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Learn how Craft’s supply chain resilience platform helps large multinational companies comply with the German Supply Chain Act here.
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 went into effect January 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.
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.
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:
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.
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.
As of January 1, 2023, the Supply Chain Act applies 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).
So what does this mean for your business, and how can you prepare? While the Supply Chain Act may not apply to all companies this year, firms should still 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:
While some global standards and frameworks for maintaining ethical supply chains are in place, binding regulations are mostly country-specific. However, as one country adopts robust legislation, others tend to follow suit. For example, many EU countries have enacted their own laws regarding ESG performance within supply chains including:
The EU’s sweeping Corporate Sustainability Reporting Directive also applies to firms of a particular size - whether they are based in the EU or not - and requires companies to disclose their efforts and progress on a wide range of sustainability and ethical concerns.
And while there are no supply chain laws like the German Supply Chain Act at the federal level in the US, 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.
The Uyghur Forced Labor Prevention Act passed in 2022 also places a burden on US firms to investigate their Tier 2 and 3 suppliers, as all goods originating from the Xinjiang region of China are now presumed to have been produced using forced labor.
Canada’s Modern Slavery Act also requires firms of a certain size to closely monitor their entire value chains and report on potential human rights risks, even if the company is not Canadian-based.
While policies and laws such as the German Supply Chain Act and the Corporate Sustainability Directive are already in place, it’s important to note that they are expected to become more strict in scope over the next several years. In addition, the Netherlands, Austria and Belgium have introduced their own supply chain bills, which may also apply to non-EU based firms that conduct business in their respective countries.
In the US, the New York State Senate has proposed 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) released proposals for new climate change and sustainability disclosures. While the proposals have faced hurdles to adoption, they would require US 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.
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.
Ensure your supplier intelligence platform can easily track changes in ESG ratings, as well as provide full value chain transparency with n-tier mapping capabilities. Because these are based on the monitoring of human rights, diversity and labor 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 Craft’s supply chain resilience platform helps large multinational companies comply with the German Supply Chain Act here.
