The New Regulation in Force – German Supply Chain Act 2023

The Germain Supply Chain Act (The German Act on Corporate Due Diligence Obligations in Supply Chains or SCDDA) known as Lieferkettensorgfaltspflichtengesetz (LkSG), has been in effect since 1st January 2023. This supply chain act intends to protect the rights of those involved in producing goods for the German market.

The History of SCDDA

It all began with the UN Guiding Principles

The United Nations Guiding Principles (UNGP) on Business and Human Rights was approved by the United Nations Human Rights Council in 2011. These global principles focused on preventing and addressing any human rights violations associated with business operations. UNGP was built on three fundamental pillars “Protect, Respect and Remedy” where the state is committed to protecting people from any human rights abuse, and the business is committed to respecting human rights. Both the state and business are expected to cooperate to bring about remedies for those impacted by the business.

Germany adopts the National Action Plan

The intent to develop a National Action Plan on business and human rights was made in the coalition agreement in December 2013 as the German Government sought to implement the UN Guiding Principles at the national level. The Federal Foreign Office took on the primary goal of the development of NAP along with 5 federal ministries.

By the end of 2014, a steering committee was formed with these 6 federal ministries mentioned above with representatives from the following institutions and corporations:

• Confederation of German Employers, Association of German Industry, Association for Industry and Trade.
• Forum Menschenrechte (German Non-Governmental Organization for the protection of Human Rights)
• German Trade Union Confederation
• The VENRO network of civil society organizations working on development policy.

Advisory members of the committee

• The German Institute for Human Rights (DIMR)
• Econsense (Forum for Sustainable Development of German Business)

The drafting of the national action plan was planned for about two years and three conferences and 11 hearings. The first phase of the National Action Plan (NAP) was adopted by the Federal Cabinet in December 2016. The NAP was largely voluntary and held as a Corporate Social Responsibility Initiative.

Objectives of the National Action Plan

• Implement UN Guiding Principles on Business and Human Rights
• Emphasize the obligations and responsibilities of the state and businesses.
• Ensure policy consistency.
• Drive Sustainable development.

Birth of the German Supply Chain Due Diligence Act

The German Federal Government Set up the NAP Monitoring process, to assess if at least 50% of all organizations based in Germany with more than 500 employees would incorporate human rights due diligence into their process by 2020. Based on the collation agreement, the government had committed to legislative action, if the target was not reached. After an initial quantitative survey in October 2019, the reports were published in February 2020 which showed only 17-19% of businesses adhered to the NAP requirements of Human Rights Due Diligence. A final quantitative survey was once again conducted around March 2020. The key results published by August 2020 disclosed only 13-17% of the 455 companies adequately met the NAP target.

The failure to comply with voluntary NAP requirements resulted in legislative measures. Revised NAP due diligence requirements were finalized after the parliamentary proceeding and published in the Federal law Gazette in July 2021 – “German Act on Corporate Due Diligence Obligations in Supply Chains”. The Human Rights Due Diligence is based on UNGP, which falls under the ESGs Social Criteria. This German Supply Chain Due Diligence Act came into effect on 1st January 2023 which requires German Companies to conduct due diligence on human rights and environmental issues across their supply chain. The effect of the act will be evaluated around 2026.

Who will be affected by this Act (Scope) ?

1. Company has its headquarters, principal place of business, and administrative seat in Germany. This would apply to many multinational companies operating outside of Germany.
2. 1st January 2023 (In effect)– German Companies that employ more than 3000 employees.
3. 1st January 2024 – German Companies that employ more than 1000 employees.
4. Businesses that are a part of the Companies’ supply chain in #2, and #3 will also be affected by the new due diligence Act.
5. The due diligence on human rights does not account for: temporary agency workers, free-lance employees, those who are self-employed, board members of legal firms, shareholders of legal firms, civil servants, and apprentices.

If you have more questions, you can visit the FAQs here.

What is the Due Diligence Act addressing?

The supply chain act tries to address the following concerns:

• Employment of Child Labour
• Employment of forced labour
• Discrimination
• Any form of Slavery
• Sexual exploitation, intimidation, humiliation, torture
• Unfair pay
• Non-conformance with workplace safety
• Freedom of Association
• Prevention of Import and Export of Hazardous Substances
• Restriction on the production and use of persistent organic pollutants.
• Restriction on the production of mercury-added products, their use and treatment of their wastes.

Conforming to the new supply chain act

The due diligence obligations require the business to verify, document and monitor their supplier’s compliance with human rights and environmental standards. The high-level requirements are listed below:

Risk Analysis

Organizations must perform a risk analysis to identify and assess any areas of violation of human rights and environmental standards in their business activities and within their supply chain.

Setting up a risk management system

Once the risks have been identified, organizations can set up a risk management system that can prevent any violations. For example, if your direct supplier involves immigrant employees who are forced into labour for longer hours this would be identified as a violation in the system. Businesses must draft policies that align with international human rights with the suppliers ensuring that all employees involved in production activity work with freedom and for the required hours.

Perform Regular Risk Analysis

Conduct a regular risk analysis to review any violations that could arise from within the organization and also the direct suppliers.

Policy Statement

The organization must adopt a policy statement that communicates the human rights and environmental strategy. The policy statement adheres to the UN Guiding Principles. The organisation’s policy statement is based on the risk analysis, and it outlines the underlying risk factors, responsibilities, what is currently being done, their expectations, and what the organization intends to do in the future.

Preventive Measures and providing remedies.

Based on the risk analysis, organizations can review and provide preventive measures and remedies if in case there has been an actual violation. This could involve reviewing direct suppliers, monitoring, and training courses and drafting contracts with the suppliers that will drive sustainable development.

Complaint Procedure

Organizations must implement a complaint procedure and provide a system where those affected can log or provide information about any breach of rights or report a potential violation. The complaints must be reviewed frequently. This can serve as input for providing preventive measures and addressing those affected through proper remedy.

Documentation and Reporting

The due diligence obligation must be thoroughly documented in the organization and an annual report must be submitted to the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA). The documentation must contain information on

• The risks identified in the human rights and environmental standards.
• The impact of those risks identified.
• Measures that were taken to fulfil the due diligence obligation and its effectiveness.
• Actions for the future.

Consequences for non-conformance

As a result of non-compliance with the German supply chain due diligence act, companies with an average turnover of more than Euro 400 million could be fined up to 2% of their annual turnover. Companies could also be banned from public tenders for up to 3 years.

For more information, you can listen to our Expert Webinar about this topic here !

How can we help?

We can provide consultation and help you get the data for meeting the SCDDA requirements with our software tool.