Due diligence requirements established by Germany and the European Union will soon be hitting suppliers in Cambodia, but how can factories prepare themselves for these stricter requirements?
Many factories have already started implementing different initiatives to maintain human rights and environmental standards, with some reporting audit overload, according to Luisa Gentile, a corporate social responsibility (CSR) project consultant at EuroCham.
To read more about EuroCham CSR Awards in 2021 click here.
She provided the results of a needs assessment study of factories during an online event organized by the GIZ Business Scouts for Development and FABRIC Asia programmes in cooperation with EuroCham on Wednesday, during which a panel of experts explained the implications of the forthcoming mandates
The talks focused on two new mandates: the German Supply Chain Act, which will come into force January 1, 2023, and the EU’s newly proposed due diligence act. The proposal for the due diligence act was put forward in February 2022 and will likely take effect from 2024.
The German Supply Chain Act will initially cover German companies with more than 3,000 employees and will start covering companies with 1,000 or more employees from 2024. Human rights and environmental practices will be monitored by the Federal Office for Economic Affairs and Export Control to ensure suppliers of German companies comply with the set standards.
The EU due diligence act will also target larger companies at first, and will also cover medium-sized companies in the future.
Tom Hesketh, the deputy executive director at EuroCham said companies like Adidas, for example, will soon have to start following these guidelines, which will affect all suppliers of Adidas goods in Cambodia.
“The message is clear. Mandatory HRDD [human rights and due diligence] requirements are coming in the long run, Cambodian companies will not be able to avoid them if they wish to continue to supply goods and products to the EU,” he said.
The EU due diligence act will be even stricter and carry heavier consequences than the German Supply Chain Act. Both of the new laws are binding and can be enforced by the law, but the EU act will also allow individuals to sue companies over breaches, an important difference between the two, Dr. Phillipp Ehring of Germany-based Branmatt Legal said.
Companies already taking action
Although the mandates have not yet been implemented, actions are already being taken by German companies to get in compliance, as pointed out by Wilfried Krokowski, the executive director of Germany-based Global Procurement Services.
For example, German-based appliance company Dyson recently cut ties with ATA, a Malaysian supplier that was found to be violating human rights standards. Adler, one of the largest garment retailers in Germany, recently implemented tracking software to monitor corporate social responsibility (CSR) standards. Zalando and Puma have also included CSR standards in their codes of conduct.
While customers and buyers alike may profess a willingness to pay more for sustainably sourced items, factories in Cambodia report that price is the main factor that keeps them competitive.
Factories in Gentile’s study reported that once they have proven that they are following standards, price becomes the main issue once again, and some factories reported losing business over price points.
The factories pointed out that suppliers always bear the training and implementation costs of these requirements.
According to the study, Cambodian factories are already drowning in new requirements enforced by individual buyers. Each buyer, they reported, typically wants to conduct their own specific CSR training as well, and some factories have faced 30 audits per year.
“We have so much similar and repetitive training. We could save money by combining. But the buyers want their own,” one factory representative said.
“Bottom line, price competitiveness is what eventually keeps our client loyal. We lost business to cheaper competitors, regardless of our high standards of compliance,” another said.
Dissemination of information appears to be a concern as well. Despite the mandates not being far off, none of the companies surveyed had awareness of the new regulations proposed by the EU Due Diligence Act.
Enforcing the new rules
There is some grey area when it comes to implementing these new rules. The main concern for buyers is that they will be held accountable in court for offenses happening in supplier countries that could be close to 10,000 kilometers away.
“Our buyers here are under pressure. What could happen in the extreme is that some HR activist finds that there’s a mine in Africa where people are not treated well. The German buyer might not even know that they are buying from this mine.
But if the HR activist finds out that this material, somehow, through weird channels is going to Germany to this buyer, then they can sue this buyer in Germany,” Dr. Peter Franke, a professor at the Kiel University of Applied Services in Germany said.
Judging how and when the buyer could have known about these offenses is something that is still up in the air.
Definitions concerning a fair working environment and fair wages will also have to be agreed upon as well, as no uniformly accepted precedent has been set.
Massimiliano Tropeano, a senior integrated GIZ garment sector advisor at EuroCham, raised the point that smaller companies — which he estimated represented at least half of the garment import business in Europe — may be exempt from the law.
Krokowski responded that these companies will come into the fold as well, partly because of overall pressure to comply and partly because they may supply larger companies that could impose these requirements on them.
A changing global environment
Krokowski said the main point is to start moving the needle in the right direction and instilling the belief along supply chains that these issues can no longer be avoided.
“As we’ve seen with Dyson in Malaysia, nobody can afford in Germany or in Europe to have suppliers that don’t take care about human rights or social responsibility,” he said.
Most factories in Gentile’s assessment study said they were doing enough but simply weren’t willing to go above and beyond because of the price point problem.
“The main goal is to produce as cheaply as possible. Only if there is no choice, then change will happen. Factories won’t change unless there is either pressure from the buyers or because it is required by the Cambodian law.”
It appears these two new pieces of legislation could make the choice for them, at least when EU companies are buying their products.
Krokowski said as evidenced by movements in Europe and the US, the world is changing its priorities from profit alone to human rights and environmental sustainability.
“The last decades have been dominated by open trade, open borders, and free trading. This is changing, especially the young generation are going on the street and saying no, cost and price is not all. We have to change the world, we have to look at the environment. We have to look at human rights. So this is really, I think, a changing environment that we are living in,” Krokowski said.
EuroCham also signed a memorandum of understanding with the Garment Manufacturer’s Association of Cambodia on Wednesday to help propel the growth of the sector. Read about EuroCham’s new Garment and Manufacturing Committee here.