Understanding the German Supply Chain Due Diligence Act [+ Other Legislative Trends Enforcing Sustainable Supply Chains]

Human rights abuses are notoriously prevalent within global supply chains. In fact, nearly 40.3 million people worldwide are trapped in modern slavery—including 24.9 million in forced labour, according to the International Labor Organization. 

Companies have long been left to “self-regulate” their supply chains and business sustainability practices. But many fail to complete the due diligence required to comply with human rights standards through the entire supply chain. And despite corporate commitments to socially and ethically responsible labor practices, unsustainable and egregious labor practices continue to plague supply chains.  

To address this problem, the German parliament passed the Act on Corporate Due Diligence in Supply Chains (Supply Chain Due Diligence Act) in 2021. The law goes into effect in 2023 and requires companies to ensure strict standards that safeguard human rights and the environment in the supply chain. 

This legislation will impact not only German and European businesses, but the international community—including vendors and subcontractors along the entire supply chain. 

Here’s what you need to know about the law, how to prepare for it, and what you can do to mitigate risks and create a more sustainable supply chain

How the law came about

In recent years, the widespread exploitation of workers—including children—has gained public visibility following tragedies like the Rana Plaza textile factory disaster in 2013 which left more than 1,100 people dead after the factory collapsed, and news of the forced labor of migrant workers in Malaysia for Samsung and Panasonic in 2016. 

As a result, there has been increasing calls from governments, NGOs, and consumers for greater human rights protections through legislative regulations and business reform. In the last decade, the European Union and other countries started taking measures to crack down on human rights abuses within the supply chain, setting the stage for this recent legislation.  

The UN’s Guiding Principles on Business and Human Rights in 2011, and the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises (the OECD Due Diligence Guidance for Responsible Business Conduct) set voluntary guidelines for states and companies to prevent and remedy human rights abuses committed in business operations. And in 2016, Germany adopted a National Action Plan to implement the UN Guiding Principles on Business and Human Rights. 

However, voluntary engagement was low and the standards lacked any meaningful enforcement. In fact, only 13 to 17% of German companies met NAP requirements on due diligence in 2020. And companies faced no penalties for abuses. 

In 2017, France adopted the French Duty of Vigilance Law—becoming the first country to implement regulation around tracking human rights within companies’ supply chains in Europe. Although this was a major step in tightening standards, there was still ambiguity on what constitutes a violation, the penalties for non-compliance were weak, and the law didn’t address indirect suppliers.  

These previous measures inspired the German parliament to pursue mandatory regulations with clear consequences for non-compliance, adopting the German Supply Chain Due Diligence Act on June 2021.

What It Does

The Supply Chain Act requires companies, including indirect suppliers (n-Tier), to conduct a risk analysis of their entire supply chain and to undertake preventative measures to ensure suppliers, domestic and global, comply with environmental and human rights. The law compels businesses to examine and be accountable for the entire supply chain lifecycle—from the production of raw materials to the delivery of products and services to end consumers. 

Companies must minimize risk of violations across multiple categories including: 

  • Forced labor
  • Discrimination 
  • Violation of the freedom of association 
  • Violation of occupational health and safety
  • Problematic employment working conditions
  • Violation of land rights 
  • Health damage 
  • Soil and air pollution 

Companies that violate the act can be fined based on the severity of the violation. Large companies with an annual global turnover or more than 400 million euros can be required to pay fines of up to 8 million euros or 2% of their annual global turnover. And companies that have been fined a minimum of 175,000 euros can be excluded from public tenders for up to three years. 

Basic Requirements

The law mandates companies implement several key measures: 

Documented Effort: Companies must document their efforts to ensure no violations of human rights or the environment occur in it's own operations or it's supply chain. The Act explicitly clarifies that a mere duty of effort is established & documented and not a duty to succeed or guarantee liability. They must publish and submit an annual report.

Risk Analysis: Companies must conduct a risk analysis of indirect suppliers if they uncover substantiated knowledge of human rights violations or violations of environmental obligations.

Policy Statement: Companies must adopt a policy statement on their human rights strategy.

Preventive & Remedial Measures: Companies must take appropriate preventive and remedial measures. This applies, for example, to supplier selection and supplier monitoring, the creation of codes of conduct, the implementation of training courses, and also sustainable contract drafting.

Human Rights Officer: Companies are required to appoint a “human rights officer” who is responsible for monitoring the risk management of the supply chain.

Who It Applies To

Beginning on January 1, 2023, the Supply Chain Act will apply to German-based companies that employ at least 3,000 people (totaling more than 600 companies). 

