The German Federal Parliament has adopted a new Act on Corporate Due Diligence Responsibilities in Supply Chains (‘the Supply Chain Act’) on Friday, June 11, 2021, due to enter into effect on January 21, 2023. By virtue of the Supply Chain Act, companies with a significant presence in Germany, as further explained below, must ensure compliance with human rights and environmental concerns in their business operations and impose equivalent due diligence responsibilities on their suppliers, irrespective of where they are located.

The Supply Chain Act could be of particular interest to the extractive industry, including oil and gas companies, and suppliers of the German automotive industry, but other industries will be affected as well given that the Act applies in principle across all sectors and covers both manufacturing and services, including, in principle, financial services.

The duty to ensure the respect of human rights and environmental concerns throughout supply chains extends to companies having their center of operations, within the meaning of German commercial law, or a branch office in Germany and employ at least 3,000 employees in Germany, including employees that are seconded abroad. This threshold will be lowered to 1,000 employees on January 1, 2024.

The German companies covered by the Act must ensure, through appropriate contractual means and the introduction of a code of conduct, a chain of custody certification, and by any other means, that the suppliers of goods and services bound to them by contract (‘the direct suppliers’) respect human rights and environmental concerns. They further must intervene and adopt safeguards where they become aware of problematic practices at the level of suppliers with whom they are not bound by contract (‘the indirect suppliers’).

German companies and company executives that either fail to introduce due diligence responsibilities in their own organization or fail to ensure the respect of these responsibilities by their suppliers run the risk of fines or other administrative penalties.

The suppliers may not incur the risk of fines. They will nevertheless have to play their part in supporting their German customers in their compliance efforts, as they will be expected to adapt their own organizations and processes, cooperate throughout audits and remedial measures, and they will ultimately run the risk of having their contracts terminated and being disqualified as eligible suppliers if they fail to ensure respect of human rights and environmental concerns.

The human, civic, social and environmental norms that are protected by the Act include,

  • a ban on child labor below the mandatory school age;
  • a ban on the most serious forms of labor for minors below the age of 18;
  • a ban on forced labor;
  • a ban on slavery and slave-like conditions;
  • a ban on practices that are incompatible with worker protection rules and may cause accidents or health risks;
  • the right to coalition, including the right to form and join trade unions and to go on strike;
  • a ban on discrimination at the work place for reasons of origin or ethnicity, social origin, health reasons, disability, sexual orientation, age, gender, political opinion, religion or ideology;
  • the right to adequate pay;
  • a ban on any acts likely to deteriorate the quality of the soil, water, air, or to cause harmful noise emissions or an excessive use of water resources, where this may significantly affect the natural resources for the preservation and the production of food, prevent access to impeccable drinking water, worsen or destroy access to sanitary facilities, or harm human health; and
  • a ban on the unlawful eviction or the unlawful expropriation of land, forests and water ways which constitute a person’s livelihood.

Germany adopts the Supply Chain Act at a time when the European Commission is still deliberating on its proposal for an EU Corporate Due Diligence Directive. The EU Directive will not replace the German Supply Chain Act, but rather it will provide a framework for the harmonization of the various initiatives undertaken by EU Member States such as Germany, France and the Netherlands in this area in order to prevent the creation of new barriers to trade between EU Member States.