Germany’s new Supply Chain Due Diligence Act: What you need to know
In June the German parliament passed a new law that will require large companies to conduct supply chain due diligence activities. The law requires these companies to identify, prevent and address human rights and environmental abuses within their own and their direct suppliers’ operations.
What is the new law?
Germany’s new Supply Chain Due Diligence Act (initially called the Supply Chain Act), requires large companies to make sure social and environmental standards are observed in their supply chain.
Companies must monitor their own operations and their direct suppliers worldwide, and take action if they find violations.
The law has been passed but it doesn’t come into effect until 2023, with an expansion in 2024.
Who does it apply to?
- From 2023: Companies based in Germany with more than 3,000 employees, or German-registered branches of foreign companies with more than 3,000 employees
- From 2024: Companies based in Germany with more than 1,000 employees, or German-registered branches of foreign companies with more than 1,000 employees.
What do businesses need to do?
The Supply Chain Due Diligence Act requires these companies to set up processes to identify, assess, prevent and remedy human rights and environmental risks and impacts in their supply chains, and in their own operations. They must also make sure they provide ways for employees of indirect suppliers (suppliers they don’t have a direct commercial relationship with) to file a complaint alerting the company to human rights or environmental violations.
The risks that companies must address include:
- Forced labour
- Child labour
- Violations to freedom of association
- Unethical employment
- Unsafe working conditions
- Environmental degradation.
Companies must also publish an annual report outlining the steps they have taken to identify and address these risks.
Consequences and penalties if companies fail to comply with this law
If the companies covered by the scope of the law don’t comply with its requirements, there are some possible consequences:
- Fines of up to €800,000, or up to 2% of their average annual global turnover.
- Exclusion from winning public contracts in Germany for up to three years.
Practical next steps if the law applies to your business
- The most important first step in a responsible sourcing system is to map all of your direct suppliers. Look at the information you already have on your direct suppliers to understand whether you have a complete list.
- Work with your procurement and buying teams to create a full list of your direct suppliers, including their locations, the nature of these businesses, the nature of their workers, and contact details for each supplier
- Conduct a basic risk assessment, considering where suppliers are located and the types of people they employ. Certain countries of location, and certain types of workers such as migrant workers, are considered more vulnerable to risks.
Practical steps for suppliers
If your business supplies companies that will have to comply with this new law, you may start to receive more requests for information from these companies.
- Read about the law and what it asks companies to do. This will help you to prepare for requests from large customers in Germany. Learn about the information your customers will need from you, so that you know what to have ready.
- Check that you are compliant with labour, health and safety and environmental legislation. Make sure your paperwork is up-to-date and ready to share with customers, to to help them comply with the new law.
How Sedex can help your business
Sedex provides a number of services that can help your business to meet the requirements of the Supply Chain Due Diligence Act.
- Our Radar risk assessment tool enables 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.
- The Sedex Self-Assessment Questionnaire asks suppliers to provide information about their work sites, operations, working conditions, and workers
- Our data platform 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
The new German supply chain law is a welcome development. However, it joins what is currently a patchwork of national regulation including the French Corporate Duty of Vigilance Law, the UK Modern Slavery Act, and the Californian Transparency in Supply Chains law.
Businesses also need to consider upcoming regulation, the most important of which is the European Union’s proposed law for corporate due diligence. You can read more about each of these laws here.
Navigating these different regulations can appear difficult. For international companies trying to address each individual law, following the basic principles of the proposed EU legislation will be the most effective approach – taking steps to identify, prevent, mitigate and remedy human rights abuses and environmental damage in your own operations and supply chain.
This will also prepare your business for the more rigorous requirements contained in the proposed EU legislation when these become law.