In June 2021, the Bundestag passed the planned supply chain law. But what does that mean in concrete terms for German companies?
The new supply chain law for sustainable globalization
Whether it's food, the latest smartphone or the latest fashion trends, the products we buy and use every day are the result of an increasingly globalized world. The globalized supply chains of these products are often very susceptible to human rights violations of all kinds.
One of the goals of the new law is therefore to make the globalization of supply chains more social . The Supply Chain Act thus joins an already long list of national and international laws and guidelines that deal with more firmly anchoring the observance of human rights in the global economy. But to which companies do the new legal regulations apply and when will they come into force? How do companies manage to implement the regulations and what do you have to pay attention to in the future? We have the answers for you!
What are global supply chains?
To put it simply, the supply chain describes the entire path of a product or service from the raw material through processing to the end customer. Viewed globally, they describe the economic interdependence of the transnational organization of goods and services . A T-shirt, for example, travels around 18,000 kilometers around the world before it ends up in our shop. Over 450 people are employed in the associated global supply chain. Strictly speaking, however, this is not a chain but rather a network of organizations involved in the value creation process.
The problem with global supply chains: they often involve serious shortcomings. Time and again, people involved in value creation are exposed to human rights violations such as child labor , slavery and forced labor as well as exploitation, discrimination, lack of labor rights and environmental destruction. Such violations exacerbate the already often precarious human rights situation in the respective production countries .
These sectors are particularly dependent on services from other countries:
- textile and fashion industry
- electronics industry
- chemical and pharmaceutical industry
- food industry
- automotive industry
- mechanical engineering
Known: Germany is more closely involved in international supply chains than any other industrial nation. In 2020, German companies generated sales of around one trillion euros in imports.
Reading tip: Learn more about supply chain risks using the fashion industry as an example in our blog article “ Project Cece: Sustainable future for the fashion industry ”.
The new supply chain law at a glance
The "Draft Law on Corporate Due Diligence in Supply Chains" passed on March 3, 2021 aims to strengthen human rights along the entire supply chain . It is also a clear signal to companies not to weigh human rights against economic interests. The law aims to encourage companies to prevent human rights violations in their supply chains, or at least to combat them as quickly and effectively as possible if a violation is reported to the company.
In detail, the law provides for the following changes to due diligence in international supply chains:
- People 's lives and health must remain intact.
- Slavery and forced labor are to be excluded.
- Children must be protected, child labor must be prevented .
- People must be protected from torture .
- The nationally applicable occupational health and safety regulations in the respective country must be observed. These include adequate safety standards at work, protective measures against the effects of harmful substances, prevention of excessive physical and mental fatigue and appropriate training and instruction for employees.
- Appropriate remuneration must be paid and the applicable minimum wage regulations must be observed.
- Employees must be treated equally and must not be subjected to any form of discrimination .
- Land, forests and bodies of water must not be illegally taken from their owners.
In our whitepaper you can download a free guide on Human Rights Due Diligence (HRDD) in relation to human rights.
Who does the Supply Chain Act apply to and when does it come into force?
The text of the law provides that both German and foreign companies that operate a second branch in Germany are subject to the announced measures. The Supply Chain Act will apply to all companies with at least 3,000 employees from January 1, 2023 . From January 1, 2024, it will also come into force for companies with at least 1,000 employees. But smaller companies can also be affected: namely when they are part of a supply chain of large companies.
What happens if the Supply Chain Act is violated?
If a violation of human rights becomes known, the company must immediately take corrective measures to put an end to the abuse. If the company cannot stop the violation at the supplier in a timely manner, a concrete plan must be drawn up on how the violation can be minimized and avoided. In addition, companies must take preventive measures.
The requirements for companies to comply with the Supply Chain Act are graded, depending on whether it is your own business area, a direct or an indirect supplier: In your own business area, i.e. also at all subsidiaries and holdings, as well as with direct suppliers, the duty of care applies without restriction. If the company learns that an indirect supplier is in breach, it must take the above measures provided for in the Supply Chain Act. The grading also takes into account the nature and scope of the business activity, the company's ability to influence the person directly responsible for the injury and the typically expected severity of the injury.
Companies that violate the duty of care and are fined are excluded from public tenders for up to three years . In addition, NGOs and trade unions can go to German courts on behalf of affected employees if there are violations of standards in supply chains.
What sanctions does the new supply chain law contain?
The bill provides for the introduction of sensitive fines and other financial sanctions . On the one hand, it allows exclusion from the award of public contracts, and on the other hand, the responsible Federal Office of Economics and Export Control (BAFA) is given the opportunity to issue graduated fines of up to 800,000 euros. Companies with an average annual turnover of more than 400 million euros even risk up to 2 percent of the average annual turnover as a fine in the event of a violation of the new law.
Who benefits from the Supply Chain Act?
In particular, people living in countries that are severely affected by poverty could benefit from the supply chain law. Around 75 million children are currently affected by exploitative child labor . The wage share of a seamstress of a branded T-shirt is 0.6 percent. Every year, 43 million tons of chemicals are used in textile production, which often cause damage to the health of workers and people in the vicinity. Requiring companies to do their due diligence could improve the circumstances of many people along the value chain.
