Understanding the German Supply Chain Due Diligence Act

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German Supply Chain Due Diligence Act: Key Takeaways

The German Supply Chain Due Diligence Act (the ‘Act’) was passed by the German Parliament and the German Federal Council. The purpose behind the Act is to protect human rights and the environment. To that end, the Act requires large companies and undertakings to conduct due diligence activities across their supply chain. As per the Act, companies are required to identify, prevent, and address any issues along their supply chain or within their operations that may negatively impact human rights or the environment. If any (threatened) violations are found, companies must act to address these pro-actively. This Act is introduced by Germany in line with a global trend towards heightened responsibility and accountability for corporations – especially regarding environmental, social, and governance issues.

The Act comes into full force and effect in 2023. It will then apply to all companies based in Germany with more than 3,000 employees or branches registered under German law whereby the headquartered company has more than 3,000 employees, regardless of location. 

From 2024 onwards, the Act will also apply to all companies based in Germany with more than 1,000 employees or branches registered under German law whereby the headquartered company has more than 1,000 employees, regardless of location.

 However, a company that does not meet either the 2023 or the 2024 requirements can still be affected by the Act. The company may be part of a supply chain in which there is also a company that does meet the Act’s requirements, which company, in turn, will need to ensure that the entire supply chain is in compliance with the minimum standards set out by the Act.

What steps to take?

For companies to comply with the German Supply Chain Due Diligence Act, they will need to set up certain processes to identify, assess, prevent, and remedy adverse human rights and environmental impacts within their operations and supply chains.

Companies covered under the Act must ensure that any activity which they themselves carry out or which is carried out in their supply chain regardless of its location, the following risks are addressed:

·      Forced labour

·      Child labour

·      Discrimination and inequality

·      Violations to freedom of association

·      Unethical employment

·      Unsafe working conditions

·      Torture and cruel or inhumane treatment

·      Environmental pollution

·      Land deprivation

Companies must furthermore ensure that there are ways for their employees and indirect suppliers to alert them to potential or actual adverse human rights or environmental impacts. All steps taken by companies are to be published in a report annually.

The extent to which a company must pro-actively address adverse human rights or environmental impacts across the supply chain depends on (a) the nature and scope of the company; (b) the company’s ability to influence the violation; (c) the (expected) severity of the violation; (d) the reversibility of the violation; (e) the likelihood of the violation; and (f) the nature of the company’s contribution to the causation. 

The Act establishes a duty of effort. There is not a duty on the company to succeed in its effort to prevent adverse human rights or environmental impacts. A company covered by the Act must make a ‘serious effort’.

Environmental Obligations under the German Supply Chain Due Diligence Act

As opposed to extensive human rights provisions, the Act is relatively restricted when it comes to the environment. The Act once refers to instances where environmental damage may lead to human rights violations. Moreover, the Act also once refers to tangible environment-related obligations which arise from the Minamata Convention (dealing with risks relating to production and disposal of mercury-containing products), the PoPs Convention (dealing with risks relating to the production or use of persistent organic pollutants), and the Basel Convention (dealing with risks relating to the import and export of waste).

Enforcement

The Act grants the German Federal Office for Economic Affairs and Export Control (BAFA) certain powers of enforcement. The BAFA can act either at the request of an affected person or on its own initiative. It may impose measures on a company in breach of the Act to ensure compliance and to this end, the BAFA has extensive rights to information and access.

Possible consequences that may be imposed on companies include (1) fines of up to €8,000,000 or up to 2% of their average annual global turnover if the turnover is more than €400,000,000 or (2) exclusion from winning public contracts in Germany for up to three years.

Practical actions

In order to comply with the German Supply Chain Due Diligence Act, companies should start with creating an overview of their operations and their suppliers. For all suppliers, you should list their locations, the nature of their business, and what kind of jobs their workers fulfill. Based on these characteristics, a risk assessment can be conducted. Certain countries and jobs are considered to be more vulnerable.

Companies should implement a policy on their human rights strategy, which will apply across the company and its supply chain. The policy must be transparent and non-generic, identifying the company/industry-specific risks identified.

Contractual arrangements with suppliers should include the minimum human rights and environmental standards the supplier should adhere to. Based on the vulnerability (e.g. the potential of adverse human rights and/or environmental impact) of a supplier, appropriate preventive and remedial measures should be formulated.

A complaint mechanism must be established to welcome complaints from (potentially) affected persons or persons with knowledge of (possible) risks and violations. This mechanism must be easily accessible.

Finally, companies should document and report on their efforts to prevent and monitor potential adverse impacts on human rights or the environment in relation to their due diligence obligations. A report must be prepared and published annually.

What we can do to help?

·      Set up due diligence procedure and human rights strategy

·      Conduct human rights assessment

·      Social and environmental compliance

·      Supplier audits