Key Supply Chain Legislation and How We Can Help

We outline the German Supply Chain Due Diligence Act, Corporate Sustainability Reporting Directive (CSRD) and Uyghur Forced Labor Prevention Act (UFLPA).

The German Supply Chain Due Diligence Act

Mandatory from 2023

Germany’s parliament passed its new Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, or LkSG) in June 2021, making human rights due diligence mandatory from January 1, 2023.

The country’s largest organizations are now obliged to actively perform due diligence to prevent human rights and environmental abuses within their businesses and supply chains.

What this means for large and small companies

The Act requires certain German-based organizations and foreign companies with subsidiaries in Germany to conduct risk analysis and implement risk management and mitigation procedures on their premises and direct and indirect suppliers.

The aim is to prevent or, where possible, remediate risks, such as poor working conditions, child and forced labor, and slavery. Furthermore, it addresses key human rights-related environmental standards.

Preventative or remedial action concerning indirect suppliers is only required if an organization knows of specific human rights or linked environmental legislation violations.

The law requires companies to risk assess their tier 1 suppliers and, where appropriate, collect due diligence data to show that risks are being managed effectively. Where there is a concern, the buying organization must investigate and conduct proper due diligence throughout all tiers below tier 1.

Suppliers to large organizations must operate with the correct transparency to enable smaller companies to comply with LkSG. They may also need to audit and monitor their operations and suppliers to meet their larger customers’ new requirements. Failing to do this could cause reputational damage and limit supplier relationships.

Which companies does it impact?

LkSG has broad consequences for German-registered firms within the scope and smaller organizations that sell into the German market. For example, any company of this size with a head office outside of Germany, but operations within the country, must be compliant. 

Initially, the Act only applied to organizations with over 3,000 employees. However, from 2024, it will extend its coverage to organizations with over 1,000 employees.

The German company register indicates that Germany has about 2,900 organizations with over 1,000 employees. However, considering their industries, only about 2,000 are likely to be affected.

The legal ramifications

The Act clearly outlines the consequences for organizations that break the law, including exclusion from public contracts for up to 3 years and fines of up to 2% of their global annual turnover.

Which sectors does it impact?

The law significantly impacts many organizations across all business sectors in Germany. Due to global supply chains and client requirements, international suppliers are directly and indirectly affected.

Impacted industries include:

• Feed and food processors
• Oil and gas, including the biofuel sector
• Textile
• Automotive
• Manufacturing and construction
• Mining
• Financial services

The basis of the law

The law is based on the UN Guiding Principles on Business and Human Rights, established in 2011. In 2016, the National Action Plan (NAP) was created to implement Corporate Social Responsibility (CSR) topics in German enterprises but, due to the NAP’s voluntary nature, Germany found that taking legislative action would be more effective.

The Act’s definitions of human rights risks come from the NAP and international treaties, including the International Labour Organization (ILO) Conventions, International Covenant on Civil and Political Rights (ICCPR) and International Covenant on Economic, Social and Cultural Rights (ICESCR).

Why choose LkSG services from SGS?

We can help to ensure that your compliance management system is up to date and supply chain functions adhere to the relevant human rights and environmental issues with suppliers. We will assist your organization and functions to understand the Act in detail via seminars and workshops.

We also provide a complete range of Supply Chain Assurance solutions, including customized audits and digital services, to help provide transparency and peace of mind across your organization, supplier network and other parties.

Our customized audits or standardized focused supplier audits, and supplier risk management and verification services can help you to implement a compliant due diligence system.

The Corporate Sustainability Reporting Directive

In effect from 2025

The CSRD entered into force on January 5, 2023, to modernize and strengthen the rules concerning the social and environmental information that organizations must report. A broader set of large companies and listed small to medium-sized enterprises (SMEs) will now be required to report on sustainability.

The CSRD will:

• Unite financial data, environmental, social and governance (ESG) information and assurance
• Replace the Non-Financial Reporting Directive (NFRD)
• Improve the consistency and quality of sustainability information
• Outline ESG reporting requirements
• Establish a shared framework for reporting non-financial data
• Expand upon the NFRD concerning who needs to report and what needs to be reported
• Enforce rigorous, robust and standardized reports
• Accelerate responsible change and create transparency across all sectors by standardizing the disclosure, reporting and assurance of sustainability metrics

The directive is estimated to increase the number of organizations affected from about 11,000 to around 50,000.

