From Policy to Practice: The CSRD Mandate and Bangladesh’s Garment Industry

 

Author: Kazy Mohammad Iqbal Hossain, South Asia Sustainability Manager, Lindex HK Ltd.

Image: Camaramadrid

Key Words: Sustainability, CSRD reporting, ESRS, Readymade Garments Factory, Bangladesh, Environment and Social Responsibility

The Corporate Sustainability Reporting Directive (CSRD) is a significant piece of legislation introduced by the European Union (EU) aimed at enhancing and standardizing sustainability reporting across various industries. For the fashion industry, which has a sprawling and often opaque supply chain, the CSRD represents both a challenge and an opportunity. This article delves into the intricacies of CSRD reporting requirements, focusing on their implications for readymade garments (RMG) factories in Bangladesh. By examining the key areas of CSRD reporting, the transfer of these obligations down the supply chain, and the necessary actions by individual factories and the Government of Bangladesh (GoB), we aim to provide a comprehensive overview of this critical issue. The European Sustainability Reporting Standards (ESRS) provides the framework for CSRD reporting.

What is CSRD Reporting?

The Corporate Sustainability Reporting Directive (CSRD) is an evolution of the Non-Financial Reporting Directive (NFRD), aimed at addressing the shortcomings of its predecessor. The CSRD mandates detailed sustainability reporting for a broader range of companies, including large public-interest entities and Small and Medium-Sized Enterprises (SMEs), thereby ensuring transparency and accountability. Key elements of CSRD reporting include:

1. Broader Scope: The CSRD extends its reach to a larger number of companies, including those listed on EU-regulated markets, large companies, and SMEs.
2. Detailed Disclosure Requirements: Companies must provide detailed information on environmental, social, and governance (ESG) factors, including their business model, policies, outcomes, risks, and performance indicators.
3. Standardization and Assurance: The CSRD introduces standardized reporting formats and requires third-party assurance to enhance the reliability and comparability of the information provided.
4. Digital Accessibility: Reports must be digitally accessible and tagged according to the European Single Electronic Format (ESEF).

Key Areas of CSRD Reporting

CSRD reporting encompasses several critical areas that companies must address:

1. Environmental Impact: This includes reporting on greenhouse gas emissions, resource use, pollution, biodiversity, and circular economy practices.
2. Social Responsibility: Companies must disclose information on human rights, labor practices, community engagement, and diversity and inclusion.
3. Governance: This involves reporting on corporate governance structures, anti-corruption measures, and ethical business practices.
4. Sustainable Business Models: Companies must describe their strategies for long-term sustainability, including how they integrate ESG factors into their core operations.

European Sustainability Reporting Standards

The European Sustainability Reporting Standards (ESRS) serve as the cornerstone for the Corporate Sustainability Reporting Directive (CSRD), providing a robust and standardized framework for sustainability disclosures. The ESRS set forth specific guidelines and metrics that companies must follow to ensure their reporting is consistent, comprehensive, and comparable across the European Union. These standards cover a wide array of environmental, social, and governance (ESG) topics, including climate change, resource management, human rights, labor practices, and corporate governance. By establishing clear reporting principles and performance indicators, the ESRS enable companies to transparently communicate their sustainability efforts and impacts. This standardization under the CSRD not only enhances the quality and reliability of sustainability information but also helps stakeholders, including investors, regulators, and consumers, make informed decisions and foster a more sustainable economy.

Figure: Key CSRD reporting area as per ESRS Standard (extracted from Envoria)

Transferring CSRD Obligations to the Supply Chain in Bangladesh

The fashion industry’s supply chain is notoriously complex, with numerous stakeholders involved in the production of garments. For fashion brands subject to CSRD reporting, ensuring compliance extends beyond their immediate operations to their entire supply chain, including RMG factories in Bangladesh. The transfer of CSRD obligations to the supply chain involves several mechanisms:

1. Supplier Audits and Assessments: Fashion brands will conduct rigorous audits and assessments of their suppliers to ensure they meet CSRD standards. This includes evaluating environmental practices, labor conditions, and governance structures.
2. Contractual Requirements: Brands may incorporate CSRD compliance clauses into their contracts with suppliers, making adherence to sustainability standards a binding obligation.
3. Capacity Building: Brands may invest in capacity-building initiatives to help suppliers improve their sustainability practices. This could include training programs, technical assistance, and knowledge sharing.
4. Traceability and Transparency: Enhanced traceability systems will be implemented to track the suppliers’ sustainability performance. This could involve digital tools and platforms that provide real-time data on various ESG metrics.

Actions Required by Individual Factories

For RMG factories in Bangladesh, complying with CSRD requirements necessitates a proactive approach. Factories need to undertake several actions to align with the expectations of their fashion brand customers:

1. Environmental Management Systems: Implement robust environmental management systems (EMS) to monitor and reduce greenhouse gas emissions, water and energy use, and waste generation.
2. Social Compliance: Ensure adherence to international labor standards, including fair wages, safe working conditions, and the prohibition of child and forced labor. Implement social compliance programs and regular audits to verify adherence.
3. Governance Improvements: Strengthen corporate governance structures by establishing clear policies on anti-corruption, ethical business practices, and stakeholder engagement.
4. Data Collection and Reporting: Develop systems for accurate data collection and reporting on ESG metrics. This includes setting up mechanisms for internal audits, data verification, and third-party assurance.
5. Stakeholder Engagement: Engage with stakeholders, including employees, local communities, and non-governmental organizations, to address their concerns and incorporate their feedback into sustainability strategies.

Actions Required by the Government of Bangladesh

To harmonize the EU’s CSRD with Bangladesh’s legal framework, the Government of Bangladesh (GoB) must take several strategic actions:

1. Regulatory Alignment: Update existing environmental, social, and governance laws to align national regulations with CSRD requirements. This includes incorporating international standards and best practices into national legislation.
2. Institutional Strengthening: Strengthen institutional capacities to enforce compliance with sustainability standards. This could involve establishing dedicated bodies or enhancing the capabilities of existing agencies to monitor and enforce regulations.
3. Incentives for Compliance: Introduce incentives for factories to comply with CSRD requirements. This could include tax breaks, subsidies, or access to low-interest loans for investments in sustainability improvements.
4. Capacity Building Programs: Implement nationwide capacity-building programs to educate factory owners and workers on CSRD requirements and best practices in sustainability. This could involve partnerships with international organizations and NGOs.
5. Public-Private Partnerships: Foster public-private partnerships to drive sustainability initiatives. This includes collaborating with industry associations, development partners, and fashion brands to promote sustainable practices across the RMG sector.

The CSRD represents a significant shift in how sustainability is perceived and reported in the fashion industry. For RMG factories in Bangladesh, complying with CSRD requirements is not just about meeting legal obligations but also about securing their place in the global supply chain. By taking proactive measures to enhance their sustainability practices, these factories can not only ensure compliance but also gain a competitive edge. The Bangladesh government also has a crucial role to play in facilitating this transition by aligning national regulations with international standards and providing the necessary support to factories. Ultimately, the successful implementation of CSRD in the fashion supply chain can lead to more sustainable and resilient industry practices, benefiting both the environment and the communities involved.

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