The New Supply Chain Act – What Companies Need to Do Now
Companies in Germany are facing new legal challenges coming next year. In this article, you will find out whom the Supply Chain Act concerns and what action your company must now take.
On 21 June 2021, the German Bundestag passed the "Act on Corporate Due Diligence Obligations in Supply Chains" – in short, the Supply Chain Act. The aim of the law is to protect the environment and human rights along the supply chains in a globalised economy, to curb exploitation in emerging and developing countries and to prevent avoidable accidents. The Supply Chain Act will enter into force on 1 January 2023 and initially obliges companies with headquarters or branches in Germany with more than 3,000 employees, regardless of the sector, to check compliance with human rights and environmental concerns, to monitor compliance and to prevent violations.
Staggered timeline for the implementation of the Supply Chain Act
As of 1 January 2023, the Supply Chain Act must be implemented by companies with more than 3,000 employees and headquartered in Germany. This affects around 600 companies in Germany. What is important to note here is the calculation includes temporary workers who have been employed at the company for at least six months, as well as employees posted abroad.
As of 1 January 2024, the Supply Chain Act must then also be complied with by the 2,900 German companies that employ more than 1,000 employees.
It is also important for significantly smaller companies to prepare for the new law, as they are obliged to provide evidence of compliant trade as part of the supply chain of affected companies.
The contents of the Supply Chain Act create legal certainty for companies and those affected
The Supply Chain Act directly addresses the global issues along the supply chains. Too many countries still disregard minimum social standards. 79 million children worldwide work on coffee plantations, in quarries or in textile factories – under exploitative, sometimes life-threatening conditions. According to the then Federal Minister of Labour and Social Affairs Hubertus Heil, “the strongest law in Europe to date in the fight for human rights and against exploitation” creates central regulations that provide legal certainty for companies and those concerned.
- Clearly specified requirements for corporate due diligence along the entire supply chain
- Graduated requirements according to the ability to influence the perpetrator of the human rights violation and the position of the company in the supply chain.
- Victims of human rights violations can assert their rights in German courts.
Compliance with the Supply Chain Act is checked by the Federal Office for Economic Affairs and Export Control. The government agency checks company reports, investigates violations and may impose fines. The government agency may also exclude companies from public tenders.
What is sanctioned under the Supply Chain Act?
The law refers to international agreements and will sanction, inter alia, the following violations of human rights or environmental protection:
Human rights area
- Child labour
- Forced labour
- All kinds of slavery
- Disregard of occupational health and safety
- Withholding an adequate living wage
- Damage to livelihoods such as food or drinking water
- Unequal treatment
- Use of security forces without adequate supervision
- Production and use of mercury-containing products or compounds
- Production of persistent organic pollutants
- Incorrect handling of persistent organic pollutants
- Export of hazardous waste
- Transboundary shipment of hazardous waste
Companies face these sanctions in the event of violations
Companies that are subject to the Supply Chain Act must be able to demonstrate that they are actively contributing to or mitigating as good as possible the prevention of human rights and environmental violations within the supply chain, respectively. Depending on the kind of the violation, fines of between €100,000 and €800,000 can be levied for violations of the law. For companies with a turnover of more than €400 million per year, a fine of 2% of the worldwide turnover can be imposed. In addition to the "official" sanctions, it must also be borne in mind that violations can cause enormous reputational damage to the company.
These measures must be implemented by the companies concerned
With different processes and measures, the companies concerned must actively contribute to preventing or minimising human rights and environmental violations. The processes include, but are not limited to:
- Establishing a risk management system to identify and prevent breaches along the supply chain
- Conducting compliance risk analyses for the company's immediate suppliers regarding products, processes and services; The risks identified must be assessed and prioritised
- Adoption of a policy statement by the management; The statement must describe a strategy by which the company will contribute to the observance of human rights and environmental protection
- Development and implementation of preventive measures. These measures include the regular review of suppliers, a code of conduct or optimised selection procedures
- Continuous documentation of all implemented measures with annual reporting; The report must be publicly available on the company's website and submitted to the Federal Office for Economic Affairs and Export Control.
- Tools around the supply chain audit and the planned realignment. Small and medium-sized enterprises in particular are currently still faced with many questions when it comes to tracking international supply chains: Numerous tools have therefore been created at federal level in recent months to support SMEs in implementing the law
- Helpdesk on business and human rights with individual, confidential and free advice from experts
- CSR Risk Check for free assessment of the human rights situation on site
- SME Compass, a free information portal for the identification and management of sustainability risks.