The Top 5 Things to Know About the German Supply Chain Act

Rekha Kumari

Sustainability Expert

24 Jul 2024

About 5 mins

24 Jul 2024

About 5 mins

In today’s globalised economy supply chains often stretch across multiple countries, making it challenging for businesses to drive ethical and sustainable practices in their supply networks. A German supply chain Act, passed in 2023, aims to address this issue by introducing stringent due diligence obligations for companies operating in Germany.

By understanding the provisions of this Act, business leaders can prepare their organisations for compliance while also building more responsible supply chain management practices.

Key provisions to understand include this law’s scope, focus on human rights and environmental risks, due diligence requirements, substantial enforcement mechanisms, and extraterritorial reach.

1. Its scope

The German Supply Chain Due Diligence Act (LkSG) is a relatively new law that aims to support responsible business practices throughout a supply chain. The LkSG applies to companies based in Germany or with significant business activities there, that employ at least 3,000 employees globally.

The law’s provisions apply not only to direct suppliers but also to indirect suppliers throughout a company’s supply chain. Companies must establish effective risk management systems that enable the identification, assessment, and mitigation of risks related to human rights and environmental issues.

2. A focus on human rights and specific environmental risks

The German Act is a detailed legislative measure designed to encourage responsible business conduct and enhance sustainability and ethics in business operations. It emphasizes safeguarding human rights and protecting the environment and mandates companies to actively identify, prevent, and address human rights and environmental risks in their operations and supply chains.

3.The core of due diligence

Due diligence is foundational to complying with the German supply chain Act. Companies must take several steps to manage environmental, social and governance (ESG) risks in their supply chains, including:  

• Establishing a risk management system to track and control ESG factors.
• Implementing preventive measures to mitigate potential adverse impacts on human rights and the environment.
• Taking corrective actions to address any violations or negative impacts discovered during risk assessments.
• Setting up a complaints procedure that allows stakeholders (including workers in their supply chain) to report grievances related to ESG issues.
• Conducting regular risk analyses to continuously monitor and update risk management strategies.
• Documenting and publicly reporting on the company’s efforts to enable transparency and accountability in their ESG practices.

4. Its substantial enforcement methods

The German supply chain Act includes strong enforcement mechanisms to drive compliance, including inspections, document reviews, on-site visits, warnings and fines of up to 2% of a company’s global turnover.

Additionally, non-compliant companies may be excluded from public procurement contracts or even banned from doing business in Germany.

The Act also introduces civil liability provisions. Individual people or groups can seek compensation for damages incurred due to human rights or environmental violations in a German-based company’s supply chain.

5. Going beyond national boundaries

The German supply chain Act represents a significant legislative step in promoting responsible business practices, by compelling companies to extend their due diligence processes beyond Germany’s borders. Businesses within the scope of this law must consider their entire global supply chain fostering a broader international commitment to ethical and sustainable operations.

This approach encourages multinational companies to implement comprehensive ESG risk management systems and facilitates a culture of collaboration across borders. Such global engagement is crucial for advancing universal standards in supply chain ethics and sustainability.

Key points to remember:

·       It’s not just about compliance

The German supply chain Act isn’t just about legal compliance. It encourages businesses to embrace sustainability and ethical conduct. By proactively implementing robust risk management systems, companies can mitigate legal risks and enhance their reputation.

·       Collaboration is key

Collaboration and knowledge-sharing among businesses, industries and governments is essential to building a more accurate picture of ESG risks in supply chains – and for driving continuous, lasting improvement.

Companies can engage in industry associations, forums and initiatives focused on responsible supply chain management, enhancing their ability to manage these risks effectively. Partnerships with suppliers, civil society organisations and labour unions also enhance risk identification and mitigation efforts.

·       Supply chain law is an evolving landscape

The German supply chain Act is a significant step in the evolving landscape of responsible supply chain law. It has been a catalyst for companies in Germany to critically evaluate their supply chains, enhance risk management systems and embrace sustainable practices.

As countries increasingly adopt legislation on corporate sustainability and supply chain ethics, businesses are pushed to recognise the urgency and inevitability of integrating ESG considerations into their operations. It’s important to stay up-to-date on emerging regulatory developments, to prepare for new requirements.

How Sedex can support you:

• Centralised data management: leverage the Sedex platform efficiently to map your entire supply chain. This tool allows you to consolidate sustainability data collected via supplier questionnaires into a single repository. This integration facilitates deeper analysis and supports more strategic business decisions.
• Risk assessment: use our comprehensive risk assessment tools to identify and prioritise ESG risks among your suppliers.
• Site-level social auditing with SMETA: employ our leading social audit, SMETA, to assess site practices, working conditions and social and environmental risks across your supply chain locations.
• Consulting services: engage with our Consulting team to craft a tailored sustainability strategy to aligns with the German supply chain Act. Our experts are here to guide you through the complexities of compliance and help you implement effective practices.
• Contact us: for further assistance or to start optimising your supply chain management under the new regulations, please reach out. We’re ready to support your efforts in meeting and exceeding the standards set forth by the German supply chain Act.

By integrating these tools and services, businesses can ensure they meet the legal requirements while fostering a more responsible and sustainable supply chain.