The German Supply Chain Due Diligence Law (Lieferkettensorgfaltspflichtengesetz [LkSG]) was enacted by the German Bundestag on 11 June 2021 and will come into force from 1 January 2023. It obliges German-based companies above a certain size to fulfil their human rights and environmental obligations throughout the global supply chain. Starting from 1 January 2023, companies with at least 3,000 employees will be covered, and from 1 January 2024 extend to companies with at least 1,000 employees. It is intended to ensure compliance with fundamental human rights standards such as the prohibition of forced labour and child labour.

The law primarily aims at protecting human rights. In addition to governments, companies will now be held accountable to improve the protection of people and ensure that human rights are respected in their supply chains. The law also intends to create legal certainty for companies and those affected by establishing clear requirements of corporate due diligence.

1. The law applies in particular to suppliers abroad

The basic idea of the law is to cover all steps from Germany and abroad that are necessary to manufacture a product or provide a service. This applies in particular to suppliers abroad, but also to national circumstances and thus also to suppliers in Germany. Acting in the company's own business sector, both nationally and internationally, is also covered by the law. Consequently, attention is paid to the treatment of employees in the company, but also what impact the production activity has on local residents along the supply chain.

2. Staggering scope of application

The law provides for a staggering scope of application. From 2023, when the law comes into force, companies with at least 3,000 employees in Germany will be covered. By 2024, the number will be reduced to 1,000 employees in Germany. This includes temporary workers, provided the duration exceeds six months, and employees sent abroad. In addition to these directly affected persons, there are also indirectly affected persons. These are all direct and indirect suppliers who are subject to the supply chain. They fall under the scope of the law regardless of the number of their employees. In addition, natural and legal persons, but also other partnerships with legal capacity as the legal entity of the enterprise, fall into this category.

3. Wide definition to cover entire supply chain

The term supply chain is defined in section 2 paragraph 5 LkSG. The reference point is the output produced by an enterprise. It covers all steps that are necessary in Germany and abroad to produce a product or provide a service. This means acting in one's own business sector as well as the actions of suppliers. But also the use of services, transport, intermediate storage of goods, financial services, legal advice, and the purchase of a reference book are included. Thus, the entire supply chain is affected. From the extraction of raw materials, through manufacturing, including direct and indirect suppliers, to the final delivery of the product to the end customer.

4. Labour protection, anti-discrimination, freedom of association included

A definition of "protected legal positions" can be found in section 2 paragraph 1 of the LkSG. This term refers to the annex of the law, which defines and summarises numerous conventions under international law. In particular, conventions of the International Labour Organization (ILO) and human rights covenants of the United Nations can be found in it. In addition, "human rights risk" is defined. This is a condition in which, due to actual circumstances, there is a sufficient probability of a violation of human rights. Child and forced labour, slavery, torture, disregard of labour protection obligations and freedom of association, but also inequality and withholding of an adequate wage are examples. Violations of labour protection obligations and the prohibition of discrimination are also covered.

5. Law covers general environmental and climate impacts

Furthermore, environmental concerns are relevant. According to section 2 paragraph 2 no. 9 LkSG, human rights risk also exists if there is a threat of a violation of the following:

"The prohibition of causing harmful soil contamination, water pollution, air pollution, harmful noise emission or excessive water consumption that

(a) significantly impair the natural basis for the conservation and production of food; or

      adversely affects,

b) deprives a person of access to safe drinking water, [...].

c) damages a person's health.”

Consequently, it goes far beyond occupational health and safety and also covers general environmental and climate impacts.

6. Requirement to issue policy statement on human rights strategy

Sections 4-10 of the LkSG contain the organisational core area that the legislator wants to see implemented in companies. Several requirements lead to organisational adjustments in the companies as far as the course of business is concerned. Companies are required to set up effective risk management systems to identify, prevent or mitigate potential adverse human rights impacts of business activities. This serves as a mandatory compliance with their own due diligence obligations at their own location. In addition, a risk analysis is to be introduced as the basis for effective preventive and remedial measures. If risks are identified, a policy statement on human rights strategy should be issued by the company management and communicated to employees, suppliers, and the public. This should express the company’s commitment to its responsibility to respect human rights. This should include a description of the procedure for complying with human rights and environmental due diligence obligations in the supply chain, the definition of priority human rights and environmental risks, and the definition of human rights and environmental expectations of employees and suppliers (code of conduct).

7. Have a code of conduct and provide training to suppliers

If a risk is identified, the law specifies preventive measures both for the company's own business operations and regarding its direct suppliers. In addition to the declaration of principles, a code of conduct and behavioural guidelines should be drawn up and internal training should take place in the company's own business unit. Suppliers should be carefully selected and a supplier code should be drawn up for them. Training and further education should also be provided to suppliers. Whether these measures are proving effective is to be reviewed annually.

