On June 11, 2021, the time had finally come: the German parliament passed the Supply Chain Due Diligence Act (LkSG). The law, also known as the Supply Chain Act and the Due Diligence Act, will come into force on January 1, 2023. Find out everything you need to know about the upcoming law below.
Was the naming intended to make an ironic allusion to the length of the debates that have taken place? Probably not - but there is no question that the law was a difficult delivery. As early as February 10, 2019, the news site TAZ reported on a proposal for a so-called value chain law, drafted by the German Federal Ministry for Economic Cooperation and Development (BMZ) under Gerd Müller. This law would require companies to take measures designed to protect human rights in the value chain - the so-called human rights due diligence.
No sooner had the plans been made public than a heated debate erupted: Do companies in Germany have any influence at all on what happens in their supply chain? Will such a law lead to competitive disadvantages vis-à-vis other countries? Should environmental impacts be included?
The LkSG that has now been passed is a compromise:
- On the one hand, the law represents nothing less than a shift from voluntary corporate responsibility to legally mandated due diligence.
- On the other hand, the requirements have been significantly weakened, for example in the monitoring of indirect suppliers. Civil liability is also missing.
In this article, we are happy to summarize the key points.
The most important points in brief
The requirements of the LkSG are not actually new: they are based on the United Nations Guiding Principles on Business and Human Rights, which were published back in 2011. In Germany, the National Action Plan on Business and Human Rights (NAP) was adopted in 2016 on the basis of these Guiding Principles.
The five core elements of due diligence.
- A public policy statement on respect for human rights is in place
- A process for identifying actual and potential adverse human rights impacts is in place (risk analysis).
- Appropriate mitigation measures and controls of their effectiveness are in place.
- Reporting is carried out.
- The company establishes or participates in a grievance mechanism.
For companies already aligned with the UN Guiding Principles, no significant adjustments should be required. Companies that have not yet addressed the Guiding Principles and the NAP requirements, but are waiting for the outcome of the legislative initiatives, need to act quickly - otherwise they risk not only lawsuits and fines, but also reputational damage and supply chain disruption.
Which companies will be affected?
The Supply Chain Act will apply to companies with a size of 3000 employees or more from January 1, 2023. From January 1, 2024, the Supply Chain Act will apply to companies with a size of 1000 employees or more. It should be noted that for the number of employees, only employees working in Germany and employees posted abroad will be taken into account. For foreign companies that have a branch office in Germany, the law only applies if they exceed the employee numbers already mentioned in Germany.
However, companies that are not directly affected by the LkSG would be well advised to deal with the requirements anyway. First, an increase in customer questions and customer-initiated control measures is to be expected. Second, there is also the possibility that the scope will be expanded as a result of EU legislative initiatives (see below).
What is required of the affected companies
The LkSG describes an obligation to make an effort, not an obligation to succeed. This means: companies do not have to guarantee that no human rights are violated in their supply chains or that environmental obligations are breached. Rather, they must be able to demonstrate that they have made efforts to identify and eliminate risks, that grievance mechanisms are in place, and that remedial action is taken where necessary.
According to the LkSG, companies should have their entire supply chain in view, but be responsible for it in a graduated manner. This means that German companies are initially only responsible for their direct suppliers, not for suppliers' suppliers.
However, if a company becomes aware of a grievance in its supply chain, it will be required to take remedial action. As soon as a German company can be shown to have known about human rights violations in the supply chain but failed to take action, heavy fines can be imposed. In addition, companies can be excluded from public tenders for up to three years.
The Federal Office of Economics and Export Control (Bafa) will take control of this. The authority is to be given a "robust mandate" and can thus carry out on-site inspections and impose penalties, according to Labor Minister Hubertus Heil.
In addition, non-governmental organizations and trade unions are to be given the opportunity in the future to file lawsuits against human rights violations on behalf of foreign workers. Previously, aggrieved parties could sue themselves, but this often failed in practice due to living conditions.
What this means for jurisdiction at
There are also efforts at the EU level to establish a regulation regarding human rights due diligence. Currently, the EU Parliament is pushing the Commission to draft an EU-wide regulation. However, the push by Germany, the largest economy in the Union, could accelerate this process. As the LkSG does not come into force until 2023, it is even possible that German legislation will already have to be adapted to the expected EU regulation before the LkSG even comes into force.
How DQS can support you:
As an independent certification and audit service provider, we can support your due diligence processes in the following ways:
- Gap analysis and validation of your due diligence processes.
- Human rights assessments
- Social and environmental compliance audits
- Supplier audits around the world
- Training and capacity building
- Sustainability reporting reviews