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Is your business ready for the German Supply Chain Due Diligence Act?

A new German law makes due diligence on human rights and environmental risks in businesses’ supply chains mandatory. In July 2021, Germany adopted the Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz). The Act requires companies to operate strong due diligence programmes to ensure that their organisation and their suppliers are identifying, preventing and remediating any negative impacts on human rights or the environment. Failure to comply with the law can result in fines of up to 2% of global turnover and being banned from accessing public contracts in Germany for up to three years.

Although the Act will come into effect on 1 Jan 2023, companies required to report under the Act should start working on implementing the obligations of the law ahead of the first reporting period.

This article highlights the key areas you need to investigate as a business to prepare for the new legislation. If you need support, you can contact us here.

Check if your company is under the scope of the Act

When it comes into force on 1 Jan 2023, the Act will apply to any business that operates in Germany, headquartered there or not, with more than 3,000 employees.

The total number of employees must take into account the employees of all enterprises and subsidiaries belonging to the parent company who are employed in Germany, including employees posted abroad. It should also include temporary workers with tenures of over six months.

From 2024, the threshold for number of employees will change from 3,000 to 1,000 employees. This means that more companies will be under the scope of the legislation.

Understand which human rights and environmental risks you must consider in risk and impact assessments

Based on international frameworks such as the International Bill on Human Rights International Labour Organisation conventions, the Act identifies the following human rights and environmental issues that your company must include in its supply chain due diligence efforts across direct and indirect suppliers.

Human rights issues

  • Child labour including the worst forms of child labour and child exploitation
  • Forced labour, debt bondage and all slavery-like practices
  • Health safety hazards resulting from poor health and safety at work
  • Barriers to freedom of association
  • Discrimination and inequality
  • Wage theft and wages not paid in line with applicable laws
  • Food insecurity, water contamination and lack of access to sanitation resulting from environmental degradation such as water and air pollution

Environmental-related issues

  • Use of mercury-added products, compounds in manufacturing processes and waste
  • Production and use of persistent organic pollutants
  • Poor waste handling, collection, storage and disposal
  • Export of and poor management of hazardous waste and other wastes

Understand your due diligence obligations

The Act sets out key due diligence obligations to ensure your company is working to prevent or minimise any human rights or environmental-related negative impacts. These obligations must be embedded into business activities, and an annual report must be produced detailing steps taken, their effectiveness and the impacts identified.

These requirements as are follows:

  • Risk management

Your company must have an effective risk management system in place to assess and minimise human rights and environmental-related risks within your operations and supply chain. The interests of all stakeholders should be considered in this system.

  • Risk assessment

Your company should conduct appropriate risk assessments at least once a year and ad hoc in order to identify human rights and environment-related risks in your business and direct suppliers, which should be weighted and prioritised accordingly. The result of this assessment should be communicated internally to relevant decisionmakers.

  • Policy

Your company must develop a policy statement on your human rights strategy, to be adopted by senior management. This policy should contain the description of the process by which your organisation is or has implemented the due diligence mechanisms mandated by the law, the priority human rights and environmental-related risk areas, and expectations to cascade across the supply chain.

  • Preventive measures in direct operations and direct suppliers

Preventive measures include the implementation of a human rights strategy, appropriate procurement strategies and practices that prevent or minimise risk, training, and monitoring practices to verify compliance. Your company should also set clear human rights and environmental expectations with direct suppliers through the contractual relationship, training, and other monitoring mechanisms such as auditing.

  • Remediation

Your company should have appropriate remedial action to address human rights or environmental incidents, with a corrective action plan and timeline if needed. The termination of a contractual business relationship should only be sought as a last resort.

  • Grievance mechanism

Your company must have an appropriate internal complaints procedure available to your employees and your direct suppliers’ employees, in which grievances can be submitted to without retaliation for whistle-blowers. The effectiveness of the system must be reviewed at least once a year and on an ad hoc basis if deemed necessary.

  • Cascading obligations to indirect suppliers (tier 1+)

Grievance mechanisms should allow the reporting of human rights or environmental risks or incidents linked to the actions of your company’s indirect suppliers. Any issues should prompt a risk assessment, the implementation of prevention measures, the drafting of prevention, cessation or minimisation concept, and a policy statement update if necessary.

  • Documenting

Your company should make sure that all efforts to meet these due diligence obligations should be widely documented and that documentation must be kept for at least seven years.

  • Monitoring & evaluation

It is recommended that a dedicated person or team responsible for monitoring risk management is appointed. Additionally, implementing a monitoring & evaluation system, which would include conducting impact assessments, would support your company in understanding the effectiveness and impact of the actions undertaken and whether it is meeting the obligations set by the law, which is required to be included on the report.

Prepare your report

Your organisation must prepare an annual report on how it is meeting the due diligence obligations under the Act. It should cover activities undertaken in the previous financial year and be published on your website free of charge. It should also be submitted to the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle) (BAFA). The report should include: any human rights and environmental risks or incidents identified; the due diligence mechanisms in place in your organisation according to the obligations listed above; how your organisation assesses the impact and effectiveness of actions taken and existing mechanisms; and drawing conclusions for future improvements.

Stay ahead of financial and criminal penalties

Fines for not meeting the requirements of the legislation are akin to those under GDPR, with your company and others potentially facing fines of up to 2% of global turnover and being barred from tendering for public contracts in Germany for a period of up to three years. The Act also allows potential victims within and outside Germany to sue your company for human rights or environment-related issues through domestic trade unions or NGOs.

How Sedex can help

Sedex provides a number of services that can help your organisation with compliance to the German Supply Chain Due Diligence Act, namely:

  • Gap Assessment – Underpinned by the UN Guiding Principles and other international frameworks, our Consulting service can conduct a gap assessment of your organisation to identify where changes need to be made to achieve compliance with the Act. The results can be used to create a tangible action plan for improvement or remedy.
  • Risk assessment – Our Radar risk assessment toolenables you to analyse human rights and environmental risks across your own and your suppliers’ operations. Compare risks across countries, sectors and individual work sites, to help you prioritise where to focus next.
  • Risk management – The Sedex Self-Assessment Questionnaire asks suppliers to provide information about their work sites, operations, working conditions, and workers. Our data platform also helps businesses to store, share and report on supply chain information. Suppliers can share data with several customers at once, and buyer companies can store information about all their direct suppliers in one place to simplify analysis and reporting.
  • Due diligence policies, processes and compliance reporting – Our Consulting service can ensure your organisation has the correct polices and processes in place to comply with the law, and that your supply chain due diligence is sufficient. Additionally, we can help you demonstrate the status of compliance throughout your supply chains and sites around the world. These reports aggregate your data so you are able to show your supply chain or site compliance status without revealing specific supplier names or business sensitive information. Consulting can also help draft your report ahead of submission.