary suppliers.

Risk analysis for the indirect or secondary suppliers is only required where a German company is informed about a human rights violation. In that event, they must also conduct risk analysis and institute preventive measures, although the requirements are less stringent in these cases.

In case the companies fail to abide by the law, they will have to face hefty fines which can go up to 2 per cent of the annual turnover for those with average revenues of more than €400 million per annum.

The maximum fine for companies with annual revenues below this threshold is €800,000. For some of the largest German companies this could mean billions of euros in fines per incident. So, it can be expected that German companies will be extremely compliant with this act.

This law will have profound impacts on Bangladeshi exporters. Germany is Bangladesh's largest trading partner in Europe and the second largest globally.

According to the Export Promotion Bureau (EPB), Bangladesh's exports to Germany amounted to $5.95 billion in fiscal 2020-21. Germany alone contributed 15 per cent of the country's total export earnings for the year, standing second in the list after the US with $6.97 billion worth of exports.

The main products that Bangladesh exported to Germany were knit T-shirts ($1.23 billion), non-knit men's suits ($1.09 billion), and knit sweaters ($975 million).

During the last 24 years, Bangladesh's exports to Germany have increased at an average annual rate of 12.4 per cent.

These numbers explain how important Germany is for Bangladesh in terms of the country's economy.

To keep business relationships up and running, Bangladeshi exporters have huge responsibilities.

So, let us now focus on how our exporters should prepare themselves in order to comply with the new regulation. First and foremost is the awareness of the law, its details, and the areas that could impact local suppliers.

Briefly, this legislation emphasises on the social and political rights of workers; more specifically this refers to the right to life, health, fair working conditions, and a decent standard of living; child protection; freedom from slavery and slavery-like working conditions; as well as the right of association, the right to assembly and the prohibition of torture.

In terms of environmental protections, the draft only covers exposure to mercury as defined in the Minamata Convention and persistent organic pollutants as defined in the Stockholm Convention.

The next step would be to define the policies and processes so that all the points stated above are taken care of.

For example, an employment policy which would clearly state that the company cannot hire any child labor and to ensure that anyone applying for employment must submit a birth certificate or National ID as a proof of his or her age.

Once a company defines its policies and adequate processes, the next step is to execute and monitor those on a regular basis so that nothing slips down the line. Another key step would be to have the required documentations updated and preserved as evidence.

Endorsement by a competent third party always adds credibility and therefore, a periodic audit conducted by any reputed and trusted organisation should be part of the practice.

A concerted effort is required to create the awareness and to build the capacity of our exporters.

Trade bodies like the Bangladesh Garment Manufacturers and Exporters Association, Bangladesh Knitwear Manufacturers and Exporters Association along with the commerce ministry should come together to form a joint committee who will guide exporters and help them become compliant.

This committee should proactively liaise with the German importers to align the export industries with their requirements and expectations. Any endorsement by German government organisations, such as the German embassy in Bangladesh, would help in a big way in terms of building a positive image of Bangladeshi suppliers. 

Besides Germany, there are other European countries like France and the Netherlands that have already instituted legal frameworks of their own. The equivalent French law known as "Loi de Vigilance" introduces the principle of civil liability.

The UK Modern Slavery Act, the Swiss Responsible Business Initiative, and similar regulatory measures are in the making in a number of other countries like Belgium and Finland. At the European level, there is a broad consensus behind ambitious legislation on corporate due diligence.

Clearly, in the near future, it is expected that most of the major export destinations for Bangladesh will adopt laws similar to those that have already been passed by Germany. Bangladesh needs to respond quickly to avoid any last moment rush, hiccup, disruptions and more importantly, get prepared well in advance to maintain its hard-earned export trajectory.

The author is chairman and managing director of BASF Bangladesh, and chairman of the German Business Council.