After lengthy and in-depth discussions, Germany’s parliament passed its new Supply Chain Due Diligence Act in June, making human rights due diligence mandatory from 2023.
The country’s largest organizations are now obliged to actively perform due diligence to prevent human rights and environmental abuses within their business and supply chains.
WHAT IT MEANS FOR LARGE & 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 inadequate pay. 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.
Suppliers to large organizations must operate with the correct transparency to enable smaller companies to comply with the Act. 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 WILL IT IMPACT?
The Act, which comes into force from January 2023, will have broad consequences for German-registered firms within the scope and smaller organizations that sell into the German market.
Initially, the Act only applies to organizations with over 3,000 employees. However, from 2024, it will extend 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 expected 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 WILL IT IMPACT?
The law will significantly impact many organizations across all business sectors in Germany. Due to global supply chains and client requirements, international suppliers are directly and indirectly affected.
Some industries that will be impacted include:
- Feed and food processors
- Oil and gas, including the biofuel sector
- Textiles
- 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 into German enterprises but, due to its voluntariness, Germany found that taking legislative action would be more effective.
The German Supply Chain Act’s human rights risks come from the NAP and international treaties, including the International Labour Organization Conventions, International Covenant on Civil and Political Rights and International Covenant on Economic, Social and Cultural Rights.
HOW WE CAN HELP
Ahead of the law’s enactment in 2023, 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 customizable audits and digital services to help provide transparency and peace of mind across your organization, supplier network and other parties.
Our customizable audits or standardized-focused supplier audits, supplier risk management and verification services will help you to implement a compliant due diligence system.
About SGS
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