Due diligence in supply chain and Bangladesh

Recently the German parliament approved the Federal Act on Corporate Due Diligence Obligations in Supply Chains law in line with the UN Guiding Principles and aims at strengthening the rights of people along global supply chains vis-à-vis companies. This UN Guiding Principles on Business and Human Rights is one of the most important internationally recognized standards of corporate responsibility for human rights.

Many companies voluntarily do not fulfil their responsibility in global supply chains.

The voluntary practice of due diligence with respect to protecting human rights and the environment leads to competitive disadvantages. These will now be reduced by means of this law.

The law makes an important contribution against human rights violations and environmental degradation in corporate supply chains:

(1) The law initiates an urgently needed paradigm shift in Germany - away from purely voluntary corporate social responsibility to binding human rights and environmental obligations for companies. It serves to ensure the comprehensive protection of human rights and thus paramount legal interests and enshrines due diligence by companies along the entire supply chain as a matter of principle.

(2) The law unfolds a preventive effect in that companies are required to change their behaviour and prevent damage to people and the environment by taking precautionary measures. For example, they are required to comply with human rights and environmental due diligence obligations in their supply chains. This includes establishing effective risk management and conducting risk analyses systematically for their own business and direct suppliers, and on an ad hoc basis for indirect suppliers, in order to identify risks to people and the environment and to prevent, end or mitigate violations.

(3) The law creates strong regulatory oversight and enforcement. If companies violate their due diligence obligations, they act in violation of the law and can be fined by the competent authority, the Federal Office for Economic Affairs and Export Control (BAFA), based on the severity of the offense as well as the company’s total turnover. In the event of significant violations of the Supply Chain Act involving fines of at least 175,000 euros, exclusion from public procurement contracts is envisaged. The law thus provides for state actions to ensure that the due diligence obligations are actually complied with.

(4) By law, affected parties can demand that BAFA takes action. If affected parties assert to the Federal Office for Economic Affairs and Export Control (BAFA) that their rights are being violated or directly threatened by a company’s failure to comply with its due diligence obligations, BAFA must take action and investigate whether a breach has occurred and work towards its elimination by the company.

(5) The law introduces representative action on behalf of people affected. In the future, affected parties can authorize NGOs and trade unions to raise such claims – using the already existing causes of action – on their behalf directly before German courts. This can reduce the obstacles foreign affected parties face when trying to bring claims before German courts - for example, reduce the high costs of such proceedings or guarantee anonymity in case of threatened prosecution.

(6) The law regulates a few environmental obligations arising from three conventions ratified by Germany that are essentially aimed at protecting human health. These provide for the prevention of the use of persistent organic pollutants (POP Convention) and mercury emissions (Minamata Convention) as well as the control of transboundary movements of hazardous wastes (Basel Convention). Beyond these conventions, the law covers the protected goods of soil, water and air in the context of human rights risks.

(7) The scope of application and environmental obligations are more comprehensive than in the government draft bill of March 3, 2021. The law will now also cover foreign companies that have a branch office in Germany with more than 3,000 employees (more than 1,000 employees from January 1, 2024). It has also been clarified that subsidiaries belong to the parent company’s own business area insofar as the parent company exercises a determining influence. And with the Basel Convention on Hazardous Waste, a third environmental convention was added to the catalogue of environmental obligations.

(8) Works councils with economic committees receive new rights. When the law comes into force, they will be entitled to information and consultation on issues of corporate due diligence in supply chains in accordance with the Supply Chain Act. This will enable the elected representatives of workers’ interests to work across company boundaries to strengthen social standards, human rights and environmental obligations.

The Supply Chain Due Diligence Act requires companies to set up processes to identify, assess, prevent and remedy human rights and environmental risks and impacts in their supply chains, and in their own operations. They must also make sure they provide ways for employees of indirect suppliers (suppliers they don’t have a direct commercial relationship with) to file a complaint alerting the company to human rights or environmental violations.

This new act will enter into force in 2023 and will initially apply to companies with 3,000 or more employees, then from 2024 to companies with 1,000 or more employees with a registered office or branch in Germany. The law obliges these companies to fulfil their due diligence obligations in their supply chains with regard to respecting internationally recognized 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.

The possible impact of non-compliance with these obligations will be sanctioned, in particular with fines of up to 2 % of the yearly global turnover and the exclusion from public tender procedures. Private enforcement by workers’ unions or non-governmental organisations will further increase the risk that infringements of the new rules will expose companies acting in Germany to litigation, financial and reputational risks.

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

It is obvious that the major export destinations for Bangladesh will adopt laws similar to those that have already been passed by Germany. 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. Corporate Due Diligence Obligations in Supply Chains Act and such other laws will have profound impacts on Bangladeshi exporters.

In brief, the human rights and environmental protection measures related to the emission of noise and water consumption in production and in the whole supply chain would be assessed under the new law. The first and foremost task is to be aware of these laws and their impact on our exports.

The writer is a legal economist. He can be contacted at mssiddiqui2035@gmail.com