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The German Supply Chain Act, what is it?
In June 2020, Germany took a significant step towards promoting responsible business conduct and transparency in global supply chains by adopting the German Supply Chain Act (Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten). This law aims to protect human rights and the environment by imposing strict obligations on companies. The key elements of this law are, firstly, due diligence; companies must implement vigilance measures to identify and mitigate risks of human rights violations and environmental damage in their supply chains. This involves thorough risk assessments to understand these potential vulnerabilities. Secondly, the law applies to all German companies with more than 1,000 employees, as well as their suppliers. Each of these companies must appoint a Human Rights Officer responsible for overseeing the implementation of the new measures. Furthermore, companies must establish reporting mechanisms to allow stakeholders to report potential violations. Finally, companies are required to document their due diligence efforts by providing an annual report on their actions. This report must include information on identified risks, the measures taken to mitigate them, and the results achieved. It is important to note that non-compliance with this law can result in fines of up to 400 million euros for companies and 800,000 euros for individuals, as well as possible exclusion from public contracts.
Three essential things to know about this new German law “German Supply Chain Act”
- Scope and effective dates: The law applies to all German and foreign companies with their headquarters or administrative offices in Germany and employing at least 1,000 employees. The implementation of the law will be in two phases, with larger companies subject to the new requirements earlier than smaller ones. The effective dates vary depending on the number of employees, with the first phase starting on January 1, 2023, and the second phase on January 1, 2024.
- New risk management requirements: Companies must focus on risks related to modern slavery, discriminatory practices, and wage practices. They must implement risk management programs for their operations and direct suppliers, as well as an internal grievance mechanism.
- Sanctions for non-compliance: Although non-compliance with the law does not lead to civil lawsuits, companies can be subject to fines of up to 2% of their average annual turnover. Companies may also be excluded from public contract awards in case of serious violations.
How will this law affect the German industry?
This German law on due diligence in supply chains will have a significant impact on German industry. Companies will now have to assume greater responsibility for human rights and environmental matters in their supply chains. They will need to be more aware and active in protecting human rights and the environment, ensuring that their suppliers and subcontractors respect workers’ fundamental rights, such as freedom of association, safe and fair working conditions, and the absence of forced labor or exploitation. Consequently, the affected companies will be obliged to investigate potential risks of violations, including discrimination and abuses. Additionally, each affected German company will need to assess and minimize its environmental impact as well as that of its suppliers’ activities. This includes the sustainable management of natural resources, reduction of greenhouse gas emissions, and preservation of biodiversity. Companies will have to monitor their suppliers’ practices in waste management, pollution, and responsible use of resources. All this will involve increasing transparency, meaning that the subject companies will have to publicly report their efforts in human rights and environmental matters. Indeed, transparency is essential for building trust with stakeholders and consumers. Furthermore, companies will need to review their business practices to ensure they comply with the new law. This could result in changes in supplier selection, production processes, and business relationships.
How to comply with the German Supply Chain Act?
To comply with the German Supply Chain Act, here are three steps to take:
- Examine your current situation: Ensure your database contains the required basic information, such as a complete list of your direct suppliers with their locations and contact details, as well as the nature of their activities and the profile of their workers.
- Conduct a risk assessment: Evaluate each supplier, starting with key partners. Examine who they employ and the employment conditions of their personnel. Pay particular attention to risks related to migrant workers.
- Communication: Inform your partners and suppliers of this new legislation and their obligations towards you. To simplify the compliance process, consider hiring an external company specialized in third-party risk analysis. This will automate the process and help you be more efficient in implementing the directive within your company.
Perspectives for the future of global supply chain regulation in Germany and elsewhere
After reading this article, we can conclude that global supply chain regulation in Germany is evolving. Looking to the future, we see a convergence with the United Nations Guiding Principles. Indeed, the German law aligns with the principles developed by the UN to guide companies in protecting human rights throughout their business activities. They emphasize the importance of due diligence to prevent violations. Furthermore, the European Union is also considering implementing a directive on sustainability due diligence, which would impose similar rules and responsibilities on EU companies (cf. article CSDDD). Finally, emerging technologies also have a role to play in enabling companies to comply with regulations. Companies can use supplier management software to automate due diligence and risk assessment processes, facilitating the monitoring of direct and indirect suppliers from raw material extraction to the delivery of finished products. Additionally, it is possible to implement technology-based traceability systems to track products throughout the supply chain. Finally, risk analysis algorithms can identify high-risk areas within the production chain. This will simplify and target compliance efforts where they are most needed.