In this country, it is primarily companies that benefit from the Supply Chain Act that have already started voluntary initiatives to fulfill their duty of care. Up to now they have had a competitive disadvantage due to investments and possibly higher prices for end users. Perhaps this disadvantage could now even develop into an advantage: They have already established an infrastructure in their supply chain that takes due diligence into account and thus have a head start in implementing the law.
What criticism is there of the Supply Chain Act?
Criticism of the Supply Chain Act has come from both business and environmental groups and human rights organizations.
Concern is spreading in business circles that German companies could be at a competitive disadvantage in a European comparison because they have to comply with standards that do not apply in other countries. However, a corresponding law at EU level is currently in the works. In addition, business associations criticize that the fines for violations and the bureaucratic effort are too high and disproportionate.
Human rights organizations have criticized the fact that the company's duty of care is graded and therefore only applies without restriction to its own business area and direct suppliers . However, the most serious human rights violations often happened in the extraction of raw materials, where the law only applies to a limited extent. The fact that civil liability is excluded in the Supply Chain Act also makes it even more difficult for those affected to take legal action against companies.
Environmental groups criticize the fact that environmental and climate protection is hardly taken into account in the draft law . The violation of environmental standards only violates the supply chain law if this has direct consequences for the health of people in the area - for example if chemicals are released into the water and the drinking water supply is endangered as a result.
What experts think about the supply chain law
To provide a detailed overview of the new supply chain law, LexisNexis organized a webinar in June 2021 with Dr. Mina Aryobsei, Principal Associate at Freshfields Bruckhaus Deringer and Thomas Becker, Business Development Manager Risk & Compliance at LexisNexis GmbH.
One thing is certain: According to experts, the package of measures accompanying the Supply Chain Act is unique and represents the most comprehensive bill to date to protect human rights and the environment in supply chains . However, the Supply Chain Act is only part of a larger trend.
The global trend towards more sustainability in relation to human rights and also environmental issues is not only reflected in the legal trend already mentioned. The new supply chain law and other similar initiatives reflect a broader " Environmental Social and Governance" (ESG) trend : More and more consumers and investors prefer companies that are aware of their global responsibility . In addition, legislative initiatives such as the Supply Chain Act strengthen the competitiveness and resilience of companies that are already dealing with their responsibility in the area of human rights and the environment.
The Supply Chain Act therefore requires a comprehensive evaluation of the existing compliance and due diligence programs as well as a possible adjustment to the new legal framework. One thing is particularly important here: There must be a clear responsibility structure that prescribes clear framework conditions for business partners and suppliers for their actions and their own responsibility . In this way, companies can counter potential risks in the area of human rights and environmental protection quickly and decisively.
How do companies implement the Supply Chain Act?
The bill provides for a comprehensive expansion of due diligence obligations . Companies are obliged to analyze and evaluate their supply chain on an ad hoc basis or at least once a year based on previously identified risk areas such as child labour, organized exploitation or forced labour. The law also provides for mandatory reporting and publication of the human rights and environmental strategy .
What does the Supply Chain Act mean for supply chain management?
Supply chain management, i.e. supply chain management, has the task of coordinating the entire value-added process of a product, such as the cooperation between manufacturers, suppliers, distributors and consumers.
For supply chain management, the supply chain law initially means that companies must check their own business area and direct suppliers for violations of the standards . The law does not require a check down to the last link in the supply chain. However, if you become aware of violations at indirect suppliers, you must act.
Companies must implement these measures under the Supply Chain Act
Adopt a policy statement on respect for human rights.
Carry out a risk analysis, i.e. establish a process for identifying adverse human rights impacts.
Establish risk management including remedial measures to avert potential violations of human rights.
Establish a grievance mechanism.
Report transparently to the public.
These tools support you in the implementation in your company
Nexis ® Entity Insight is a fast and efficient solution for proactive risk monitoring of local and global suppliers and business partners . Entity Insight delivers a comprehensive spectrum of market intelligence content across all PESTEL categories, which is often not accessible on the open Internet or is hidden behind paywalls - in near real time. PESTEL stands for Political, Economic, Social, Technological, Environmental and Legal. The tool was specially developed for compliance officers, purchasing departments and supply chain managers.
Nexis Diligence™ is a web-based due diligence tool for know-your-customer analysis that allows you to compare your business partners against sanctions and PEP lists, company databases, biographies, legal judgments and international news sources via a user-friendly interface. To prevent business risks, use the background checks with Nexis Diligence™ to check your direct business partners and their business partners .
Further questions on the Supply Chain Act:
The Supply Chain Act obliges active customers in Germany to comply with human rights and environmental requirements . These requirements not only relate to their own area of activity, they also oblige the customer to take the organization of the national and international supply chains into account.
Yes, you should review your suppliers regularly (ongoing due diligence). A one-off review does not guarantee that the affected suppliers will comply with the new supply chain law.
People with connections to authorities and politicians are often particularly vulnerable to corruption. Here, too, it is important to guarantee a continuous review and evaluation of the possible risks within the framework of the new supply chain law
In principle, there is no principal liability along the supply chain. However, if there is a suspicion of possible violations, there is a graduated liability towards indirect suppliers.
Yes, with the decision of the Supply Chain Act, injured persons will be able to be represented by German trade unions or NGOs.