The German supply chain due diligence act
In Germany, many of the products we buy were produced in continents such as Asia (clothing), Africa (chocolate), or South America (coffee). To better protect the rights of people there from exploitation, the German Bundestag has passed and launched a new law: the Supply Chain Due Diligence Act (LkSG).
On January 1st, 2023, the new LkSG will come into force in Germany and will be binding for all companies based in Germany.
The aim of this new law is to improve and protect the environment and human rights along the global supply chain by ensuring compliance with basic human rights standards and prohibiting child and forced labor.
And although many companies are already trying to bring more transparency into their supply chain and pass on some of these conditions to their suppliers, it remains a major challenge for most companies to make their supply chain transparent as quickly as possible.
A violation of the LkSG can result in a hefty fine. This can be up to 8 million euros or two percent of average annual sales if annual sales exceed 400 million euros.
Why is this important to know?
It is important to know because, from 2023, the act will initially apply to companies with a corporate or branch office in Germany and/ or companies with a branch in Germany with a workforce of at least 3,000 employees. One year later, from January 2024, the LkSG will also apply to all companies in Germany with at least 1,000 employees.
Hence, it is recommended to prepare for the new Due Diligence Act NOW!
What exactly does the new LkSG mean for companies?
With the new LkSG, companies must take the responsibility for the actions of all their partners in the supply chain – from component suppliers to the companies that further process or sell manufactured products. Here, the requirements for companies to comply with due diligence and influence are divided into three levels:
– the company’s own business unit (including affiliated companies),
– the direct suppliers, and
– the indirect suppliers.
If violations are found, companies must take countermeasures and document them to the Federal Office of Economics and Export Control (BAFA), which can impose fines if companies violate their due diligence obligations.
What needs to be done?
According to the LkSG, every company is obliged to first conduct a risk analysis and assessment along the entire production and supply chain to identify and prevent possible negative impacts on human rights and the environment at an early stage. In this context, the LkSG provides the following measures that each company must implement.
The so-called heart of the due diligence act is the risk analysis. On the basis of the risk analysis, suitable preventive measures are derived and applied in a targeted manner. The focus is on the human rights and environmental risks mentioned in the LkSG, which are based on the Universal Declaration of Human Rights, the UN human rights covenants (UN Civil Covenant and UN Social Covenant), or the ILO core labor standards. In addition to human rights violations, environmental aspects such as the production and use of organic pollutants, or the handling of hazardous waste by companies must also be analyzed and evaluated.
Measures to minimize risks
If risks are identified, measures must be taken to avoid and reduce them. These include, for example, drafting appropriate contractual human rights clauses with the direct supplier, implementing suitable procurement strategies, training company employees on labor rights, or monitoring suppliers to ensure that they comply with legal requirements.
Documentation and preparation of a due diligence report
Companies must document all their due diligence activities on an ongoing basis and set out in an annual report to the German Federal Office of Economics and Export Control (BAFA) what they have identified and undertaken as part of the risk analysis about environmental as well as human rights risks.
The documentation will be kept for a period of seven years.
It is expected that the company’s management will issue a policy statement on the observance of human rights, thus fulfilling its responsibility to respect human rights.
To be able to implement the required measures promptly, companies should bring more visibility and transparency to their supply chain. The goal is to achieve complete transparency about the risks in the selection of suppliers in the procurement process. By leveraging internal and external data sources, the risk profile for the entire supply chain can be assessed and analyzed. However, this is only possible through the collaboration of all stakeholders along the whole supply chain.
Click here to learn more about the upcoming Due Diligence Act.