SUMMARY
I. New German Supply Chain Act is about to be passed
II. Requirements of the German Supply Chain Act
III. Duty of risk analysis
IV. Duty to follow up and make an effort
V. The German Supply Chain Act in an international context
VI. Evaluation of the German Supply Chain Act – What can you do?
I. New German Supply Chain Act is about to be passed
Germany is in the midst of a major discussion about a new Supply Chain Act (“Lieferkettengesetz”). While the Ministry of Economics generally opposes this supply chain law, the Ministry of Labor and Social Affairs and the Ministry of Economic Cooperation and Development strongly support it. Just recently, a compromise has been found. German politicians speak of a globally unique and groundbreaking legislative project.
The law will oblige German companies to ensure that human rights are respected in their supply chain on a global level. As legislative procedures have not been finished yet, much is still not certain but: Companies will incur considerable additional costs for compliance as a result of the new law in Germany.
II. Requirements of the German Supply Chain Act
The new law is scheduled to come into force on January 1, 2023. German businesses shall have sufficient time to adapt to the Supply Chain Act. Initially, only companies with more than 3,000 employees are affected. From 2024, companies with more than 1,000 employees will also be included in the scope of the law. However, as the project is still in the legislative process, companies with fewer employees are not off the hook yet.
The bill was initially preceded by self-regulation attempts. Labor law and environmental violations in supply chains were supposed to be monitored and reported. As it is so often the case in practice, such voluntary self-regulation systems have failed within the business community in the eyes of the government.
On the whole, the crucial question is: How should companies in Germany promote compliance with human rights in their supply chain globally in the future?
The honest answer is: This goal is unlikely to be achieved in practice. Nevertheless, the law will be passed soon. Therefore, existing compliance management systems will once again have to be expanded in order to monitor a company’s supply chain for labor rights and environmental violations and to set up notification systems for possible victims of such violations.
III. Duty of risk analysis: Companies will be obligated to identify and assess country- and sector-specific risks in their supply chain. In this context, generally known risk scenarios of the respective industry sector will have to be taken into special consideration regularly. These are usually scenarios that have already led to numerous incidents/infringements in the past. For example, in regard to the textile industry in Asia, questions of living standards corresponding payment or child labor should be addressed. Another scenario may be the extraction of raw materials: There have been considerable environmental and health risks for residents and neighbors in the past. It will take some time for reliable case groups to emerge in administration and case law that create a certain degree of legal certainty in Germany.
IV. Duty to follow up and make an effort: According to the Supply Chain Act, it is not enough to simply conduct such a risk analysis. Violations must be specifically monitored, reported and even measures have to be taken to prevent further possible infringements. According to the current legislative status, however, this only applies to a company’s direct suppliers and not to all subcontractors. In addition to that, compliance with human rights in the supply chain has to be confirmed by an auditing firm. Anyhow, there is no duty to succeed, but to merely make an effort to protect human rights so far. The degree and scope of such efforts, however, is entirely open.
Sanctions are set to be harsh; penalties may reach up to 10% of the annual sales of a company. Furthermore, companies that have already been fined can be excluded from public contracts for up to three years.
V. The German Supply Chain Act in an international context
Indeed, to date, no other country seems to have imposed a law with similar far-reaching scope. Maybe, comparable models include the Modern Slavery Act in England, the Act against Child Labor (Wet Zorgplicht Kinderarbeid) in the Netherlands or the Swiss corporate responsibility initiative that aims to require Swiss companies to undertake due diligence measures in relation to human rights abuses and environmental violations abroad caused by companies under their control. But these laws are definitely not as extensive. Of course, this German step has not been unanswered by the EU. A draft European legal act has already been announced for 2021. Certainly, further EU members will issue their own national legal solutions in this respect soon. This is why there will probably be a patchwork of
laws with different protection levels in Europe with an EU-wide minimum level of supply chain risk management. Corporate groups with affiliates throughout the EU will be busy to bring everything under one roof.
VI. Evaluation of the German Supply Chain Act – What can you do?
This new law certainly risks the successful model of the German economy with its strongly internationalized value chains and production abroad. And this risk is accepted, although it is highly questionable whether companies in Germany are able to influence compliance with human rights within their supply chain abroad. Perhaps, it is more up to sovereign states to do this job and a burden companies are not able to carry.
The German Supply Chain Act will definitely bring supply chain mapping into the legal department. Thus, legal risks may be better dealt with if preliminary investigative work can be performed under the attorney-client privilege shield. As a part of future supplier management, regular spot checks will have to be carried out, and suppliers will be required to provide evidence that they have carried out appropriate training. All in all, additional bureaucracy companies will have to cope with.
Reporting obligations are likely to be extended in any case, and legally binding due diligence obligations in the supply chain introduced at EU level appear inevitable. It makes sense for companies to use existing risk management systems as a starting platform to implement this new regulatory situation. However, there is a fundamental distinction to be made between the classical risk approach and the new regulatory regime: A classical CMS is designed to protect the society, due diligence under the Supply Chain Act will have to focus on the environment and the individual.
Nevertheless, in practice, supply chains are often extremely complex. Therefore, it is important for companies to identify potential risks to the people and the environment in their supply chain and to be prepared for the upcoming reporting obligations related to them.
Feel free to contact us if you would like to discuss the German Supply Chain Act!
