German Supply Chain Act (LkSG)
The German Supply Chain Due Diligence Act, or Lieferkettensorgfaltspflichtengesetz (LkSG), is a mandatory piece of legislation requiring large companies operating in Germany to conduct comprehensive due diligence on their supply chains. The law obligates businesses to identify, prevent, and address human rights and specific environmental violations within their own operations and those of their direct suppliers. It marks a significant step towards enforcing corporate accountability for global supply chains.
Why it matters
For any procurement professional whose company falls within the scope of the LkSG, compliance is not just a best practice—it is a legal necessity. The Act sets a new standard for supply chain risk management, and failure to comply can result in substantial fines and exclusion from public contracts. Understanding the LkSG is fundamental for mitigating risk and ensuring continued market access in Germany.
A proactive approach to LkSG compliance is crucial for several reasons:
- Ensure legal compliance: The Act is enforced by the Federal Office for Economic Affairs and Export Control (BAFA), which can impose fines of up to 2% of a company’s annual global turnover for serious violations. A structured due diligence process is your primary method for demonstrating compliance and avoiding these severe penalties.
- Manage human rights risks: The LkSG specifically targets severe human rights risks, including forced labour, child labour, discrimination, and violations of occupational health and safety. The law compels procurement teams to move beyond cost and quality metrics to actively manage these ethical risks.
- Strengthen supplier relationships: Compliance requires deeper engagement with direct suppliers. It necessitates clear communication of expectations, collaborative risk assessments, and joint efforts to implement preventive and corrective measures, fostering more resilient and transparent partnerships.
- Enhance corporate reputation: Demonstrating robust compliance with the LkSG signals to investors, customers, and other stakeholders that your business is committed to ethical sourcing. This transparency can build trust and provide a competitive advantage.
How it works / key points
Companies must implement an effective risk management system to identify, prevent, and mitigate human rights and environmental risks. This includes assigning clear internal responsibility for overseeing supply chain due diligence, for instance, by appointing a Human Rights Officer.
At least once a year, and on an ad-hoc basis when significant changes in the supply chain occur, businesses must conduct a risk analysis. This analysis must identify, weigh, and prioritise risks within their own business area and for their direct suppliers. While not mandatory for indirect suppliers, due diligence must be triggered if the company gains substantiated knowledge of a possible violation.
Based on the risk analysis, companies must take appropriate preventive measures. This includes adopting a policy statement on human rights, developing a supplier code of conduct, and embedding these expectations into procurement contracts. Training for relevant employees and suppliers is also a key preventive step.
If a violation is identified or is imminent, the company must take immediate corrective action to prevent, end, or minimise it. For direct suppliers, this could involve creating and implementing a corrective action plan together. Terminating the business relationship is considered a last resort.
Companies are required to set up an accessible and effective grievance mechanism. This channel must allow individuals to report human rights or environmental risks and violations within the supply chain, ensuring that the voices of affected people can be heard.
Finally, businesses must continuously document their due diligence activities and create an annual report on their fulfilment of these obligations. This report must be published on the company's website and submitted to BAFA, ensuring public transparency.
Examples
A German-based retailer automatically includes a supplier code of conduct, which explicitly references LkSG requirements, in all new supplier contracts. Before onboarding a new direct supplier from a high-risk country, the procurement team requires the supplier to complete a Sedex Self-Assessment Questionnaire (SAQ) to identify potential risks related to working hours and wages.
Through its grievance mechanism, an engineering company receives a complaint about unsafe working conditions at a direct supplier’s factory. In line with its LkSG obligations, the company launches an investigation. It works with the supplier to develop a corrective action plan, which includes providing new personal protective equipment (PPE) and implementing new safety training, tracking the plan’s completion through a shared platform.
An automotive manufacturer performs its annual risk analysis and identifies excessive overtime as a key risk among its Tier 1 suppliers in a specific region. The company’s annual LkSG report details this risk, outlines the preventive measures taken (such as supplier training on labour law), and reports on the number of corrective action plans implemented during the reporting period.
About Sedex
Sedex is a global technology company that specialises in data, insights and professional services to empower supply chain sustainability. Our platform, tools and services enable businesses to easily manage and improve their environmental, social and governance (ESG) performance to meet their supply chain sustainability goals.