For EU-based organizations and non-EU organizations with EU-based subsidiaries or securities on EU-regulated markets, this pathway to more sustainable practices will be unavoidable.

As well as organizations currently in the NFRD’s scope, the CSRD will impact all EU-based organizations with:

• A EUR 40 million or more net turnover
• At least EUR 20 million in assets
• 250 or more employees

Every listed organization will also be affected, except micro-enterprises at first. The first companies will have to apply the new rules in the 2024 financial year, for reports published in 2025.

We offer CSRD compliance and assurance services to help you meet the requirements.

How can we help?

As a sustainability leader for over 30 years, we can support you wherever you are on your CSRD journey.

Our experts actively contribute to developing international standards, frameworks, schemes and regulations, including the UN Sustainable Development Goals (SDGs), UN Principles for Responsible Banking (PRB) Assurance and the CSRD.

As a result, we can provide you with in-depth CSRD expertise, including:

• Supporting stakeholders with mapping, prioritization, consultation and engagement
• Assessing material topics – double materiality, impact and financial assessments
• Assisting with essential performance data, including collection, consolidation, disclosure metrics and targets

Whatever your CSRD maturity level, we will consider the timeline and resources needed to achieve your goals, including the highest-quality disclosures and reports. See our Frequently Asked Questions for more details.

Check out our services or contact us for more information.

You can also download CSRD/ESRS Fundamentals – our introduction to the CSRD, European Sustainability Reporting Standards (ESRS), double materiality and how they apply to an organization.

The Uyghur Forced Labor Prevention Act

Signed into law

The Uyghur Forced Labor Prevention Act (UFLPA) was signed into law by US President Joe Biden on December 23, 2021, and came into effect on June 21, 2022.

The purpose of the Act

The UFLPA allows the US to stop goods from entering the country if manufactured using forced labor in China, particularly in the Xinjiang Uyghur Autonomous Region (XUAR), or Xinjiang.

The aim is to ensure that US entities are not funding suspected forced labor through goods or services produced in the region.

How does this impact businesses?

Numerous global industries source raw materials or components from the XUAR. The most common materials from the region include polysilicon for solar panels and about a fifth of the world’s cotton.

The UFLPA gives US Customs and Border Protection (CBP) the power to seize goods from any organization whose products or raw materials have links to the XUAR.

The organization must prove that it has fully complied with Forced Labor Enforcement Task Force guidance. It must respond to all CBP inquiries to prove that there are no forced labor crimes within its supply chain.

CBP can also seize shipments with goods that appear on the UFLPA Entity List. The US government presumes that all items on this list are produced with forced or indentured child labor. This list is expected to grow over time.

Operational guidance for importers

Enforcement of the UFLPA and rebuttable presumption applies to merchandise imported on or after June 21, 2022.

CBP has released importer guidance to assist the trade community. This provides transparency on CBP’s operational approach, but not the Forced Labor Enforcement Task Force’s strategy. This strategy provides additional importer guidance, as required by the UFLPA.

What must your organization do?

Your organization must demonstrate that its goods and materials are not produced in the XUAR by any company on the Entity List or in any part via forced labor.

If goods are seized, you have two paths to securing their release:

1. Prove that the goods and their inputs are sourced entirely from outside the XUAR and do not have any connections to the Entity List.

For this, we have the tools to help you map your entire supply chain and keep strong records of your suppliers.

2. Concede that the goods or materials were produced in the XUAR, but provide clear and convincing evidence that no part was produced by forced labor.

You will need to provide evidence that forced labor was not used in the production process, including harvesting, collection, production, raw materials and components. To collect and report on this evidence, we can support you to implement a vigorous due diligence program, mapping your supply chain and maintaining strong records of supplier relationships and behaviors.

Why choose UFLPA services from SGS?

With years of experience in US border laws, regulations and initiatives, including the Customs Trade Partnership Against Terrorism (CTPAT), our experts can help you to:

• Understand the intricacies of the UFLPA
• Map your entire supply chain
• Keep robust supplier records
• Collect the relevant evidence, if needed
• Implement a robust due diligence program

This is but an extract from our new Supply chain internationalization, risks and legislation – how experts, technology and customized audits are key white paper.

Contact us for more information.

For further information, please contact:

Jason Hulbert
Associate Marketing Manager
Knowledge
t: +44 7912426878