The Supply Chain Due Diligence Act

Overview of the Supply Chain Due Diligence Act

In order to further protect internationally recognized human rights and environmental standards, the German Federal Parliament passed the Supply Chain Due Diligence Act on 11 June 2021. This law is the first in Germany for business companies to establish binding standards related to human rights and the environment. It requires that companies take responsibility for human rights and environmental due diligence obligations on their supply chains. The scope of application covers companies with at least 3,000 employees that have their statutory seat, principal place of business or a branch office in Germany and foreign companies’ German branch office if it employs 3,000 employees and more. The size of the scope will expand and companies with 1,000 or more employees will be affected as well in 2024. On January 1, 2023, the Act will enter the force, in-scope companies must identify and assess risks to human rights and the environment within their supply chains, and establish effective risk management systems.

In-scope area and companies’ obligations

The Supply Chain Due diligence Act impacts two aspects of companies. The first one is business operations. The own business area includes all business activities worldwide and includes dominated subsidiaries, especially activities with regard to production, product refinement and service provision. The second one is the companies’ supply chain. The supply chain includes all products and services of a company and all production steps in Germany and abroad which are necessary for the production or performance of service. The supply chain due diligence duties extends through the total supply chain, from raw material extraction to the delivery of the product to the end-user, both upstream supply chain and downstream supply chain. The Act requires companies must adopt the highest standard of obligations on their business operations and the operations of direct suppliers.
In the case of the operations of indirect suppliers, companies only have a duty to end a violation if the violation occurs in their own business area. The Act requires companies take measures and carry out a risk analysis once they believe that human rights abuses or environmental damages have occurred. Numerous sources may be deemed to provide companies with grounds for believing that human rights abuses or environmental damages have occurred, such as the fact that an indirect supplier operates in a sector with high exposure to human rights or environmental risks. The Act believes the vast majority of human rights abuses and environmental damages occur in the extended supply chain.

Targeted human rights abuses & environmental issues

The Supply Chain Due Diligence Act requires companies must address the following human rights violations and environmental issues:

• child labor
• forced labor
• forms of slavery
• disregard of workplace safety standards
• disregard of the right to freedom of association 
• discrimination against employees
• denial of a decent wage
• unlawful displacement of persons
• violence on the part of security forces
• environmental damages that entail human rights abuses (damage to soil, water pollution, air pollution, noise pollution, and excessive water consumption)
• Environmental degradation

Additional duties & Fine policy

In particular, companies are required to set up a risk management system and grievance mechanisms, and reporting on an annual basis to the German government on the regulated activities.

If companies fail to comply with their obligations, fines and penalty will apply. Fines of up to €800,000

The future impact of the Act 

The Supply Chain Due Diligence Act makes a major step with regard to protecting all human rights in companies’ supply chain, and also plays an important role in global sustainable development. In the context of globalized trade, supply chains extend across the entire world and the diversity of stakeholders increases, which leads to environmental degradation and serious labor issues. Labor Organization estimates that 25 million people worldwide are victims of forced labor, and that global environmental damage is also steadily increasing, according to the UN.  Nowadays, a transparent supply chain is urgently needed for sustainable development. By increasing transparency, companies can ensure sustainable production and avoid labor from exploitation. Because of this, The Act requires companies to increase transparency requirements in the supply chain on a regular basis, and strictly combats low social responsibility and low environmental standards in global supply chains. Although the Act only apply to large businesses, in the medium term, the new Act will also affect small and medium businesses, as they are part of the supply chain of companies in the scope of the Act. In addition, since companies are increasingly taking responsibility for social and environmental sustainability violations committed by their contract suppliers, the whole supply chain standard will be increased and consumers will have higher requirements accordingly, which can also impact those companies that are not in the scope of application. Sustainability is the inevitable trend of supply chain development. Increasing transparency and ensuring corporate social responsibility would be top priorities for all companies.

Images by Julius Silver Pexels & Artem Podrez Pexels