Update on the Supply Chain Act: It’s been passed!

In March, we reported on the draft for the Supply Chain Act. This draft was passed by the German Bundestag in June 2021 and confirmed by the Bundesrat. The Act on Corporate Due Diligence Obligations in Supply Chains (LkSG) – or Supply Chain Act for short – will initially apply to companies with more than 3,000 employees from 01.01.2023. In Germany, around 600 companies will be affected in the first stage. From 2024, the law will then also apply to companies with more than 1,000 employees, so that around 2,900 more companies will be affected. The Supply Chain Act will be evaluated from 2026 and this will be accompanied by a possible adjustment of this limit. Companies with fewer employees could then also be affected.

1. The Supply Chain Act defines the requirements for corporate due diligence. The aim here is to create legal certainty for companies and those affected. The due diligence requirements defined in the text of the law include

• the establishment of a risk management system,
• the definition of an internal responsibility,
• the performance of regular risk analyses
• the issuing of a policy statement,
• the anchoring of preventive measures,
• the taking of corrective action,
• the establishment of a complaints procedure,
• the implementation of due diligence with regard to risks at indirect suppliers, and
• documentation and reporting.

2. Companies bear responsibility for the supply chain. The due diligence obligation relates to the entire supply chain from raw material to end product. The requirements for companies are graduated. They are based on the one hand, on how likely a company is to be considered a perpetrator of human rights violations and, on the other hand, on the different stages in the supply chain. Companies must take action if there are clear indications of violations along the supply chain.

3. The Federal Office of Economics and Export Control takes over the external verification of compliance with the law. This involves looking at company reports or complaints submitted and, if necessary, imposing fines in the event of omissions or violations.

4. The Supply Chain Act ensures better protection of human rights by allowing affected parties to file complaints with the Federal Office of Economics and Export Control and assert their rights before German courts.

The act provides a legal framework for the protection of people and the environment in global supply chains. The key objectives of the Supply Chain Act are to ensure respect for human rights worldwide, to end the exploitation of people and nature in developing countries, and to promote equitable globalization.

In other EU countries, laws already exist in which individual subsections of the Supply Chain Act are enshrined in a similar form. In the UK, this is the Modern Slavery Act (2015) – the law against modern forms of slavery and for reporting and measures against forced labor. Since 2017, France has had the “Loi de vigilance” to identify and prevent human rights risks in subsidiaries and along the supply chain as well. With the “Child Labor Due Diligence Act”, the Netherlands has been obliging companies to comply with due diligence obligations with regard to child labor since 2019 and provides for complaint options and sanctions in the event of non-compliance.

A draft for a European supply chain act is to be presented in fall 2021. However, further design and implementation may then take several years. It is to be expected that the EU law will be significantly stricter in some aspects than the German forerunner, which represents a compromise in many places and excludes some topics or does not consider them in depth. As soon as a corresponding law is passed at EU level, the national German Supply Chain Act will be adapted.

In July 2021, the German Federal Ministry for Economic Cooperation and Development published a study prepared by the Handelsblatt Research Institute. The study examines the implementation of human rights due diligence along global supply chains in German companies. For this purpose, the impact of the Supply Chain Act on Germany as a business location was examined with the help of two surveys and several interviews with experts from various sectors.

Ultimately, it is clear that even after the passing of the Supply Chain Act, there is still a great deal of uncertainty among German companies. This is probably due to the fact that, although the law specifies when it becomes a legal obligation for a company on the basis of the number of employees, the law is also relevant for companies that do not fall within this direct scope of application. This is because all those who are part of a supply chain of a company that falls within the direct scope of application are indirectly affected by the law – and thus also those who employ fewer employees.

Even if you are only indirectly affected by the Supply Chain Act so far, you should already deal with its requirements now. Solutions can already be found today in the area of quality management. At the latest, when requirements are broken down from the EU level to national law, the LkSG will become more relevant. The size of a company as a guideline could then be invalid. Preparing for the law now pays off in many ways:

• You increase trust among customers and suppliers and gain a positive image.
• You improve transparency and visibility in the entire supply chain.
• This visibility gives you advantages on the capital market and with investors.
• You increase intrinsic motivation to do the right thing for people and the environment and to avoid harm.
• You help create a culture that is focused on sustainability.