As the global economy becomes more interconnected, companies must commit to ethical and sustainable practices across their supply chains. Governments worldwide are addressing concerns of human rights violations and environmental degradation with legislation to mandate corporate accountability within companies' supply chains.
One such groundbreaking regulation is the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, or Lksg).
Adopted on June 2020, the German Supply Chain Act represents a significant step towards fostering responsible business conduct and promoting transparency throughout the supply chain.
Read this article to navigate the complexities of the German Supply Chain Act. Whether you are a business owner, supply chain professional, policymaker, or simply interested in the evolving landscape of corporate social responsibility, this resource is essential.
The German Supply Chain Due Diligence Act, or just the German Supply Chain Act, is legislation enacted in Germany to promote human rights, environmental protection, and social standards in global supply chains. It was passed on June 11, 2021, and applies to companies operating in Germany with a specific size or turnover threshold.
The German Supply Chain Act stipulates that companies must implement due diligence measures across their entire supply chains to identify and mitigate any risks of human rights violations or environmental damage. It involves ensuring that all business activities, including those of suppliers and subcontractors, comply with specific human rights and environmental standards, such as preventing forced and child labor, providing safe working conditions, and avoiding environmental harm.
The precise actions that are expected from companies include conducting risk assessments, implementing preventive measures, and establishing reporting mechanisms.
The short answer is that all German business entities with more than 1,000 employees must comply with the provisions.
However, the law enters into force in two circuits. First, large business entities with more than 3,000 employees become subject to the Supply Chain Due Diligence Act. After a year, the law also extends to German companies with 1,000+ employees. Besides, the obligation to comply with the German Supply Chain law also applies to foreign companies with a branch in Germany with the same number of employees.
Not only the aforementioned organizations but also their suppliers should be aware of the compliance with LkSG. Depending on the terms and conditions agreement, suppliers can fall under the simplified German Supply Chain law requirements, even if they have less than 1000 employees.
From January 1, 2023, large business entities with more than 3,000 employees will be subject to the Supply Chain Due Diligence Act (LkSG).
From January 1, 2024, the circle of users will be extended: business entities with more than 1,000 employees must comply with the provisions.
The German Supply Chain Act encompasses several key provisions to promote responsible business practices and improve supply chain transparency. Some of the key requirements include:
Risk management. The German Supply Chain Act requires companies to identify, assess, and prioritize risks associated with their supply chains. Companies must implement a risk management system to address and prevent potential violations of human rights and environmental standards.
Appointment of human-rights officer. Under the terms of the Supply Chain Act, German companies must appoint an internal human-rights officer responsible for conducting risk management and monitoring human rights protection.
Due Diligence obligations. Companies covered by the German Supply Chain Act are required to exercise due diligence in their supply chains to identify and address potential risks of human rights violations and environmental harm. It involves conducting annual risk assessments of the company's business actions and the actions of its suppliers.
Company's policy and standards. The company needs to publish an official corporate policy emphasizing its commitment to protecting human rights and the environment. It also requires companies to ensure that their supply chains do not involve practices such as forced labor, child labor, or environmental damage.
Preventive measures. If a company has identified a risk during its risk assessment, it must promptly implement suitable preventive actions within its operational sphere and toward immediate suppliers.
Remedial actions. In the event of a violation of human rights or environmental obligation within the company's operations or by a direct supplier, companies must promptly undertake suitable corrective measures. Companies should follow the principle of engagement and transformation rather than disengagement – contract termination should only be resorted to as the last measure when no alternative measures of equal significance are available to the company.
Complaint procedure. Companies need to implement an internal reporting system (complaints channel) through which they can be notified about any violation of human rights or environmental protection.
Indirect supplier obligations. Companies are expected to cascade their due diligence obligations to their suppliers and subcontractors, ensuring that these entities also adhere to human rights and environmental standards. Companies must engage with their suppliers, communicate expectations, and support capacity-building efforts to improve sustainability and compliance.
Documentation and reporting. Affected by the German Supply Chain law, companies are obligated to publish annual reports detailing their compliance efforts, including information on their supply chain management systems, risk assessments, and measures taken to address identified risks.
With the Supply Chain Act coming into force, companies need to ensure they have established the required processes and have a compliance system for recurrent processes. Ensuring your company complies with the German Supply Chain Act involves a series of actions. Notably, companies need to take care of the following:
1. Get familiar with the law. Companies need to know the provision of the German Supply Chain Due Diligence Act to be able to comply with it. Find the Lieferkettengesetz text here.
Involve your legal team or compliance officer, depending on your company structure. If needed, resort to external legal consulting specializing in this field. We at Whistleblower Software have a database of trusted legal experts and can help you with suitable recommendations. Let us know if you are looking for guidance.
2. Review your current situation. Ensure your database comprises a comprehensive inventory of your direct suppliers, detailing their locations, contact information, business nature, and worker profiles.
3. Asses suppliers. Perform a comprehensive risk assessment of all suppliers, focusing on core partners. Gain a thorough understanding of your supply chain by mapping out the various tiers of suppliers and subcontractors involved. Identify potential risks related to human rights violations and environmental harm at each level. Consider your suppliers' personnel, geographic location, and workplace conditions.
4 Conduct risk assessments. Conduct comprehensive risk assessments to identify and evaluate potential risks within your supply chain. Assess factors such as working conditions, child labor, forced labor, environmental impact, and human rights issues.
5. Develop Due Diligence processes. Implement due diligence processes to address identified risks. Establish clear policies and procedures for monitoring and managing risks throughout your supply chain. It may involve supplier assessments, audits, certifications, and continuous monitoring.
6. Appoint a human-rights officer. Appoint a human-rights officer to monitor compliance with the Supply Chain Act. Make sure that an appointed officer has relevant education and training.
7. Implement a reporting system. Implement a robust complaint channel that allows workers, suppliers, and other stakeholders to report violations or concerns related to human rights and environmental issues. Ensure confidentiality, accessibility, and transparency of the reporting process.
8. Keep records and publish annual reports. A good recommendation here can be to consider reporting functionality when choosing risk management, compliance, and complaints tools. Understand the reporting requirements under the Supply Chain Act and choose a system to collect and report relevant data. Besides regular monitoring and reports, companies are also obliged to prepare and publish annual reports.
Non-compliance with the German Supply Chain Act can result in penalties, including fines. The fines against natural persons can go up to 800,000 euros; against companies, fines can go up to 400 million euros, and up to 2 percent of the average annual turnover can be imposed depending on the complexity of cases.
In severe cases, companies that fail to fulfill their due diligence obligations may face exclusion from public procurement processes. The act also allows for civil claims to be filed by individuals or non-governmental organizations (NGOs) on behalf of victims of human rights violations.
To sum up
As the German Supply Chain Act represents a transformative milestone in responsible supply chain management, companies should remain vigilant and adapt their practices to evolving legal frameworks and consumer expectations.
Get in contact with us to learn how we can help you stay compliant.