German supply chain due diligence is proposed to raise the practice of comprehensive assessment implementation and the company's supply chain investigation to identify and mitigate potential risks related to human rights violations, environmental harm, labor practices, and other ethical considerations. It involves evaluating the practices of suppliers and subcontractors to ensure compliance with legal requirements and adherence to responsible business standards.

The German Supply Chain Act (Lieferkettengesetz), which came into effect in 2023, places legal obligations on companies to conduct due diligence in their supply chains. Under this law, companies with more than 3,000 employees in Germany are required to assess and address risks in their supply chains related to human rights, environmental protection, and the prevention of corruption.

What are the purposes?

The purpose of German supply chain due diligence, as outlined in the German Supply Chain Act (Lieferkettengesetz), is to promote responsible business practices and ensure that companies operating in Germany take adequate measures to protect human rights and the environment throughout their supply chains. It emphasizes transparency, collaboration, and the continuous improvement of supply chain practices to create sustainable and ethical supply chains.

The key objectives of the German supply chain due diligence act (SCDDA) are:

Protecting Human Rights: The primary purpose of supply chain due diligence is to prevent and address human rights violations within supply chains. This includes ensuring fair labor practices, preventing forced labor and child labor, and protecting workers' rights, health, and safety.

Environmental Protection: This act also aims to minimize the environmental impact of supply chains. It encourages companies to assess and address environmental risks, reduce resource consumption, mitigate pollution, and promote sustainable practices across their supply chains.

Ethical Business Conduct: Supply chain due diligence promotes ethical business conduct by encouraging companies to adhere to high standards of integrity, transparency, and responsible governance. This includes preventing corruption, bribery, and other unethical practices throughout the supply chain.

Legal Compliance: The German Supply Chain Act establishes legal obligations for companies to conduct due diligence in their supply chains. The purpose is to ensure compliance with national and international laws and regulations related to human rights, environmental protection, and other relevant aspects of supply chain management.

Accountability and Transparency: This German SCDDA enhances accountability and transparency by requiring companies to document their due diligence processes, identify risks, and report on their efforts to address those risks. This enables stakeholders, including consumers, investors, and civil society, to hold companies accountable for their supply chain practices.

The overall purpose of German supply chain due diligence is to create a more sustainable, ethical, and responsible business environment, where companies take responsibility for the impacts of their supply chains and work towards improving social and environmental conditions throughout their operations.

What is the practical approach?

When conducting German supply chain due diligence, it's important to follow a practical approach that takes into account the specific requirements and regulations in Germany. Here's a step-by-step guide to help in navigating the process effectively, the company should:

• Familiarize itself with relevant German laws and regulations that govern supply chains, such as the German Supply Chain Act. This law requires companies to ensure that their supply chains are free from human rights violations and environmental harm.
• Identify the key risk areas that are specific to the industry and supply chain which may include labor practices, environmental impact, corruption, conflict minerals, and product safety. It is essential to consider both internal and external risks.
• Create a list of suppliers in the German supply chain and evaluate their reputations, financial stability, compliance with regulations, and track records in terms of social and environmental responsibility. They have to look for certifications or membership in industry associations that indicate adherence to recognized standards.
• Consider conducting on-site audits of selected suppliers, depending on the risk level. This will involve visiting their facilities, interviewing management and workers, and assessing their compliance with the standards and local regulations. Pay particular attention to health and safety practices, labor conditions, and environmental management.
• Engage with relevant stakeholders such as suppliers, workers' representatives, NGOs, and local communities. Seek their perspectives and gather information about any concerns or issues related to the supply chain. This will help to gain a comprehensive understanding of the situation on the ground.
• Establish remediation processes while identifying any issues or non-compliance during the due diligence process, establish clear and transparent remediation processes. They have to work with suppliers to address the identified gaps and ensure they are taking appropriate corrective actions within a reasonable timeframe.
• Implement mechanisms to continuously monitor suppliers and assess their performance. This can include regular reporting, data collection, supplier surveys, and site visits.
• Collaborate with other stakeholders, industry peers, and organizations working on similar supply chain issues. Also, the company has to share best practices and lessons learned that can contribute to a more sustainable and responsible supply chain ecosystem.
• Document the due diligence activities, findings, and actions taken and develop a comprehensive report that outlines the steps that have been taken to ensure supply chain compliance and mitigate risks. This documentation may be necessary to demonstrate compliance with legal requirements and for internal and external reporting purposes.

Remember that the approach may vary depending on the specific industry and supply chain complexity. It is advisable to seek legal and compliance advice to ensure that the approach is fully aligned with the relevant laws and regulations in Germany.

What are the challenges due to this act?

Companies may face several practical challenges when implementing supply chain due diligence in accordance with the German Supply Chain Act. Some of these challenges include:

Supply Chain Complexity: Many companies have complex and extensive supply chains with numerous suppliers and subcontractors. Identifying and assessing risks throughout the entire supply chain can be challenging, especially when dealing with multiple tiers and global sourcing.

Data Collection and Verification: Gathering accurate and reliable data from suppliers, particularly those in different countries, can be difficult. Companies may encounter challenges in obtaining timely and comprehensive information on supplier practices, certifications, and compliance.

Limited Supplier Cooperation: Some suppliers may be resistant or uncooperative when it comes to sharing information or allowing on-site audits. Building relationships based on trust and convincing suppliers to participate in due diligence activities can be a challenge.

Resource Constraints: Implementing due diligence processes and managing ongoing monitoring requires significant resources, including financial investments, skilled personnel, and time. Smaller companies or those with limited budgets may find it challenging to allocate adequate resources to meet the requirements of the law.

Remediation and Improvement: Addressing identified risks and implementing remediation plans can be complex. Companies may face challenges in supporting suppliers to improve their practices, especially when capacity-building and resource allocation are needed.

Collaboration and Information Sharing: Collaboration and information sharing among stakeholders, including suppliers, NGOs, and industry associations, are crucial for effective due diligence. However, establishing and maintaining these partnerships can present challenges due to differences in interests, priorities, and trust.

Legal and Compliance Complexity: Complying with the German Supply Chain Act and other relevant legal requirements can be complex, especially for companies with global operations subject to various jurisdictions. Understanding and navigating the legal landscape while ensuring consistency and alignment with multiple regulations can pose practical challenges.

To overcome these challenges, companies can consider investing in technology solutions for supply chain management, engaging in industry collaborations, leveraging external expertise, and establishing robust communication channels with suppliers and stakeholders.

Reach out to our regulation experts on product regulatory compliances