Our economy is global: electronic components for computers and smartphones or parts for the automotive and engineering industry, textiles or food – almost every product originates from global supply chains as we are closely linked together on an international level.
When it comes to the discussion about sustainability in the economic sphere, the idea is increasingly gaining ground that companies should take responsibility for ensuring that their suppliers observe human rights and comply with environmental standards.
Corporate Social Responsibility (CSR) stands for businesses voluntarily contributing to sustainable development and implies responsible corporate action by all market participants. Its core is the socially, ecologically, and economically responsible corporate management that has an impact throughout the entire value chain. Numerous companies use codes of conduct or CSR agreements to obligate their contractual partners to observe minimum standards of occupational health and safety and to object to child labor, forced labor, or discrimination in their companies or at their suppliers. Voluntary assumption of social responsibility is being legalized in the form of binding statutory provisions, for example through the Minimum Wage Act, which already includes CSR approaches.
In2011, the United Nations Human Rights Council adopted Guiding Principles on Business and Human Rights, representing a global instrument for eliminating and preventing human rights violations in a business context. In 2015, the international community adopted the 2030 Agenda with 17 global goals for a better future based on these principles.
In 2016, the German federal government initiated the National Action Plan – Transposition of the UN Guiding Principles on Business and Human Rights (NAP). As apparently only few companies comply with their human rights due diligence obligations in the supply chain, the German government agreed on a “Due Diligence Act” (also referred to as Supply Chain Act) after tedious political negotiations.
In France (Loi de Vigilance), the Netherlands (Wet Zorgplicht Kinderarbeid), and the United Kingdom (Modern Slavery Act), statutory provisions to prevent human rights violations and child labor in the supply chain already exist. Following the narrow failure of the referendum on the “Corporate Responsibility Initiative” in Switzerland in November 2020, the Swiss parliament’s legislative proposal with far-reaching reporting obligations for companies in the areas of the environment, employee protection, human rights and anti-corruption entered into force.
The new German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG) - Corporate due diligence to prevent human rights violations in supply chains
After tough negotiations, the German Bundestag passed the Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz (LkSG)) on June 11, 2021. Final deliberation in the Bundesrat took place on June 25, 2021. The law was promulgated in the Federal Law Gazette on July 17, 2021 and will enter into force on January 1, 2023.
The LkSG obliges companies to ensure that human rights violations, for example through child and forced labor, slavery, torture or the violation of occupational health and safety conditions, as well as environmental risks, are identified at an early stage and avoided or discontinued in their own supply chain.
The provisions of the LkSG initially only apply to large domestic and foreign companies that have a regular workforce of at least 3,000 people in Germany and that have their registered office, headquarters, principal office or a branch office in Germany. As of January 1, 2024, this threshold will drop to 1,000 employees.
The “supply chain” within the meaning of the act ranges from the extraction of raw materials to the delivery to the end customer. In principle, companies are only responsible for their own area of operations and their direct suppliers. However, if a deficit within the supply chain that can be traced back to the actions of a mere indirect supplier becomes known, companies are still obligated to take remedial action in this respect.
In order to comply with their due diligence obligations with regard to human rights and environmental aspects under the LkSG, affected companies must
- implement a risk management system
- define appropriate internal responsibilities, for example by appointing a human rights officer
- conduct regular risk analyses
- issue a policy statement (Grundsatzerklärung),
- implement preventive measures (e.g. by setting up a whistleblower hotline) in their own area of operations and at their direct suppliers,
- take corrective actions if necessary,
- establish a complaints procedure, and
- implement procedures for documentation and reporting.
Compliance with due diligence requirements is ensured by the introduction of comprehensive monitoring and sanctioning instruments. In the case of non-compliance with the corporate due diligence obligations of the LkSG, companies face severe fines. Depending on the severity and significance of the accusation and the individual circumstances, violations can be fined up to 8 million euros. For companies with worldwide average annual sales of more than EUR 400 million, sales-related fines of up to 2% of average annual sales can be imposed. Moreover, exclusion from public contracts may be considered as an additional sanction.
Violations of human rights already put the reputations of large, international companies seriously at risk in the past. The new Supply Chain Due Diligence Act will nevertheless significantly increase the importance of compliance with regard to the supply chain for the companies, as the risks in the event of a violation are considerable and the potential sanctions are severe.
Affected companies should therefore strive to implement the measures specified by the legislator promptly and consistently. A policy statement must be drawn up, supplier codes of conduct and supply contracts must be revised and adapted to the new requirements. Employees must be trained and the necessary internal staff must be made available. Finally, the new organizational instruments, consisting of a risk management system, complaints procedures and reporting, must be implemented in the company and regularly reviewed.
Draft for a European supply chain law - EU Commission proposes significantly stricter regulations
On 23 February 2022 the European Commission presented its proposal for a directive on rules for companies to respect human rights and environment in global value chains. With the proposal the EU intends to support sustainable and responsible corporate behavior in all global supply chains. The provisions of the draft go significantly beyond the German Supply Chain Act ("LkSG").
Compared to the LkSG, the scope of the draft directive is significantly larger. Companies are affected if they meet the following criteria:
Member states shall ensure that companies comply with their human rights and environmental due diligence obligations. To achieve this, the draft sets out a catalogue of concrete measures in six steps, similar to the German LkSG.
The EU also focuses on combating climate change. Companies are to adopt a plan to ensure that the company's business model and strategy are in line with limiting global warming to 1.5°C as agreed upon in the Paris Climate Agreement.
Compliance with the new climate obligations is also to be taken into account when determining variable compensation management bonuses.
Sanctions for violations of the directive shall be based on the respective turnover of the company. In addition, EU member states must ensure that decisions on such sanctions are officially published by them.
In contrast to the German law, the draft directive provides for comprehensive liability for damages under civil law. Damages resulting from non-compliance with the prescribed preventive and remedial measures would have to be compensated.
The proposal will now be submitted to the European Parliament and the Council for approval. Once adopted, member states will have two years to implement the directive into their national law. In Germany, the directive will lead to a significant stricter provisions of the Supply Chain Act which has been adopted last year.
