What is the German Act on Corporate Due Diligence Obligations in Supply Chains?
Since 1 January 2023, the Act holds companies accountable for the protection of human rights and environmental standards as they relate to their supply chain.
While companies are not required to guarantee that no human rights or environmental obligations are violated in their supply chains, they must prove that they have complied with all of the due diligence obligations contained in the Act. These include ongoing obligations to proactively conduct human rights and environmental due diligence exercises, to asses any potential findings and to take adequate and effective preventative measures. Companies must also regularly report on their human rights and environmental activities. Non-observance may result in severe fines of up to 2% of worldwide revenue of a corporate group as well as being blacklisted from participation in public tenders.
Who does the Act apply to?
The Act applies to German companies, as well as non-German companies which have their head office, principal place of business, administrative headquarters, registered office or branch office in Germany and who have at least 3,000 employees in Germany (or deployed from Germany). From 2024 onwards, all companies with at least 1,000 employees will be subject to the Act.
In corporate groups, the Act attributes employees in subsidiaries in Germany to the highest German parent company. Consequently, if the sum of employees across such parent company and its subsidiaries is 3,000 (1,000 from 2024 onwards), then the parent company falls within the Act.
By way of example: A German parent company has two subsidiaries in Germany. The parent company has 2,000 employees and each subsidiary has 550 employees. The 1,100 employees of the subsidiaries would be attributed to the parent company, thereby requiring compliance with the Act since 01. January 2023.
If the parent company is subject to the Act, then the parent company itself must comply with the Act, together with all companies controlled by it.
Foreign companies located outside of Germany may also fall within the scope of the Act, especially where they have:
1. branches in Germany and reach the required threshold for employees; or
2. a German parent company which falls under the Act and controls the foreign company. In this case, the Act obliges the German parent company to ensure that the business operation of its subsidiary complies with the Act.
Many companies that do not directly fall within the scope of the Act will soon be required to show compliance with it in any event. This will result from companies subject to the Act implementing their due diligence obligations, as well as those companies delegating obligations, such as through contractual requirements imposed on suppliers. These indirect implications are an essential part of the Act and mean that its scope is far wider than it may first appear.
What are the Human Rights and Environmental Rights protected under the Act?
The Act refers to a series of international human rights and conventions protecting human rights, which are incorporated by reference in the Act. These include, amongst others, the prohibition of child labour, protection against slavery and forced labour, freedom from discrimination, protection against unlawful land confiscation, occupational health and safety and related health hazards, the prohibition of the withholding of an adequate wage, the right to form trade unions or workers' representatives, the prohibition of causing harmful soil or water contamination and protection against torture.
Environmental risks relate to violations that lead to human rights violations, such as poisoning of water, as well as the banning of substances that are dangerous to humans and the environment. Obligations are incorporated by reference to three international conventions: the Minamata Convention on Mercury, the Stockholm Convention on Persistent Organic Pollutants and the Basel Convention on Transboundary Movements of Hazardous Wastes and their Disposal.
When does the Act apply from?
The Act became law on 1 January 2023. Accordingly, companies that fall within its scope are required to comply with the various requirements set out in the law.
For example, companies must prepare an annual report describing their compliance with the Act for the preceding business year. Such reports must be submitted to the responsible agency BAFA (Bundesamt für Wirtschaft und Ausfuhrkontrolle) by no later than four months after the end of a business year. In practice, this means that a report must be submitted regarding any of its activities, starting from 1 January 2023. If a company’s business year ends on 31 March 2023, the report must cover activities from 1 January 2023 until 31 March 2023 and is due within four months following the conclusion of the business year.
How can you ensure compliance with the Act?
Whilst many companies already have certain policies and procedures in place regarding human and environmental compliance, companies are well advised to pro-actively consider their obligations under the Act and thoroughly document their activities. The Act requires companies not only to discharge all of the obligations set out in the Act, but also to continuously reflect on identified risks and take account of their observations in order to continuously improve their protection of human and environmental rights.
Specific measures required under the Act include:
- Establishment of a risk management system, including clear allocation of responsibilities for this function. The management board must receive regular briefings about relevant findings
- Conducting an annual risk analysis (in case of specific circumstances, risk analyses might be required more often)
- Defining adequate preventative measures in relation to any identified findings under the risk analysis, as well as a policy statement setting out the company’s policy on human and environmental rights
- Immediate measures in case of identified breaches of human rights or environmental obligations within its own business activities or that of any of its direct suppliers
- Establishment of a whistleblowing procedure
- Taking adequate measures in case of (potential) violations within the wider supply chain, e.g. through indirect suppliers of the company
- Establishment of adequate reporting arrangements showing the discharge of all obligations under the Act
Are other countries introducing similar laws?
Alongside the German Act, human rights due diligence laws have been introduced or are being consulted on in Austria, Belgium, the EU, Finland, France, the Netherlands and Norway. In the US, state-level due diligence legislation has been proposed. Some laws apply beyond companies established in those countries, for example, to organisations supplying goods and services into a country but based elsewhere.
Broad reforms are planned to be implemented on a EU-wide level, after the European Commission presented a draft of a new Corporate Sustainability Due Diligence Directive in early 2022. The Directive is envisaged to have broader scope and more extensive requirements than the German Act, and apply to EU and non-EU businesses (including in the UK) with over 500 employees and net turnover above EUR 150m (Group 1 companies), or over 250 employees and net turnover above EUR 40m in high impact sectors including textiles and agriculture (Group 2 companies). Once the Directive becomes effective, Member States will have two years to incorporate it into national law, after which it will apply immediately to Group 1 companies and two years thereafter to Group 2 companies.
For businesses incorporated in the UK, the German Act, the EU Corporate Sustainability Due Diligence Directive and similar regimes will complement Modern Slavery Act 2015 requirements and require a proactive approach to be taken to future compliance in this area. Such businesses should familiar themselves with the proposed obligations now, and ensure that their boards are fully briefed on the issues involved.