German Supply Chain Act

Mariana Abreu

Partner

Contents

• Introduction
• Who's affected
• What you need to do
• Risk Management
• Key highlights
• Fines & sanctions
• Anthesis support

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The German Supply Chain Due Diligence Act, known in German as the Lieferkettensorgfaltspflichtengesetz (LkSG), was published in the German Federal Law Gazette on July 22, 2021. The objective of the act is for German business to comply with due diligence obligations to improve compliance with human rights and material standards within supply chains.

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What is the new law?

The German Supply Chain Act is intended to improve international human rights by defining requirements for responsible supply chain management for companies. The guidance provides a legal framework for fulfilling human rights due diligence obligations. The internationally compatible Act which is based on the UN Guiding Principles, will be adapted into future European regulation with the aim of preventing competitive disadvantages for German companies. The Act is in line with the National Action Plan (NAP) for business, which was adopted in 2011 by the Federal Government.

When will the new act come into force?

The new act came into force on January 1st, 2023, with extensions covering a wider group of organisations in 2024.

Why was it needed?

In 2016, the Federal Cabinet adopted the German National Action Plan (NAP). The plan set out the expectation that at least 50% of German companies with more than 500 employees will introduce effective human rights due diligence measures into their business processes by 2020. Surveys carried out in 2019 and 2020 showed that only 17–19% of the companies who participated could show they comply with the NAP requirements. This demonstrated to the German Government the need for mandatory human rights due diligence legislation.

Who will the German Supply Chain Act apply to?

• From 2023, the Supply Chain Act applies to all companies that have their head office, principal place of business, or registered office in Germany and typically employ more than 3,000 employees in Germany or via a German contract abroad.
• The Act also applies to foreign companies with a branch office in Germany employing a similar number of employees.
• The calculation of the size of the company is dependent on the number of employees of all affiliated companies.
• On January 1, 2024, the Act extended to companies with head offices or branches in Germany with 1,000 or more employees.

What are companies required to do?

The Act will require in-scope companies to investigate their supply chains to identify and address corporate social responsibility risks. Companies will be required to establish effective risk management systems in accordance with the UN Guiding Principles on Business and Human Rights and take appropriate action when risks are discovered.

Key requirements:

• Establish a risk management system and human rights impact assessment, covering business operations and direct suppliers
• Define management systems and governance
• Establish robust policies and procedures, covering supplier code of conduct, Human Rights, the company’s approach to due diligence (in line with supply chain due diligence expectations), complaints procedures and grievance mechanisms
• Create preventative measures for any potential human rights violation within the company’s business unit and for direct suppliers such as establishing control measures to verify compliance
• Provide clear documentation on all activities disclosed annually and publicly
• Report on identified risks and how the company fulfils its due diligence obligations, including measures the company has taken in response to complaints

Considering the termination of a business relationship is considered as a last resort; it is only required if the violation is very serious, the measures of the minimising concept do not bring about change, and less stringent measures are not available

Risk Management

A key first step is for organisations to analyse and assess risks within their supply chains to be able to take appropriate measures to manage these risks.

German Law extends the corporate due diligence to specific environmental risks. Environmental risks are only relevant if there is a risk of violating the Minamata Convention on Mercury 2013, the Stockholm Convention on Persistent Organic Pollutants 2001 or the Basel Convention on Hazardous Wastes 1989. In addition, the law refers to the risk of polluting soil, water, and air if this leads to violations of the rights to food, water, sanitation and health.

The German Supply Chain Act identifies the following social, and [Corporate] Governance (ESG) criteria as relevant risk areas:

• Child labour
• Forced labour
• Occupational health and safety
• Problematic employment and working conditions
• Freedom of Association
• Discrimination
• Minimum wage
• Health
• Unlawful seizure of land and waters
• Torture
• Environmental damage

Key Highlights

Obligation to Remedy

Through risk analysis, companies must take measures to identify, prevent, minimise, and remedy on line with the OECD Due Diligence Guidelines for Responsible Business Conduct and address any identified negative impacts on human rights and the environment. If a company identifies a risk as part of such an analysis, the senior management must issue a policy statement on its “human rights strategy” to prevent negative impacts on human rights and the environment

The effectiveness of the preventive and remedial measures must be reviewed annually and on an ad hoc basis in the event of a significant change in the risk exposure profile – e.g., through the introduction of new products, projects or a new field of business.

Most of the key requirements of the Act are in line with the EU Corporate Accountability and Due Diligence requirements.

Establishing internal grievance systems

The Act requires companies to establish an internal complaints procedure to address grievances for any violations to protect human rights and environmental standards caused by the activities of the company which includes its supply chain as well as through its direct or indirect suppliers. This should be reviewed once a year to understand its effectiveness.

Through mandatory documentation and reporting, companies must continuously document their compliance with the due diligence requirements under the Supply Chain Act and retain the relevant records for at least seven years. The German Law will be monitored and enforced by the Federal Office for Economic Affairs and Export Control (BAFA), which is under the Federal Ministry of Economics and Energy. BAFA will receive and assess company reports, has the power to adopt necessary measures to detect, end and prevent violations of the law and may summon people, request information and enter the premises of companies.

How is compliance being monitored and enforced?

The Act requires the Federal Office for Economic Affairs and Export Control to monitor compliance with due diligence obligations, review companies’ reports, issue the necessary orders and/or measures, and conduct onsite inspections at companies. It acts at its own discretion or upon application to monitor compliance with the obligations under the Supply Chain Act and to detect, remedy and prevent violations of the Act. However, the Federal Office for Economic Affairs and Export Control will only impose measures upon application if the person filling the application asserts in a substantiated manner that a protected right has been violated or that a violation is imminent due to the company’s failure to comply with an obligation under the Supply Chain Act.

Fines and sanctions if companies fail to comply

If a company fails to comply with the due diligence obligations in accordance with the Supply Chain Act, the Act provides BAFA to impose administrative fines for sanctions in the form of:

• periodic penalty payments of up to EUR 50,000 in administrative enforcement proceedings and/or fines
• the fines can amount to up to EUR 8 million or 2% of a company’s global revenue

Companies that have been subject to such fines may be excluded from public procurement procedures for a maximum of three years.

What can Anthesis do?

We can support you with:

• Benchmarking to understand where you stand in relation to regulatory compliance compared to various indices and competitors
• Highlighting gaps in your organisation in relation to the requirements of the Act
• Developing detailed human rights risk assessments for the business which includes raw materials used in products that have been identified during a materiality assessment
• Setting up a system for the collection of required supplier data to allow the client to focus on its key business
• Policy research, conducting human rights impact assessments, and reviewing reports against existing policy commitments, international standards or industry best practice
• Building capacity within your organisation, including training and development on ethical trade, human rights, gender equality, modern slavery and creating grievance mechanisms and worker representation models for global supply chains
• Guidance in setting up a grievance mechanism

Anthesis can support businesses in developing strategy and direction towards human rights due diligence with a focus on transparency and traceability in supply chains. Using our in-house tools, we can identify and rank where the key human rights and salient risks are located within your business, both geographically and within Environmental, Social and Governance (ESG) parameters.