The German Supply Chain Act: Everything You Need to Know

When it comes to fighting environmental damage and human rights violations, there are multiple approaches governments can take to ensure the future of our planet is safe.

Net Zero, for example, will involve a huge overhaul of our infrastructure and society, including 240 million households having solar panels and the introduction of motorway speed limits and eco-driving.

But what do supply chains have to do with it? Well, quite a lot, actually. While governments are cautious about directly controlling how businesses are run, they can use the power of legislation to dictate a more eco-friendly and human-friendly economy. That’s Germany’s plan with its much-talked-about Supply Chain Act.

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While there were supply chain laws in place already, the German government has introduced a new, more prescriptive one, which goes deeper into holding companies accountable for environmental risks and human rights violations.

Here’s our deep dive into what’s involved in 2023’s new Supply Chain Act, and what it means for German business.

The German Supply Chain Act 2023

The German Supply Chain Act – also known as the German Supply Chain Due Diligence Act, or the Lieferkettensorgfaltspflichtengesetz (LkSG) in German – came into effect on January 1st 2023.

The Act’s objective is for German companies to comply with due diligence obligations which improve compliance with human rights, ethical treatments, and material standards within their supply chains.

Climate change is often framed as the planet vs the businesses, but acts like this one acknowledge that companies can continue to turn a profit while being part of a wider positive change.

What’s involved in the Act?

The Supply Chain Act looks at German companies and their contributions through an ESG lens. The key due diligence requirements laid out by the new supply chain law are as below:

  • The prohibition of modern slavery, certain hazardous wastes, non-compliance with labor protection laws, torture, and mercury-added products.
  • Establish a risk management system and conduct a risk analysis of the entire supply chain.
  • Carry out a human rights impact assessment.
  • Define management and leadership systems.
  • Put in place robust policies and procedures that cover the supplier code of conduct, human rights, child labor, the business’s approach to due diligence, complaints procedure, and working conditions.
  • Establish measures that prevent human rights violations within the company’s supply chain and establish control measures with direct suppliers to measure compliance.
  • Create clear documentation which discloses all business activities, annually.
  • Report on risks identified from the risk assessment and the remedial measures taken to combat them.
  • Report measures the company has taken in response to complaints or grievances.
  • Designate internal responsibilities, such as a human rights officer.

What differentiates this new law from previous ones is its scope. The new Act forces companies to implement measures not only in relation to their own business, but also to direct suppliers, and in some instances, indirect suppliers.

In other words, companies aren’t just responsible for their environmental and human rights approach, but that of their key suppliers, too.

If breaches of compliance are uncovered, companies must show they’ve done everything possible to prevent human rights infringements throughout the supply chain.

Who does the new Supply Chain Act apply to?

For 2023, the Act will apply to all companies with their head office or registered office in Germany that employ more than 3000 employees in German or via a German contract.

It also applies to foreign businesses with a branch office in Germany that employs a similar number of employees. So far, the law doesn’t take into account the legal status of a business or its annual turnover.

From 1st January 2024 onwards, the Act will also apply to companies with head offices or branches in Germany and only 1000 or more employees.

What laws were in place before the new Act?

Before this updated 2023 German Supply Chain Act, there was a Federal Government’s National Action Plan for Business and Human Rights (NAP), first launched in 2016, in which the responsibility of German businesses to prioritise human rights was emphasised.

The plan was based on the UN Guiding Principles on Business and Human Rights, and the federal govenment carried out a monitoring exercise to assess which companies with 500 employees or more fulfilled their duty of care.

The results were disappointing, with only 13% to 17% of the companies voluntarily fulfilling the NAP requirements, and another 10% to 12% on track to meet them. The government’s target of 50% was, therefore, missed.

With this in mind, the government established a new plan to reduce non-compliance, improve sustainability, act on corporate due diligence, and adhere to robust environmental standards.

What does this mean for German business?

In short, the 2023 Supply Chain Act, as the 2017 Act did before it, requires companies to clean up their act (pun intended).

For companies that fail to comply with an adequate human rights strategy and compliance with the requirements, there will be consequences. If a company fails to comply with the due diligence obligations of the new law or becomes aware of a violation and fails to take remedial action, the government can impose administrative fines.

These fines can take the form of:

  • Periodic penalty payments of up to €‎50,000 in administrative enforcement proceedings and/or fines.
  • A fine up to €‎8 million or 2% of a company’s global revenue.

Plus, companies that have been subject to these fines can be excluded from procurement procedures for up to three years. While these sanctions might seem harsh, fines and the like are some of the best preventative measures for non-compliance.

When companies work harder to make their global supply chains more sustainable and ethical, the planet and the people on it both win.

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