Getting Ahead: How to Prepare for Germany’s Supply Chain Due Diligence Act

Did you know that only 4% of businesses consider themselves “very well prepared” for Germany’s Supply Chain Due Diligence Act? This 2022 Study by the German Association for Materials Management, Purchasing and Logistics also revealed that 70% of organisations only consider themselves “moderately to very poorly prepared” for the Act. At IETP, we closely monitor the ever-changing global regulations landscape and when it applies to labor standards and environmental risks. Our goal is to provide our members and the industry in general, with the tools required to stay compliant regardless of where your business is conducted. One of the more recent regulatory acts to take effect is the German Corporate Due Diligence Obligations in Supply Chains Act (LkSG), which is the focus of today’s article. While this act applies specifically to products being produced or imported into Germany, you don’t have to be a solely German-based company to be affected by this new legislation. This article will explain who this Act applies to and the steps companies must take to be compliant and continue to do business in Germany while avoiding the costly financial and reputational damage for non-compliance. The German Supply Chain Due Diligence Act came into effect in January 2023. The Act currently applies to any company that: Is based in Germany or German-registered branches of foreign companies (i.e. their central administration, their principal place of business, their administrative headquarters, their statutory seat or whose domestic branch office is based in Germany); and has at least 3,000 employees in Germany – including employees posted abroad.Beginning on the 1st of January 2024, the Act will expand to become mandatory for all companies with 1,000 employees or more in Germany. Although the legislation does not require direct compliance from smaller companies, due to the trickle-down effect, many more will be affected as they contribute to the supply chain of larger organizations. Companies in the supply chain will likely be required to report on their performance and impact relating to human rights and environment-related risks. We understand that due diligence obligations are now more frequently required in contractual relationships, for example within the terms and conditions of the supplier contract. What types of risks do companies need to address? The Act entails due diligence obligations relating to human rights and environmental risks and violations. These include:What are the core obligations of the Act? The Act essentially requires companies to establish processes for identifying, assessing, preventing, and resolving human rights and environmental risks in their supply chains and own operations. They must also ensure they provide a grievance mechanism accessible to employees of both direct and indirect suppliers to file complaints alerting the company to human rights or environmental violations. Due diligence obligations must therefore be integrated into the corporate policy of companies. A number of supplementary and related measures are also included, such as:Establishment of a risk management system (sec. 4),Designation of a responsible person or persons within the enterprise for compliance (sec. 4 (3)),Performance of regular risk analyses (sec.5),Issuing of a policy statement (sec. 6 (2)),Establishment of preventative measures in its own area of business (sec. 6 (1) & (3)) and vis-à-vis direct suppliers (sec.6 (4)),Taking corrective/ remedial action (sec.7 (1) to (3)),Establishment of a complaint’s procedure (sec.8),Implementation of due diligence regarding risks at indirect suppliers (along product supply chains) (sec.9),Documentation (sec. (10 (1)) & reporting on the fulfilment of all obligations (sec. (10 (2))Read the Act in full here 6 Steps to help you comply:1. Policy Review: look at how you can embed responsible business conduct into policies and management systems,2. Human Rights Impact Assessment: assess actual and potential adverse human rights impacts,3. Action Plan: integrate the findings and take appropriate action,4. Measure Results & Progress: track action plan implementation and results,5. Report Publishing: communicate and report how impacts are being addressed,6. Remediate issues found: provide for, or cooperate in, remediation when appropriate.