And from January 1, 2024, it will apply to companies with over 1,000 employees (which is expected to cover more than 2,900 businesses).   

How To Prepare

So what does this mean for your business, and how can you prepare? While the Supply Chain Act does not go into effect until next year, companies should take steps now to lay the foundation for their due diligence programs. 

To ensure a sustainable supply chain from end to end, companies will need to focus on implementing a robust supply chain compliance system that focuses on these key areas: 

Risk identification: What sustainability risks exist within your supply chain? 

Risk analysis: What is the level of risk (i.e., probability, severity, potential impact)?

Appropriate and effective measures: What measures will you take to address and mitigate those risks? What is the plan of action?

A complaints mechanism: What process will you implement to ensure potential violations can be communicated clearly and quickly?

Transparent and public reporting: How will you communicate your efforts and findings?

For best results, be sure to:

  • Designate clear supply chain management responsibilities within the organization, including setting standards and monitoring and handling risks.
  • Apply a Code of Conduct that benchmarks company expectations and meets the legal requirements of the company’s main customers.
  • Implement regular supplier training for quality assurance across standards.
  • Adopt supplier monitoring to ensure suppliers are monitored, regulated and managed in relation to quality, cost and performance, with key indicators for potential risk factors.

Monitoring Similar Legislation in Effect in Europe & US

Currently there is no global standard for supply chain sustainability. However, other recent laws in the EU and UK have created a patchwork of regulations that companies must now navigate including: 

  • The French Duty of Vigilance Law
  • The UK Modern Slavery Act
  • The Swiss Responsible Business Initiative
  • The Norwegian Transparency Act
  • The Dutch Due Diligence Act  

And while there are no supply chain laws like the German Supply Chain Act at the federal level in the U.S., there is some state-level legislation that is trying to better track environmental & human rights abuses, including the Alien Tort Claims Act, CA Transparency in Supply Chains Act, and Section 1502: Conflict Minerals of the Dodd-Frank Act.  

Planned Legislation on the Horizon

Europe

So far, legislation has been limited to individual countries’ initiatives. But in February of this year, the European Commission proposed a due diligence law for corporate sustainability to promote sustainable and responsible corporate behavior throughout global value chains that would apply to the entire EU. 

Under the law, companies would be required to detect, prevent, and mitigate violations of human rights, environmental obligations, and good governance. The act would give victims the power to take EU companies to court—even if the violation occurred outside the bloc—and require a broader scope of enforcement and compliance for companies doing business in and with EU-based companies.

In addition to the EU Due Diligence Act, other EU countries have more regulations in the works that businesses should be aware of:

  • Norwegian Transparency Law (adopted, not yet in force)
  • Dutch Responsible Business Conduct Bill 
  • Austrian Supply Chain Bill
  • Belgian  Duty of Vigilance Bill 

The United States 

In the U.S., the New York State Senate recently proposed new legislation called the “Fashion Sustainability and Social Accountability Act” that would significantly increase corporate fashion companies’ obligations to map their supply chains and disclose their findings. 

If the Act passes, it will be the most significant legislation related to supply chain tracking and ESG data to date. Companies that do not have robust supply chain monitoring and ESG performance systems in place may struggle to comply with the law. Although the legislation is New York-based, the obligations would still apply to the global activities of those companies—expanding potential liabilities for inaccurate disclosures down the supply chain.

Additionally, the U.S. Securities and Exchange Commission (SEC) just released proposals for new climate change and sustainability disclosures. These proposals would require U.S. companies to disclose data on their carbon footprints and provide information on their climate risks along with plans to address those risks. While many companies already disclose key sustainability data and ESG performance metrics, the SEC proposals provide standardized frameworks for reporting that may streamline the process for organizations. 

Creating a more sustainable future

Two-thirds of the average company’s ESG footprint lies with suppliers. This means the majority of sustainability risk exists in your supply chain. 

While there have been many sustainability frameworks and guidelines developed over the last decade, we are finally seeing more “teeth” behind these initiatives, with sweeping legislation across the U.S. and particularly Europe. And with many using the UN Global Compact as the framework for their legislation, companies around the world will need to prepare to mitigate risk and ensure compliance across their partnerships and suppliers

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Ensure you supplier intelligence tools can easily track changes in ESG ratings. Because these are based on the monitoring of human rights, diversity and labour rights, energy and climate change, leadership ethics, and transparency, you will be able to take action quickly and comply with the highest standards of the Supply Chain Act and beyond. Learn how you can access a free ESG report on your top suppliers here.

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