8. Draw up a concrete timetable to terminate or minimise violations

Should violations of human rights or the environment nevertheless be identified or are imminent, corrective measures must be taken internally to bring the violation to an end. If it is not possible to eliminate the violation in the immediate supplier's business area in the foreseeable future, a concept for ending or minimising the violation should be drawn up with a concrete timetable. Termination of the business relationship serves as the last resort.

9. Investigate complaints and engage with whistle-blowers

The law provides that all covered enterprises should establish an internal and, if necessary, external complaints procedure. The aim of this is that (potentially) affected persons in their own business in and around the supply chain, as well as persons who have knowledge of possible violations, can point out human rights and environmental risks and violations. The company must investigate complaints and engage in dialogue with the whistle-blowers.

10. Documentation and reporting obligations

All companies have a legal documentation and reporting obligation. The internal documentation obligation orders the documentation of the fulfilment of due diligence obligations. There is no public access and the retention period is seven years. In addition, there is an external reporting obligation that serves regulatory control. The report must be submitted to BAFA (Bundesamt für Wirtschaft und Ausfuhrkontrolle, Federal Office of Economic Affairs and Export Control) and is publicly accessible on the website for seven years.

11. Authorities can issue orders and assert human rights before courts

BAFA acts as a control authority equipped with far-reaching control and intervening powers to monitor compliance with due diligence obligations. The authority acts based on an application by a data subject or ex officio. In addition, it has the power to issue orders, i.e., it can oblige companies to submit a plan to remedy the abuses, including concrete timeframes, or impose concrete obligations to act. Those affected by human rights violations can file their complaints with BAFA and assert their rights before German courts.

12. Multi-million fines and exclusion from public tenders threatened

Sanctions primarily threaten in the form of fines for violations of due diligence and reporting obligations. Depending on the type and severity of the violation, fines of up to EUR 8 million are imposed. For companies with an average annual turnover of more than EUR 400 million, the fine is up to 2% of the average annual turnover. The average annual turnover is calculated from the worldwide turnover of the last three business years. The basis of assessment is the significance of the administrative offence, economic circumstances, and other circumstances. If the law is completely disregarded, there is the threat of exclusion from public tenders for up to 3 years.

13. Be aware of human rights and establish due diligence obligations

By the time the law comes into force on 01 January 2023, awareness of human rights and the environment must be created in companies and among company management. The due diligence obligations already mentioned should be established and/or adapted by then.

14. Each Asian country has its own challenges

Indirectly, laws like these say that some countries do not meet certain international requirements. There may be an element of criticism behind this, which some governments do not like to hear. Ultimately, to comply with due diligence requirements, one needs staff on the ground at the production sites to write reports and pass them on to German companies. The law requires German companies to collect information about circumstances in foreign countries, which not every government is happy about.

In Southeast Asia, on the other hand, there is less politics involved. Conventions are often signed there but rarely implemented, which in turn leads to deficits. Child labour, in particular, is still a problem in some Asian regions. This is because not everything is regulated by law. Even if certain items are in the law, they are not always adhered to. The question is how German companies should deal with this when they buy products from such suppliers. If in doubt, they should take a closer look at the individual members of their supply chain and investigate.

In conclusion, it can be said that German companies face challenges in how they should implement the German Supply Chain Due Diligence Law locally in Asia. This is because each Asian country has its own challenges.

Possible solutions: Train your employees in sustainability management

With these complex requirements, an innovative new approach between experienced partners is needed to develop practical solutions. The German Supply Chain Due Diligence Law has an impact on all involved parties in global trade. Joint efforts will be needed to fulfil these requirements.

In cooperation with our partner CSI-Consulting Service International Ltd., we are working on solutions regarding the new requirements. CSI has developed a course in Sustainability Management that relates to section 4 paragraph 3 of the law – assigning a responsible person for sustainability management. The practice-oriented and relevant course is accredited by a German University and can be taught in English, in-person and online. The course trains and certifies professionals in sustainability management, compliance requirements, and risk assessment in various supply chains, making them invaluable assets to their company as qualified Sustainability Managers. Companies with global operations further benefit from training key staff in the headquarters and international offices using the same course to establish an equal baseline for communication.

Secondly, the establishment and maintenance of effective grievance mechanisms require joint solutions for grievance management, complaint hotlines, and training of key personnel to manage and document grievance processes – internally and along global supply chains. Grievance management can only be successful when responsible managers on the ground understand the requirements as well. By training and certifying grievance managers at key suppliers, the requirements of the German Due Diligence Law can be implemented at factories.

In order to manage the due diligence requirements long term, risks associated with different products and supply chains need to be assessed and evaluated. Suitable management systems should be established in the German or European headquarters, that do not just manage risks associated with the German Due Diligence Law, but also plan for upcoming requirements on the EU level. In this area, innovative software solutions are currently being developed by our partner. They are already performing well in test runs and will soon be available to the market.

This article was co-authored by Karl Borgschulze from CSI firm.”